How to use derivatives as a source of added income. June 14, 2021

According to a recent survey, 83.3% of our members and subscribers are either involved with derivatives (calls and puts) or would like to be. Accordingly, we will deal with the subject on a regular basis, usually on Mondays.

Properly carried out, derivatives can be a source of added income in a portfolio. Buffett himself uses them in a major way.

On Tuesday, June 1 (Monday, May 31 was a holiday) in our “fun” portfolio, Rosi and I sold  15 contracts of  Novavax (NVAX) expiry date June 11, strike price of $150           (C 11JUN21 150). Our purchase price was $US145.40 per share.

We made $US10,320.00 on the deal, still allowing $US5,550 for growth if there was to be any.

Well…

Growth there was — NVAX closed at $US209.68 last Friday, June 11!

So yes, we made $US15,870.00 ($US10,320.00 plus $US5,550.00) on this transaction but…

…had we held NVAX we would have made $US96,420.00 ($US209.68 minus $US145.40 multiplied by 1,500)!

Does that hurt?

Well, it should not. I needed two weeks in dental practice to net $US15,870.00.

Two points here–

1. There will always be better investments and than the one we just made.
2. If we had to do it over again, we frequently would have done things differently.

To stay in the game, we now need to buy NVAX at the significantly higher price of $US209.68 per share.

Does that hurt?

Investors writing covered calls generally do not like to be assigned. But if the compound annual growth rate (CAGR) is good, we should be happy to put in more money, should we not?