I used to own 300 shares of Nvidia back in 2023 but I sold Covered CALL on them at the worst possible time when Nvidia had reached its bottom at $100+ in early 2023. My breakeven price was around USD263, and my strike price was around USD200 but the premium was not high as Nvidia was trading at a much lower price than the SP.
Then, Nvidia’s share price started to moon and the premium of the Covered CALL contract increased exponentially. It seemed impossible to buy back the contract as the premium was 10x the premium I received for selling the Covered CALL.
So, I was caught in this situation where the share price rose rapidly but I could not take the profits because while I had a paper gain on the share price, to realize it would mean I had to take the loss on my Nvidia options contract.
Read more here:
How A Wrong Move In Options Trading Stopped Me From Taking $66k Profit | Disadvantages (Risks) Of Selling Covered CALL Options
Then I made the worst decision of my options trading journey thus far by selling away 200 of my 300 Nvidia shares to redeem the capital and going into selling naked CALL because I thought that Nvidia was due for a correction after its Q2 result and that I could mitigate the risk of early assignment rolling the CALL options to a later date until a market crash, which would help me recover and close the options contracts.
Read more here:
Nvidia Catch-22: How I Attempt To Unwrong A Failed Covered CALL Trade
Nvidia has since doubled and rose from 400+ to its all-time high of USD 974. Each options contract is worth USD 71k, which is 35 times the premium that I received in the first place.
As I am 200 shares short for Nvidia, my unrealised loss amounts to USD 141.5k when Nvidia was trading at USD 875. If Nvidia is going to hit USD 1k or more in the future, this unrealised loss would be even greater. In short, the potential loss is unlimited when the trend works against you.
Initially, my plan was to let the contract remain as they were (even when unrealized losses were increasing) until I had a chance to get out in the very distant future, which means I will keep rolling the contract to a later expiration date and increasing the SP each time. This becomes an infinite get-out-of-jail card until two scenarios happen: Nvidia crashes when supply overtakes demand (like in 2022) so I can close the contract or when I finally buy enough Nvidia shares to cover my short positions. These two scenarios can only happen if there is no early assignment of the option contract due to the buyer exercising his rights to buy the shares.
However, I started to face liquidity warnings because the rapid rise in Nvidia’s share price was increasing my maintenance margin and eating away my excess liquidity. It does not help that the share price of Tesla, the biggest position in my portfolio, kept dropping which further lowered my liquidity value.
Read more about my liquidation warning:
Getting Liquidation Warning | Why I am Getting Liquidation Warning & What You Can Do If You Get Liquidation Warning
Concluding Thoughts
I hope this experience is useful to you especially if you are considering short-selling some stocks that you think are going to crash or selling naked CALL hoping to redeem them later at a lower premium. If the stock goes against you for whatever reasons, for example, in the case of Nvidia where it becomes the frontrunner in a totally new (AI) revolution, then you will face unlimited losses if you need to redeem back your options contract or shares. So, manage your risk and plan for the worst-case scenario of every decision you make in trading or investing. If you are really bearish on a stock, then buying a PUT option would be a safer choice.
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Why did you sell 2026 call?
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Hi Voka, because I wanted to roll it to a later date for a higher SP (so that I can eventually sell higher each time with each rolling) and to avoid early assignment because there is much extrinsic (time) value left in the contract.
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got it, thanks – helpful for this option newbie.
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Hi Voka, please don’t mention it, I am happy to help if I can, cheers 😊
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uh sorry I dont get your post. can I ask why didnt you just let the shares be assigned if they were ITM? you could have earned a small amount of money instead of going through all these right
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My SP back then when I had those 3 Covered CALL contracts was lower than my average price. Assume that the shares get assigned, I would have made a loss selling 300 shares at that strike price. However, trying to close the options contract is also bad because premium has 10x since I sold. So, it is a double whammy situation back then.
I shared the background in this post:
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