Last week, the market went up 0.4%. Since our fearless, intrepid investor has a 50/50 asset allocation (50% SPY and 50% TDB166) she made 0.2% last week.
Meaningless! Investors need a long-term mindset. Twenty years from now, SPY will most certainly be up, similarly, 10 years from now and likely five years as well.
Writing (selling) covered calls is exciting because it can increase the income from your portfolio. You buy Novavax (NVAX) at, say $100, and you sell a covered call with a strike price of $110. If NVAX does not go up very much, the option expires and you get to keep the premium. If it does go up, you have a $10 capital gain plus the premium. If it goes down, the premium offsets the losses. If it goes sideways, the premium looks like finding money on the street.
From the foregoing, it looks like investors cannot lose.
But… in her “fun” portfolio, our fearless, intrepid investor bought NVAX at $226.56! That is close to the very top! NVAX proceeded to decline to a much greater extent than the premium which she received. She lost $65,700 in 2021, premium income notwithstanding.
As we stated previously, the risk of writing cover calls entirely comes from the selected security.
What will our fearless, intrepid investor do when the market opens at 9:30 AM today?
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