On 30 March 22, I closed my Tesla PUT contract (Strike Price USD980, Expiry Date 29 April 22) and locked in a profit of USD150. The contract was just opened one day earlier on 29 March 22.
I usually roll my contract manually as I want to have better control over the closing premium price of the existing contract and opening premium price of the new contract. So, after manually closing the SP980 PUT contract, I decided to sell another PUT on Tesla at the strike price of USD990, with the same expiry date. The range of premiums was from USD3,000 to USD3,200.
I would usually start my bid at the highest possible price of USD3,200 before adjusting downwards until the contract gets assigned. However, in this round, I was assigned immediately when I confirmed my bid price of USD3,200, which was quite strange as people usually don’t buy at the highest asking price.
I then went to look at my buying power and realized a bulk of the money that was set aside for the cash-secured PUT contract was still available. I checked my trades again and was shocked to realize that instead of selling a PUT contract (SP990, expiry 29 April), I actually bought a PUT contract instead.
I then tried to quickly sell the PUT to close the contract but was unable to do so as the share price of Tesla was rising. I eventually sold the PUT contract at USD2950, which was a loss of USD250, as I paid USD3,200 for the PUT contract just minutes earlier.
An options trader often buys a PUT contract to hedge against a downtrend. The agreed strike price is the price the buyer of the option contract can sell if the share price falls below the strike price on the expiration date. If the share price falls to $0 on the expiration date, the buyer of the PUT contract can still sell at the agreed strike price.
See how a PUT option works here (explained in layman’s terms):
How does PUT Option Works?
Therefore, when the share price keeps falling after the PUT contract was purchased, the premium of the contract will keep increasing and the buyer can then sell away the PUT contract at a profit.
In my case, the opposite happened and the share price actually went up after I bought the PUT contract, so the premium of the contract dropped and I had to sell at a lower premium to close the contract.
I share this experience so that you can take reference and be more careful when you trade in the future. You may have accidentally pressed the wrong button (buy become sell or sell become buy) and incur a loss for nothing. So, always check your trades before confirming the order or you may have to pay a price to reverse it. Don’t trade when you are too tired (especially the US stock market opens in a different timezone as where you are in) as you may be prone to error when you are sleepy or tired. I hope you find the sharing useful.
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