This is our weekly post dealing with derivatives (calls and puts). Over 80% of our members are interested in the subject.
Yesterday, Monday, June 5, was a stock market holiday so this post is going out today, June 6.
At the closing bell on Friday, June 25, Rosi and I were assigned on our 18 Novavax (NVAX) contracts. To continue writing covered calls on NVAX we had to buy the shares again, albeit at a higher price.
Many investors do not like to be assigned. Paying a higher price and committing more money for a security (in order to stay in the game) is actually ideal if the premium returns are high. Still, many investors get frustrated with “what could have been”.
We placed an at-the-market buy order for 1,800 shares of NVAX on Monday, June 28.
That order was filled about one second after we placed it. Of course, another investor or other investors sold those 1,800 shares in about one second. Ever try to sell a piece of real estate?
We then wrote (sold) 18 just out-of-the-money contracts on NVAX, expiry date on Friday of the same week, namely July 2 (C 02JUL21 192.50) and received $9,000.00 in premium income. Before breakfast! Bird in the hand, money in the bank! I rarely netted that much in a full week of work when I was in dental practice.
In our “fun” portfolio (value about $314,000.00), every Monday, Rosi and I have been writing covered calls on Novavax (NVAX), expiry date on Friday of the same week, strike price just out-of-the-money or further out-of-the-money to benefit from growth of NVAX if there was to be any.
Several times, NVAX shares dropped by more than the premiums which received and at one time our losses totalled $91,467.99. “Fun” portfolio, not much fun!
With the $9,000.00 premium which we received last Monday, June 28, our gains to date add up to $68,641.81. So currently, our losses are $22,826.18 ($91,467.99 losses combined with the gains of $68,641.81). Less painful but still not much fun!
At the closing bell on Friday, June 25, Rosi and I were assigned on our 18 Novavax (NVAX) contracts one more time. To continue writing covered calls on NVAX we need to buy the shares again.
When the market opens at 9:30 AM today, July 6, we will buy 1,800 shares of NVAX and then sell 18 just out-of-the-money contracts, expiry date, Friday, July 9 (NVAX C 09JUL21 217.50).
Based on last Friday’s closing prices, the NVAX will cost $217.50 per share and the premiums will be $7.00 each. Expected return on 18 contracts then is $7.00 times 1,800 which equals $12,600.00. Before breakfast! Bird in the hand, money in the bank! Few dentists in solo practice net that much in a full week of work.
Premium percentage return? $7.00 divided by $217.50, multiplied by 100 equals 3.22% for the week! Multiply that by 52 to arrive at the annual percentage return!
What is the best that can happen?
NVAX market price remains about the same after Friday, July 9 or goes higher.
What is the worst that can happen?
NVAX market price drops significantly below our strike price by Friday, July 9 resulting in losses greater than the premium income received. That has happened annoyingly frequently.
With the habits of the Monday Morning program, luck hardly matters. Selling covered calls on individual securities ignores habit number 3, that is, buy the US market as a whole with no stock picking. What we are doing here does require luck.
You can take a closer look at the recent history of our fun portfolio.
Remember what you see below.
- 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 to prevent market panic and collapse of the entire financial system.
- Gambling with derivatives, many individual investors keep losing 100% of their money.
With the habits of the Monday Morning program, luck hardly matters.
Good luck to those who use derivatives as a source of added income!
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