When is the Best Time to Buy?

When you buy a new car, you pay a steep price that includes the dealer markup, fees, and profit margins that aren’t recoverable in resale. There is a common understanding that a vehicle losses value as soon as you drive it off of the dealer’s lot. It is the same four wheels in the parking lot that enter the street and the vehicle becomes less “valuable” to potential buyers. The problem is that every potential buyer on the street will consider it “used.” They don’t want to pay for the things you had to pay for to get the shiny new one. Sometimes investors have similar behaviors. They think something is less valuable today even though it was worth considerably more yesterday.

ChatGPT says the following about some of the likely vehicle depreciation. The typical immediate depreciation is probably between 5% to 10%. The “instant” drop once it becomes a used car can be significant. In some cases (luxury brands or oversupplied models) the instant depreciation can be up to 15%–20%. The first-year depreciation could be 20%. Of course that depends on the brand, mileage and the condition of the vehicle. It is a supply and demand issue. Why pay top dollar for a used vehicle if you can get a new one instead?

Sometimes a company’s stock can drop like you just drove it off of the broker’s website. That may actually provide the buyers with a good value. In addition, if the price drops, and the stock pays a dividend, the dividend yield has increased.

Two Different Responses for Prudent Investors

Investing well requires emotional stability and paying attention to the price of the shares. That is one reason I set alerts. I want to be aware so that I can respond without irrational emotional responses. Today I will look at two decisions I made yesterday. One involves MAIN and the other involves AVGO. MAIN had moved down significantly in price, and AVGO was charging up over $400 per share.

First Decision: Buy MAIN Shares

One decision was to buy more shares of BDC MAIN (Main Street Capital Corporation.) The price per share dropped significantly on Thursday. Because we own MAIN shares, I quickly looked at the stock market and decided it was time to buy more. I also bought five shares for each of our grandchildren who had sufficient cash. They have owned MAIN in the past, and I sold their shares when they shot up in value. I also purchased 30 shares for a friend. That brought his share count to 100 shares.

I used “Buy Limit” orders to buy the shares. As a result, all of the shares were purchased for $54 per share. The closing price yesterday was $ 54.82, so apparently others felt the same way I did. The other nice thing about this BDC is that it pays a monthly dividend. If the price drops again, I will seriously consider adding some more shares to the UTMA accounts.

Second Decision: Roll An Option

The other decision was related to an AVGO covered call option contract that was due to expire yesterday at 3PM CST. It was obvious that the price would be higher than my contract price of $397.50, so I looked for a way to increase the price I wanted for my shares and was successful in doing that very thing. Bear in mind that I already sold a covered call on AVGO on Wednesday and made about $554 in options income as a result.

I was able to add to that Wednesday income before the market closed on Friday. As a result I earned $263.64 by rolling the covered call contract from $397.50 to $405.00 and extending the expiration date from April 17 to April 24.

There are two pieces to a roll. You buy a transaction to close the existing covered call contract. In this case it cost me $603.67 to get out of that contract: YOU BOUGHT CLOSING TRANSACTION CALL (AVGO) BROADCOM INC COM APR 17 26 $397.5 -AVGO260417C397.5APR 17 26 $397.50.

The second piece is to sell a new contract and extend the expiration date by one week. I earned $867.31 from the buyer of the new contract. Therefore, I increased the potential for a better price for my 100 shares by $7.50. If you multiply $7.50 by 100 shares, the gain could be $750 plus the $263.64 I earned by rolling the contract. YOU SOLD OPENING TRANSACTION CALL (AVGO) BROADCOM INC COM APR 24 26 $405.00 -AVGO260424C405 APR 24 26 $405.00

My YTD options income is now above $32,000 at $32,225.70. YTD dividends still outpace that amount at $57,238. The combination of the two results in total income of $89,463, or $22,366 per month. And that is before April ends. There are still more dividends coming and it is highly likely that I can trade some more options contracts.

What Might Happen

There is a good chance that AVGO will continue to go up in price next week. If that happens, and I do nothing, my shares will be called on Friday. That means $40,500 will be paid to me by the buyer of my covered call option contract. I get to keep the $554 I made on Wednesday and the $263.64 I made on Friday. As a result, my total profit will be more than the price of the shares. Of course, I could have just sold my shares and made a profit, but using options I can create additional income with little effort.

Total Ten-Year Returns

Both AVGO and MAIN have a good track record for delivering to their shareholders. A substantial portion of MAIN’s total returns come from dividends.

Recommendation

There is no easy way for the average investor to buy shares of AVGO at the current price if they want to trade options. Currently 100 shares would set you back $40,654. So unless your total investment balance is at least $800K, don’t risk more than 5% of your total account balances in AVGO.

There are, however, less expensive ways to start trading options. For example, 100 shares of CRDO (Credo Technology Group Holding Ltd) are a more affordable $16,069. CRDO has weekly options, so you could earn income every week if you learn to trade covered calls.

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