I shared just a few days ago how an early assignment (on the SELL PUT leg) of my Apple BULL PUT Spread (9 contracts) resulted in a major loss of USD 3k instead of a max loss of USD117 on the spread.
You may refer to this article for reference:
My Vertical Spread Disaster, How Max Loss USD117 Became USD3,036 Loss | What To Do (& Not To Do) When One Leg Of Vertical Spread Gets Assigned
If I had waited for just one more day when Apple’s share price had a huge drop, I would have significantly reduced my loss. If I had waited a couple of more days as Apple’s share price continued to fall, I would have made a profit instead of a loss.
After that loss, I had 9 contracts of Apple BULL PUT Spread contracts left, which I thought would eventually expire worthless in a few days (2 Dec 22).
However, as fate would have it, on 29 Nov 22, this remaining 9 Apple BULL PUT was again assigned and I was left with 900 new Apple shares and 9 new Apple BUY PUT contracts at a strike price of $165. It is like deja vu and history repeated itself to make me go through another round of deciding what to do with these shares and options contracts since I regretted selling too early in the previous round.
It was one day before Fed Chairman’s speech and that could move on the market significantly depending on whether he is hawkish or dovish.
I have a few options:
1. Exercise my PUT options contracts and sell my 900 Apple shares for $165 per share. Then, I will realize the max loss for 9 BULL PUT Spread contracts, which is $117.
2. Sell both the shares and options at the same instant and settle for a loss close to the max loss of the 9 Spread contracts. This way, I reduce the risk of the trend going against me, which might significantly increase the loss, just like in the previous round.
3a. Sell off either the shares and hold the PUT option contracts if I am bearish. Or …
3b. Sell off the option contracts and hold the shares of I am bullish.
In the end, I observed and saw that Apple was dropping further so I went for 3a.
I sold away all 900 Apple shares at 143.13. Thus, each of my PUT contracts is worth $22 each ($170 minus $4.87 credit collected from spread minus $143.13).
I then put in a sell price for these contracts at $24.50 as I could not wait till the market closed at 5am (time where I am based). It was a good decision as Apple’s share price fell close to somewhere near $140 and the 9 PUT contracts were sold. Thus, my profit was ($24.5 – $22) x 900 = $2,250.
The next day when Jerome Powell spoke about slowing down the interest rate to avoid over-tightening, the market rallied and so did Apple stock, which rose to $148. If I had held onto those PUT contracts, I would have lost $4.5k!
From the 2 experiences that I went through, you can see that buying single-legged options has its risk as the loss could escalate quickly if the share price moves quickly. The max loss will be 100% if the premium paid (assuming the option contracts expire worthless). Of course, if you are right, the profits could also escalate as well and there is no cap on the max profit.
If you are a risk-averse person, it is better to have a stop-loss strategy to manage your risk, either by a spread contract where the max loss is within your acceptable amount or you have a plan to exit when your premium falls by a certain percentage, e.g. 20%. This way, you can save yourself from the heartache of a big loss.
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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
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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)
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 on executing these trades:
Also, check out my trading strategies in different market conditions, whether it is bullish, bearish or volatile:
How Not To Lose Money In Trading? | My Trading Strategies For Bullish, Bearish And Volatile Market
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:
My Secret Weapons For Options Trading: I Watch These YouTube Financial Channels Every Day
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 sense 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
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