Warren Buffett once stated that derivatives (puts and calls) are financial weapons of mass destruction. At the same time, his partner Charlie Munger said that saying that accounting for derivatives in America is a sewer is an insult to sewage.
To a large extent, due to its derivatives involvement, twenty-five years ago, Orange County California became the largest municipality in U.S. history ever to file for bankruptcy.
We usually start our comments about how our fearless, intrepid investor manages her options activity. She usually writes (sells) covered calls on SPY on Mondays, expiry date on the Fridays of the same week at a strike price sufficiently out-of-the-money to give her a 1% per month premium income. That will significantly reduce the possibility of being assigned while yielding a decent return.
We have previously stated that the most important thing to learn from our fearless, intrepid investor’s loss of $US10,990.00 in her “fun” portfolio over a year is not to write covered calls on individual securities. She bought Novavax (NVAX) to write covered calls on and as the stock declined, she lost much more than she received in premium income.