Writing just out-of-the-money covered calls on Novavax (NVAX) every Monday, expiry date on Friday of the same week, our fearless, intrepid investor lost $US10,990.00 in her “fun” portfolio over the course of about one year. She bought 1,100 shares at $US300 a share for a total of $US330,000.00. Last Friday, September 30, NVAX closed at $US18.20! Her shares would have had a market value of$US20,020.00 ($US18.20 times 1,100) but she got out earlier plus she did earn something from the weekly premium income that she received reducing her losses to the $US10,990.00 mentioned above.
Mistakes are practice shots if we learn something from them. What did she learn from her NVAX experience?
“The market can stay illogical longer than investors can stay solvent.” (John Maynard Keynes) Is NVAX an example?
Instead of writing just out-of-the-money covered calls on any security, 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!
She likes Intuitive Surgical (ISRG), so she bought 300 shares at $243.7592 per share for a total of $US73,127.76. ISRG will continue to generate premium income even when it declines in the short term. In. The. Short. Term.
Indeed, last Friday, September 30, ISRG dropped to $US187.44 per share giving them a value of $US56,232.00 ($US187.44 times 300) for a total loss of $US16,895.76 in her “fun” portfolio. ($US73,127.76 minus $US56,232.00).
Intelligent investors ignore short-term fluctuations. She likes ISRG and is happy to hold long-term.
What will she do when the NYSE opens at 9:30 AM today?
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