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?
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, ISRG has dropped by a far greater extent than the premium income that selling covered calls on the security has produced.
Intelligent investors ignore short-term fluctuations. She likes ISRG and is happy to hold long-term.
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