I have been reading much about the “Chicken Genius (Ken) Quits YouTube” news lately. So, apparently, other than being attacked by other YouTubers such as Meet Kevin, he was also worried about his followers getting into margin calls because they had echoed his bearish outlook and followed his trades (sold covered calls on Tesla at USD770 expiring in May) using leverage (margin loans).
While this is something that Ken had repeatedly reminded his followers not to do, that is to go on leverage in uncertain times like now, he felt bad as he believed his message could have been delivered better.
In selling a covered call contract, Ken is expecting the share price of Tesla to go below USD770 in May due to a recession triggered by the Ukraine War. Otherwise, if the share price rose above USD770 in May, he would have to sell his Tesla (100 shares per contract) at the agreed strike price of USD770.
Tesla closed at 801.89 on March 15, the day he tweeted about his trades. It was around the same time the recent rally started. So, if he collected a premium of $X dollar by selling this covered call, then the subsequent rally USD208 rally (>25% rally) meant that the premium price would be worth much more now.
If Tesla’s share price continues to stay at this level until May 2022, Ken would either have to sell away his shares at USD770, which means he potentially loses out on USD20.8k gain per covered call contract, or he would have to pay a much higher premium to buy back the contract to close it at a loss and prevent losing his shares at USD770.
Ken has started investing in Tesla much earlier than most people and so, even selling at USD770, it could be massive profits for him. Besides, this trade may only be a small portion of his total portfolio. And even if he has to buy back the contract at a loss, he probably can absorb the loss given that his portfolio is worth $6M now.
However, that cannot be said for people who borrowed money (margin loans) from a brokerage to bet on Tesla going down. Or worse, selling a naked call which would have ended up in unlimited loss.
I have explained what margin call is all about in this article:
Understanding The Risk Of Margins, Selling Naked CALL & PUTS
In layman’s terms, you borrow money from the bank/ brokerage to buy big on a certain bet only to have the outcome worked against you, and then the brokerage/ bank comes after you and threatens to sell away your asset (e.g. your existing shares, property) just to repay some of your debt or close your trade prematurely to result in a massive loss.
From this episode, it is important that we do not follow our mentors or any big channel YouTubers blindly (be it trades or predictions) without understanding the risk and consequences of our actions. No matter how confident you are or of your finance mentor/ idol, you should always be prepared for the worst-case scenario.
Losing 100% of your capital may sound scary but being short squeezed into covering back your position with an unlimited loss will bankrupt you. So, always do your own due diligence and be mentally prepared for any outcome. Margin loans, naked calls are high-risk games that may drown even the most experienced investors/ traders, so always be careful about that.
Lastly, remember that you are always in a different financial situation than the people you follow. They may have millions to burn, but not you.
Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading
The LEAPS Strategy has helped me make more than USD120,000 in 2021. Here’s all you need to know about this strategy that can help you increase your wealth exponentially:
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Looking for ideas on what stocks to invest in or which stocks to trade? You can take reference from what I have been buying or selling. I try to update them as soon as I can in this section, as well as share my thoughts behind executing these trades:
If the bear market in 2022 is making feel depressed as your stocks come tumbling down, read this article to find out how you can use options trading to help you claw back some of your losses as you await market recovery:
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Also, check out my trading strategies in different market conditions, whether it is bullish, bearish or volatile:
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I watched tons of videos on YouTube since 2020 and if you are wondering if there are any useful channels that you can subscribe to for learning market trends, TA, FA, check out this compilation here:
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I concluded my first year of options trading with more than USD160k of gain, see how I do it and the capital I use for every month to give you a sensing of the percentage yield I get out of my gains:
1st Year Options Trading Recap: The Journey Towards SGD$217,509 Profits In 2021
This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
I Cut $135,715 Worth Of Losses In The Last 1.5 Months
Want to learn more about Technical Analysis (TA) but find it difficult to grasp the concepts? This article brings you TA at a glance, and helps you understand key terminologies, indicators, and techniques used in TA to equip you with the knowledge that can empower you in your investing/ trading journey.
The Newbie Guide To Technical Analysis (TA)
Excited to start your trading journey or perhaps try out with a paper trading account to build your confidence in trading? Check out this step-by-step to help you get started:
How To Buy Options on Interactive Brokers (Step-By-Step)
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