On Dreams of Yesteryear and Covered Calls

I had the weirdest dream over Martin Luther King Jr. holiday weekend. I was transported back a quarter-century to the year 1995. Just like now, government was raucous, partisan and divided. However, the two gentlemen leading their respective parties at that time had all their wits about them, and even if each was morally flawed they were occasionally able to work together to craft legislation that passed by a decent bipartisan vote. The big focus then was getting to a balanced budget. Such a quaint notion given we will soon have passed at least $5 trillion in coronavirus relief legislation all tallied up, even as the unemployment rate is at levels similar to the start of 2013. At the office, things were much more cohesive. There weren't social media, virtual staffing or 500 cable channels. People had a lot of common ground and conversed on the latest episode of Seinfeld instead of a streaming sci-fi show on Apple TV that three-tenths of one percent of the population will ever watch. It was a simpler and more fulfilling time in my opinion, and one with much less anxiety in the pre-smartphone era. Unfortunately, there is no going back to those times from a societal perspective. One thing that has changed for the better since then is the tools available to the individual investor. If I would have told someone then that in 2021 they would be able to trade a quarter-million dollars of stock for less than a $10 commission they probably would have looked at me if I had three heads. Yet, 25 years later, here we are. Commissions for trading options have also fallen off a cliff and simple option strategies have never been cheaper or more available to the retail investor. While not enough investors are using these tools yet, they are appearing in more and more investors' toolboxes. As my regular readers know, I make heavy use of covered calls. This is especially true now in what I consider a significantly overbought market. This strategy allows me to stay in the game while ensuring I have significant downside protection for whenever the next hiccup hits equities. This is invaluable to me right now as I have more than 40% cash in my personal portfolio as so many of the covered calls that I executed during the market plunge in March and the initial stages of the rebound have expired in the money over the past few months. I am working diligently to put that money back to work even in an overvalued market. One name I have acted on in this way over the past week is Xeris Pharmaceuticals, which recently was Rev Shark's small-cap play for 2021. With the stock trading at $5.62 a share, I executed some covered call orders utilizing the July $5.50 call strikes, from which I netted $1.47 a share in option premium. By doing so I got about 25% of downside protection on my holdings and just over 30% potential return potential even if the stock does absolutely nothing over the next six months. Now if Xeris performs up to Rev Shark's expectations, I am probably going to be leaving some money on the table. However, that is a tradeoff I am more than willing to make at the moment. It is also something I would not have been able to do at a cheap price in the 1990s, even if in my mind it was a much better era.

On Dreams of Yesteryear and Covered Calls

The ability to execute options plays at cheap prices is a big change from a quarter-century ago, and small investors would do well to employ them.

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