When an options seller sells a CALL option, he agrees to sell 100 shares of an underlying stock at a specific price, also known as the strike price, if the share price of the underlying stock rises above the strike price at the expiration date (end of contract).
A CALL Seller can get stuck in his SELL CALL position if the share price keeps rising as it means he will need to close the contract at a loss by paying a higher premium than he received.
I was caught out in my Nvidia options position when I sold 3 CALL contracts on Nvidia back in early 2023 when Nvidia was trading around USD100+ but had since skyrocketed to where it is today.
Things got really bad when I sold away 200 shares when Nvidia was trading around USD400+ and went into selling naked CALL and Nvidia’s share price continued to rise, then creating a timebomb situation when my increasing unrealised losses on my 3 options contract were wiping out all liquidity and I faced liquidation risk.
I tried a few methods to improve my liquidity but they weren’t effective as my unrealized losses continued to increase with Nvidia’s share price and dipping Tesla share price, by which I own more than 700 shares. Eventually, I tried this strategy to turn things around for my Nvidia option contracts.
The Strategy
So, what I did was to turn the contract from SELL CALL to become SELL PUT. I converted it from a SELL CALL SP260 18 Dec 26 to a SELL PUT SP1600 18 Dec 26. As you can see from the screenshot above, my liquidity actually increases by more than $3k.
I can only use this strategy on one contract as I do not have enough margins to cover the 2nd converted SELL PUT contract. The whole conversion does not require any extra premium to be paid and does not eat up any liquidity for my account.
What Happens Next?
When Nvidia’s share price continues to rise, my unrealised gain in this (SELL PUT) contract will offset my unrealised losses in the other 2 Nvidia SELL CALL contracts. If Nvidia’s share price starts to plunge, then my 2 SELL CALL contracts will gain but my SELL PUT contract will be at a loss. The liquidity kind of balances out each other (bearish vs bullish strategies), in either way the stock market goes.
The risk for this trade is an early assignment exercised by the option buyer, which means that I need to buy 100 Nvidia shares at the agreed strike price (USD 1600) if it happens. However, this risk would get lower if Nvidia continues to rise in share price or goes on an uptrend, which seems likely as Nvidia is currently the dominant leader in the whole AI revolution and is mostly likely to do well in coming years.
What Is Early Assignment Risk In Options Trading? Who Is Affected & How To Mitigate It?
Concluding Thoughts
While my liquidity is still not back to the healthy level yet, it is not going to fluctuate too much either as there are upside and downside protections now with SELL CALL and SELL PUT contracts.
Another advantage of this strategy is that I no longer need to buy any shares to cover my shortfall positions because the new options contract is no longer a SELL CALL options contract where I am obliged to sell the shares to the buyer if the contract gets exercised by the buyer. Thus, the strategy may be useful for those who are selling naked CALL options and facing unlimited loss due to the trend not going in their favour.
This may not be the best strategy to fix broken SELL CALL options positions but it is something that I can think of now to solve my liquidity issues. I hope you find it useful in some ways.
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