September has been a really choppy month traditionally for the stock market and this year (2022), it was worsened by the chaotic macro environment. The 2 events that caused the market to drop hard in September were the higher-than-expected CPI (Consumer Price Index) and the Federal Reserve’s hawkish expectations of future rate hikes.
In September 2022, all my Meta LEAPS CALL options contracts (expiration date: 16 Sept 2022) expire worthless and I lost $10.36k of premium that I have paid when I purchased those contracts. Together with the 81k worth of losses that I cut from closing some of LEAPS CALL contracts last month (Aug), the total realized losses were 91k.
The consolation of cutting losses in August was that I managed to claw back some capital, albeit only 10 to 30%. It could have been much worse if I have held them till September when my overall LEAPS CALL portfolio was down by 95%.
All is not lost though. Thanks to the enlightenment and inspiration of some kind folks, I began studying new options and strategies to capitalize on the fall in September to earn back some money. I have shared these strategies that I have learned in my previous articles to help you understand the concepts and fundamentals better.
I have always thought that selling CALL is a good bearish strategy. However, you have to own the shares first before you can sell Covered CALL. Otherwise, you subject yourself to selling a naked call, which has an unlimited potential loss and is a very dangerous thing to do.
The disadvantage of selling Covered CALL is that while you are picking up a good premium while the share price drops, you are also losing value in the stocks that you own, which is counterproductive. It is like a double-edged sword that allows you to gain and lose at the same time.
In the worst-case scenario, some companies cannot survive the onslaught and share price crash and went bankrupt. The risk is higher for the growth companies that have not been profitable or do not have much cash reserves to tide through the economic downturn.
This is where the Bear CALL Spread has an edge over the single-legged options strategy of selling Covered CALL. It allows you to still sell CALL options but you do not need to own any shares, thus eliminating the risk of your shares falling in value or going to zero.
Here are the trades that I have made in September 2022 that allow me to still make a net 15k profit despite losing 10k to the expiration of the Meta contracts.
Meta CALL expiring worthless:
Closed some of my Covered CALL positions for profits:
My Vertical Spread Trades:
Total Earning Increased By SGD$15,958.35
My overall earnings for the month of September increased by $15,958.35
Risk Of Bear CALL Spreads
The Bear CALL Spread strategy has its advantages but there are risks as well, especially when you guess the trend wrongly, you may lose more than what you received in the first place. Take for example, when I used the Bear CALL Spread on Tesla in Sept, it rose instead of falling with the rest. Tesla had a strong performance in September and outperformed the rest of the market, probably fuelled by high expectations of AI Day and Q3 delivery numbers. As a result, I accumulated huge unrealised losses as I opened up a big position in Tesla Bear CALL Spread. I will share this horrifying and extremely stressful experience in a separate post.
A Bear CALL Spread is more difficult to repair when you are caught as compared to selling a Covered CALL. In the event you are wrongly for selling Covered CALL, you can allow your shares to be sold at the strike price you are okay with selling. But for BEAR CALL Spread, you must be mentally prepared for the max loss scenario because anything can happen.
The vertical spread options strategies are not plug-and-play strategies that you can use to earn money instantly from a bear market. Coupled with the high volatility of the market where it can swing up and down in a single day, the risk gets higher. Before going to the vertical spreads, it is important to understand the basic concepts of how CALL and PUT options work. Otherwise, it will cause more confusion. I strongly encourage you to start with a small position or use paper trading to get familiarised with the strategies.
I hope this sharing has been useful and given you some food for thought as you try to navigate and survive in this unpredictable stock market.
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