I accumulated 300 shares of Nvidia over 2021 and 2022 when my SELL PUT contracts were exercised. The average price of my Nvidia shares is USD 263.33.
Since the start of the year, Nvidia has experienced a phenomenal rise in share price. Its YTD (Year To Date) performance is almost 200%.
Based on Friday’s (16 June 23) closing price of USD 426.92, my paper gain is USD 49,077, also equivalent to S$66,253.95. However, I am not able to sell away my Nvidia shares to realize my gains, as my shares are locked in a losing Covered CALL trade.
At the start of the year, I sold Covered CALL on Nvidia when it just bottomed and was about to rocket upwards As selling Covered CALL is my bearish strategy, Nvidia going on a crazy bull run meant that the trade failed completely.
Mistakes To Avoid When Selling Covered CALL
I sold my Covered CALL when Nvidia was trading around USD120. As the premium was peanuts if I were to sell at a strike price that is near my average (breakeven) price of USD263.33, I decided to sell at a much lower strike price, thinking that Nvidia would go down further.
I received USD2396 per contract but would need to close the contract at USD23.6k, which was 10 times the premium I received. Thus, in order to close the contract, I would lose USD 21.2k per contract. As I have 3 contracts, I would lose USD 63.6k, which is equivalent to S$85.86k. So, if I realized S$66.2k worth of paper gain, I would lose $85.8k to close the options contract, which is a net loss of S$19.66k.
If there is an enormous market crash that brought Nvidia down to the USD 100+ range, then I would be able to close my options contract with no loss. However, it would also mean that I would lose all my paper gain now as my shares accumulated paper losses.
Lesson Learnt
The important lesson that I learned from this episode is that I should not be setting the strike price too low, no matter how bearish I was at the time of opening the contract. This is because if the share price suddenly shoots up exponentially, I would either be stuck with the contract for a long time or I might risk getting assigned early, thus forcing me to sell at the strike price that I am not comfortable selling.
Also, if you have the intention to use the cash that you put into buying shares at a certain stage in your life, then do not use these shares to do options trading, i.e. selling Covered CALL on them. In my situation, if I need money desperately, I will feel so screwed as I cannot withdraw my capital and paper gain, which is a significant sum if I withdraw them all.
Concluding Thought
I am currently in this situation whereby realizing a paper gain would result in a greater loss, while a crash in share price means that I go from a $66k paper gain to a paper loss. It makes sense to choose paper loss over an actual loss. I may just wait it out and wait patiently (possibly years) for the time value of the contract to drop so that I can avoid any losses when closing the contract and hope that Nvidia rises again in the future for me to realize my paper gain.
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hi jason. long time never visit your blog. selling covered call is not exactly a bearish trade. overall delta is still positive although the short call deltas is neg. No one has a crystal ball and when you pair your 100 shares with a short call, there is no way to know a particular stock would go up or down. you are jus implementing an income system that involves potentially buying the shares and getting rid of it after being assigned and making an income from the whole process. if long term investing or capital growth is something you are after, then you prob should not be deploying the strategies which you blog about. in other words, the system which you are currently using makes money SLOWLY. key is there is still money to be made and you must be disciplined and have the patience to do so. cheerio.
p.s. i am currently out of the options market as IV is at a historical low and interest rates is high. so it makes sense to just put monies in safer money market instruments and enjoy the historical high interest rates. remember risk is only worthwhile taking when the price is right.
really cheerio.
raymond
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Hey Raymond, yeah…been a long while, hope all is good for you! Thanks for your valuable advice again, I really appreciate them 🙂
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