Derivatives are financial weapons of mass destruction. Could it be worse?

• Resulting from its involvement in derivatives, in 1994, California’s Orange County declared bankruptcy.
• Resulting from its involvement in derivatives, in 1998, Long Term Capital Management needed a $3.6 billion bailout from 14 financial institutions in order to prevent market panic and collapse of the entire financial system.
• Gambling with derivatives, many individual investors keep losing 100% of their money.

However, properly carried out, derivatives can be a source of added income in a portfolio. Buffett himself uses them in a major way.

According to a recent survey, 83.3% of our members and subscribers are either involved with derivatives (calls and puts) or would like to be. Accordingly, we will deal with the subject on a regular basis.

Rosi’s and my core portfolios are 50% in exchange-traded funds which track the S&P 500 (SPY) and 50% in a money market fund (TDB166). When volatility is high, we write covered calls on our SPY holdings. Otherwise, we leave things alone, buying more SPY  at bargain rates with the market drops and taking profits when the market rises.

But in our fun portfolio, often not much fun, we write covered calls on Mondays (unless it is a holiday) with expiry dates on Fridays of the same week.

Monday, May 31 was a holiday so here is what we did on Tuesday, June 1.