First, here is how one of our members, an investment banker, sells derivatives safely. His objective is to earn 1%/month — a decent but not greedy return.
He frequently sells puts. The risk in selling derivatives entirely comes from the underlying security involved. Unlike sellers of covered calls, put sellers do not own a security. Their risk comes from having the security put to them should its price drop below their selected market price. With a high volatility security like Novavax (NVAX), investors could get a premium earning 1% per month from a strike price 1/3 or so below the market price at the time. That gives significant protection from having NVAX put to them.
Covered calls and cash-protected puts have identical risk levels. Nevertheless, Canadian investors are not allowed to sell cash-protected puts in tax-advantaged accounts. American investors are allowed to do so.
Now, back to our fearless, intrepid investor. In 2021 she took a real beating writing (selling) covered calls on NVAX. She lost $65,700. As we said, the risk in selling derivatives entirely comes from the underlying security involved. Because of that, most experienced investors sell derivatives using a safe underlying security such as an exchange-traded fund that tracks the S&P 500.
The one thing our fearless, intrepid investor did correctly is to do her covered call selling in her “fun” portfolio. Like most departures from the six habits, it has not been a lot of fun, but it makes up a small percentage of her overall assets.
What will she do when the market opens at 9:30 AM today?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