On Friday, December 17, our fearless, intrepid investor was assigned, and her 1,000 Novavax (NVAX) shares were called away. To stay in the game, on Monday, December 20, she bought back 1,000 shares of NVAX. That cost her $226,559.99.
Many investors dislike buying a security at a price higher than the one which they were obligated to sell it for when they were assigned. However, if the returns are good, shouldn’t we want to have more rather than less money invested?
She then sold 10 NVAX covered call contracts, expiry date December 23, strike price $250.00 which allowed $20.00 f0r growth per share. (NVAX C 23DEC21 250.00) She received immediate premium income of $7.05 per share for a possible total of $27,050.00 ($7.05 times 1,000 plus $20.00 times 1,000).
What an exciting possibility – earning $27,050.00 before breakfast on a Monday morning! She needed nearly 4 average weeks’ net earnings to make that kind of money when she was in practice.
However, the best laid-plans of mice and men often go awry. (Thank you Robbie Burns.)
NVAX tanked by $72.75 giving her a loss of $72,750.00 on the security!! That was offset by the $7,050.00 premium income for a loss of $65,700.
2021 was a forgettable year for all of us but especially for our fearless, intrepid investor. In addition to Covid and Omicron, she had her “fun” portfolio to make her miserable.
Mistakes are practice shots. This loss is taking place in her “fun” portfolio which amounts to a small percentage of her investments. Like most “fun” portfolios, hers cannot match the simple act of holding an exchange traded fund which tracks the S&P 500, such as SPY, for example.
As we have previously stated, the risk/reward relationship is inescapable. The greater the reward that we seek, the greater the risk that we need to take. Buying SPY is safe. Therefore, writing covered calls on it is safe. Because it is safe, the reward will not be huge. But it will be an improvement on simply holding SPY, which we agree is a license to print money.
What are her plans when the market opens today at 9:30 AM? What choices is she looking at?YOU NEED TO LOGIN TO VIEW THE REST OF THE CONTENT OR LEAVE A COMMENT. Please Login. Not a Member? You can now sign up for $12 for a one-year membership. Join Us