In previous posts, we mentioned that our fearless, intrepid investor lost $US10,990.00 in her “fun” portfolio over one year by writing (selling) just out-of-the-money covered calls on Novavax (NVAX) on Mondays, expiry dates on Fridays of the same week. How much fun is that?
She ignored habit number three, which recommends that investors buy the American market and not pick individual stocks. Investors can buy the American market by acquiring an exchange-traded fund (ETF) that tracks the S&P 500.
SPY is the best. It is the largest, oldest, and most heavily traded US ETF. It has the narrowest bid/ask spread, one of investors’ expenses that most tend to ignore.
All risk in selling covered calls comes from the market movement of the underlying security. When she owned NVAX, it dropped significantly more than the premium income she received. So, no more writing covered calls on individual securities for her.
Further, she decided to write (sell) covered calls sufficiently out-of-the-money to earn about 1% per month or slightly more. That would significantly reduce the possibility of being assigned while yielding a decent return!
What did she do last Tuesday, January 17, 2023? (Monday, January 16, NYSE was closed for Martin Luther King Jr. Day.)
She sold covered calls on SPY at a strike price of $US5.00 out-of-the-money, that is, $US404.00, expiry date Friday, January 20 (SPY C 20JAN23 404.00 US). She earned $US0.83 per share – much less than the previous week’s premium income which was $US1.22 per share. Nevertheless, it still is guaranteed, immediate and decent.
What will she do today when the NYSE opens at 9:30 AM?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