[28 March 22 Trades] Why I Sold Away My 40 Tesla CALL Contracts After Stock Split News & What I Did Next?

Tesla’s share rallied 8% on the news that the company is planning for a stock split in 2022. Tesla announced on its Twitter page that it would seek shareholders’ vote in the upcoming annual shareholder meeting to proceed with issuing dividends (in the form of more shares) to the shareholders. This concept is similar to a stock split.

I first bought my Tesla OTM CALL contracts (Strike Price $2,475, Expiry: 16 Sept 22) back in January this year after Tesla recorded a phenomenal quarter of car deliveries, smashing all estimates. I had anticipated that the share price will keep rising back to its all-time high price of $1,243 and bought the CALL option contracts to capitalize on the share price gain.

The stock price ran up more than 13% on 3 Jan 2022 to reach USD1,199 and I bought 3 CALL contracts on that day. However, after that day, the share price started falling and even a strong earning announcement (on 26th Jan 2022) could not prevent the share price from dropping 11.55% the following day.

As seen from the below summary table, the premium of the contract dropped from a high price of 3170 to a low of 150 (more than 95% drop) as I averaged down on the premium price with new contracts. The premium price actually did go lower than USD150 on certain days but I did not buy during those days. I had mentally prepared that I may lose the whole capital if the stock price stayed this way until the expiration date in Sept 2022.

DatePremium per
contract (USD)
QtyTotal Premium
(USD)
Delta
3 Jan 223000260000.116
3 Jan 223170137100.124
6 Jan 222950129500.118
6 Jan 222100121000.086
7 Jan 221800118000.092
12 Jan 222250122500.098
12 Jan 222300123000.098
14 Feb 2255015500.021
15 Feb 2262016200.022
24 Feb 2215046000.011
28 Feb 2218047200.015
1 Mar 22240614400.019
2 Mar 22260410400.02
7 Mar 22220511000.018
14 Mar 2215034500.012
18 Mar 2215023000.012
Subtotal4027,200
Average Premium
Price (USD)
680

However, after the FOMC meeting on 16 March 22, Tesla’s share price rose and it continued rising with the opening of the new Gigafactory in Berlin, Germany. I bought my last batch of Tesla CALL contracts on 18 March 22 and average down the premium price of my 40 CALL contracts to USD 680 per contract. Last week, the premium price hit more than 680 briefly and then dropped by to below USD680.

I was hoping that the new factory opening in Texas on 7 April 22 can help to boost the price so that I can take profits on these LEAPS. The stock split news came as a surprise and the premium price rose above USD680, achieving my breakeven sooner than I had expected.

Why Sell ALL 40 Contracts At Once?

I had initially planned to sell these 40 contracts in batches of 10 contracts to take profit as the share price increases due to the stimulus of the good news, such as factory opening. However, on 28 March 22, I made the decision to sell them all for a few reasons:

Reason 1) The Market Is Too Unpredictable
The 3 Jan incident taught me one thing, always be prepared for the unexpected. Even the best news cannot guarantee that the share price will keep going up. There are many other variables and uncertainties, such as the macroeconomic environment or market manipulation by institutional investors. So, history could repeat itself, which means the share price will keep dropping after the spike.

Reason 2) The Risk Is Increasing By The Day
The con of being an option contract buyer is that time is always not your friend. With every passing day, the contract premium decreases subtly as the time value gets lower with each day. As the contract reaches near the expiry date, the time value (theta) will drop to almost zero. The only way that can still earn profits out of the contract is to have the share price keep increasing, which has a direct correlation with the premium price.

When this round of rally ends, Tesla’s share price may drop to USD800 and below, so the (market) premium price of the contract may drop to less than USD680 per contract. If I manage to sell away some contracts with a good profit, I may end up having to cut losses if such a scenario happens.

Reason 3) Redeem Capital and Reallocate It Elsewhere
I decided that since I have already achieved my first objective of getting back my capital (share price hitting my breakeven price), I can redeploy my capital elsewhere, hopefully into something that can help me hedge against market uncertainties and lower my risk as well.

What I Did Next?

I sold 40 Tesla CALL contracts at a premium price of USD880 per contract and thus earned a profit of USD8,000 {(8.80 – 6.80) x 40 x 100}. With that capital and profits reinvested as the new capital, I bought a Tesla LEAPS contract (Strike price USD2475) that expires on 19 Jan 2024. The Tesla LEAPS contract was worth USD11.5k. I have 2 other Tesla LEAPS that I bought in November and December 2021 at USD18k and USD14k respectively. So, the new LEAPS contract helped to average down the premium price to USD14.5k.

I also rolled my Tesla PUT contract from a strike price of USD820 to a new strike price of USD950. I locked in a USD700 profit for the old Tesla contract and collected a premium of USD2,800 for the new contract.

Further reading on this strategy:
Why I Choose To Roll My PUT Option Contract When Share Price Rises

Concluding Thoughts

If Tesla’s share price continues to rise above USD1,100, I will keep rolling my PUT contract to a higher strike price or a longer expiration date, to lock in profits gained for each PUT contract and to collect a new premium.

If Tesla’s share price rises to a new all-time high, then my Jan 2024 LEAPS will turn profitable and I can sell them and take profits in 3 different batches (for my 3 LEAPS contracts).

However, if the share price starts to fall, then I still have holding power on my LEAPS as these contracts only expire 1 year and 9 months later. For my PUT contract, it is OTM and as long as the share price does not drop below USD950, the contract will expire worthless. Also, the covered call contract that I sold on my existing Tesla shares at a strike price of USD1,200 will expire worthless.

I hope this sharing has been useful to you, especially if you have bought the same CALL contracts at their peak in Jan 2022. I hope you have (or are going to) breakeven and earn some good profits out of those positions. All the best!

***
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5 thoughts on “[28 March 22 Trades] Why I Sold Away My 40 Tesla CALL Contracts After Stock Split News & What I Did Next?

  1. good trades there, congrats! i been sell calls with stock in case it gets trigger, your trading strategy gave me a lot of insights!

    Like

  2. Currently have a short put contract of USD 940 expiring on May 6th. Let’s hope the drop of share price doesn’t go too low and bounce when it goes down to nearly 940. 😄

    Like

    1. Sold to open this contract today when i saw it drop for the 2nd day. Let’s see if it can bounce back on around USD 1007…hehe..

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      1. Oh thanks for sharing, I have a sell put at strike price USD1005, expiring on 6 May as well. Let’s hope it does not keep dropping so I still have many cash for future PUT contracts 😄

        Like

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