Question about investing in derivatives and our answer

On November 13, 2020, from J. G….Ontario

Question and Monday Morning Millionaire Program Answer:

I’ve been thinking more and more about trading options for income. One of my portfolios has about $350,000 in it. If I took about $100,000 and dedicated that to options income, I’m basically saying I would be OK with potentially losing that money if the underlying stock went to $0.

That attitude will allow you to sleep at night. However, unless fraud is involved such as for example Enron, WorlCom and Nortel, the underlying stock is very unlikely to go to zero. Companies need to meet a high standard to get listed on one of the major stock exchanges. Regulations are more thorough than ever before, keeping fraud down to a negligible minimum.

I’ve been trading in options every week since August. I’ve been assigned about 50% of the time.

First, don’t trade but only sell options (with some rare exceptions).

Next, options with nearby expiry dates tend to give a higher percentage return.  So, selling options every week is one part of a good strategy.

Since by a near expiry date, the underlying will be higher or lower with a 50/50 chance for either outcome, investors selling options every week can expect to be assigned half the time.

I think with trading in options, I have to be in consistently each week and hope that I have picked a stock that will keep or grown in value.

Selling (not trading) options once a month instead of once a week can be effective as well. It is more important that the stock that you pick has a decent premium percentage return than for it to grow in value. Think of your underlying security as being a money tree.

Novavax made me a little nervous, when I saw the price go to the low $70’s after their earnings report, but it certainly has good premiums.

The chart below shows us that Novavax has traded for under five dollars a share, earlier this year.

Could either drop below $70? Morningstar states that Novavax is overvalued by 18%. A few months ago, it was overvalued by 71%!

Please let me know how to manage this.

First, review our post dealing with the ideal investment.

Then, review the material above and best wishes with your investing.

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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