[31 Jan Trades] As Market Spikes, I Closed My CC Positions With A Loss Of USD1.06k | The Risk Of Selling CC When You Do Not Wish To Get Assigned

It was a great green day on 31st Jan 2022 as many stocks spike on this day, signalling that the market may have priced in the interest rates that are coming up this year.

Tesla closed with more than a 10% increase in share price, so did some of the stocks that I am selling covered call on.

Palantir was up 7.87% and Pinterest was up 10.13%.

Nio was also up 17.27%.

This means that the premiums for these covered call contracts also spike up. Thus, in order not to let the contract get exercised as my Strike Price (SP) is much lower than my average price (which means I will suffer a huge loss if the contracts get assigned), I have to buy back these contracts at a higher premium and incurred losses.

Name of StockStrike Price (USD)Premium Collected (USD)Returns (%)
Pinterest281702,79
Nio211092.56
Palantir1314 x 40 = 5602..05

The previous total premium of USD839 was totally erased and to close these contracts, I have to fork out an extra USD1.06k.

This is the risk of selling covered calls if you do not wish the contract to get assigned. You will need to buy back the contract at a loss when the share price exceeds the strike price before the expiration date.

I chose to close my covered call contracts as they are close to the expiration date (4 Feb 22) and if the share prices of these stocks rally for the next few days, I will incur a greater loss buying the contracts back to close them.

The reason for selling covered call way below-average price is because the current share price has fallen way below my average (breakeven) price and selling at that average price will not bring any premium. Thus, in order to earn a higher premium, I am taking the risk to sell covered calls at a lower SP.

This strategy of selling covered calls way below the average (breakeven) price works when the stock is trading sideways or on a downtrend. If share price rises or spike, it will be better to close them soon to prevent a bigger loss, especially when the contracts are close to expiration.

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2 thoughts on “[31 Jan Trades] As Market Spikes, I Closed My CC Positions With A Loss Of USD1.06k | The Risk Of Selling CC When You Do Not Wish To Get Assigned

    1. Didn’t calculate but I know it is a lot! The good thing is that most of them are expiring in Jan 2023 or later, which means I have about 11 months to wait it out.

      Like

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