Writing (selling) just out-of-the-money covered calls on any security generates the largest percentage return if the expiry date is close, say, a week away or in the same week. It also results in having a 50% chance of being assigned, that is, having to sell the security below market price. Then, to stay in the game, investors are required to buy high. Our approach to investing is to sell high!
Our fearless, intrepid investor lost $US10,990.00 in her “fun” portfolio over one year, writing just out-of-the-money covered calls on Novavax (NVAX) on Mondays, expiry dates on Fridays of the same week.
Mistakes are practice shots if we learn something from them. What did she learn from her NVAX experience?
Instead of writing just out-of-the-money covered calls on any security, she decided to write 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!
For the last few weeks, she has been doing that with Intuitive Surgical (ISRG) with good results. ISRG has dropped by a far greater extent than the premium income that selling covered calls on the security has produced, but intelligent investors ignore short-term fluctuations. She likes ISRG and is happy to hold long-term.
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