Our fearless, intrepid investor owns only SPY, an exchange-traded fund (ETF) precisely tracking the S&P500 which tracks the American economy, the strongest economy for over 100 years and likely to remain that way in the foreseeable future. History strongly suggests that all investors should do that.
The risk in writing (selling) covered calls is entirely due to the underlying security. SPY is not Enron or Nortel or WorldCom or any other security that fell out of bed.
Adjusting for market holidays, on Mondays our fearless, intrepid investor writes (sells) covered calls on SPY with a strike price just out-of-the-money, expiry date, Friday of the same week.
About half the time, the weekly decline will be greater than the premium income received during that week. Nevertheless, the premium income will be there every week. Investors can ignore any weekly decline knowing that SPY will recover over the long term.
That’s what happened last week.
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