A Near-Miss Experience with Option Trading

Published by moxlotus on

Due to the pandemic, this year has been pretty exciting for the financial market. NASDAQ is the first to rebound and broke the All-Time-High in June. Since then it has been going higher and higher. With such a bullish market, I have decided to start trading options to maximize my returns.

In september, after the market retracement from all time high, most of the tickers are going sideways trading within a predictable band. And two weeks ago, I have decided to sell a Tesla (TSLA) $500 02 Oct Call. The first contract was sold on 30 Sept with a premium of $0.48 per share. And sold a second one on the same day at $0.51. I thought that Tesla should be relative safe from $500. Therefore, I sold a 3rd contract the following day at $0.39. If Tesla doesn't reach $500 by the end of Friday, the options should expire worthless. On Friday morning, I woke up early to check the closing price of Tesla which ended at $448, that was a big increase of 5% from the previous close. And the post-market was trading at $445. This has gotten me worried. Tesla being a very volatile stock has a huge potential to burst through $500 mark. To ease my worry, I have decided to look through possible news that may be announced on Friday. To my surprise, Tesla is going to release its monthly sales figure on the Friday, which is predicted to be better than expected. Now with this piece of information stuck in my head, I was unable to continue my sleep and unable to focus for the whole. This has the same effect as watching horror movie. While a horror movie ends within 2 hours, this is gonna last for the next 24 hours.

At this point in time, my option has a mark-to-market loss of -184% which isn't a lot by absolute term, assuming that I can get out of the market quick during the opening, I may be able to limit my losses to within 400%. The worst outcome that may happen to this is that I held onto the option till expiry and if the price goes near $500, there is a possibility of it being exercise if the counterparty anticipate further rally on the price of the underlying asset. If that were to happen, I will be holding a short position of 300 shares of Tesla that is worth $150,000. any increment from $500 will result in me losing $300 per dollar.

The news that annihilated worry came at 1PM - Trump was tested positive for coronavirus. The market reacted immediately with that news. Futures for NASDAQ dropped 2% and various other indexes dropped by 1% within 30 mins.

From this episode, I have learnt 2 important lessons regarding trading options.

  1. Close the option before expiry, the uncertainty is just not worth that few dollars of gain (if it ever gets materialized)
  2. Set a profit target and take your profit early. I was being greedy and wanted to have 100% gain from the position.

When the market opened on that night at 9.30PM SGT, I quickly closed my positions to lock in all the possible profits.

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Categories: Finance