Q and A about paying too much for an underlying security

On June 21, 2020, from P. T  …BC, Canada

Question:

I was very impressed with your previous blog mentioning a phenomenal return selling options when VIX is high.

By selling just out of money cash secured puts, how can one avoid being “trapped” when the market is so frothy?  Picking a strike price just out of the money has the advantage of higher premium but if the market is close to the vertex, and if the put got assigned, one will end up with the underlying that is too pricy?   So the question is, how can one predict the top of the bubble?

Monday Morning Millionaire Program Answer:

Predict? It has been said that only death and taxes are predictable. To that, we can add the permanence of a tooth extraction.

First, the Monday Morning Program recommends selling just out-of-the-money covered calls and just in-the-money, cash-secured puts for for the greatest premium income. Since by expiry date, the market will be either higher or lower, such a sale will result in assignment half the time.

On June 18, 2020, we answered a similar question from John G.  …ON, Canada.

If investors’ underlying is an exchange-traded funds (ETFs) which parallels the S&P 500, being assigned at the top of the market is a pain in the short term only.  We should think long-term. We want to own one of these ETFs anyhow, so having it put to us is desirable.

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The program does not provide any investment advice or endorsements.

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Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me

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