If you missed my first post, you’ll want to read it here.  Today is Options Expiry and it looks like SMH will close below the $35 strike price which means I get to keep the $850 (2.5%) premium AND I get to hold on to my shares so that I can write February 07 or May 07 Calls.

But what I really want to illustrate is how much mutual funds suck.  Click on the graph to follow along.

If I had bought SMPSX (Semiconductors Mutual Fund) back in December 2006 at $17.34 I would be down 6% today.  I know what some of you are going to say…..”Great time to dollar cost average down….blah…blah…blah”

Perhaps it is a great time to dollar cost average down and perhaps you’ll eventually make up the loss but while you’re busy dollar cost averaging down I’ve made $850 in cash that’s sitting in my account and I STILL own the shares of SMH just like you STILL own the shares of SMPSX.  Look at the chart, the graphs lines are nearly identical except one of them generates cash flow (SMH) while the other just sits there waiting for something to happen (SMPSX).

Where do I go from here?  I’m bullish on the semiconductor industry so I’ll hold for now.  I have many options from here:

  • Sell February 07 $35 Calls  (currently $0.28 = 1% additional return)
  • Sell May 07 $35 Calls         (currently $1.25 = 3.6% additional return)
  • Sell August 07 $35 Calls    (currently $2.15 = 6.2% additional return)
  • I can wait until SMH breaches $35 then sell May or August Calls which would yield higher returns.
  • I can liquidate now and break even
  • I can straddle or do some fairly exotic things

What can a mutual fund holder do?

  • Buy more (to dollar cost average)
  • Sell Fund and move to greener pastures (at a loss)

While I’m selling and making money you’re waiting and buying (spending money).  Remember:  YOU MAKE MONEY SELLING STOCKS NOT BUYING THEM.
Is it sinking in yet?

If it is, go over to www.etfcoveredcalls.com to check out how I’m putting it all together.

Please note that the trading day still has a few hours left as I write this and SMH could rocket up to the moon in which case I’ll be forced to sell at $35 and only capture 4.6% return in 42 days but I’d be ok with that scenario too 😉