Earlier in March, I shared that one of my trades on Nvidia was like a ticking timebomb as my unrealized loss on 2 SELL CALL contracts was around USD141k at that period, The 2 SELL contracts are naked in nature, which means I am selling 2 CALL contracts without owning any Nvidia shares. This is an extremely risky trade as it may lead to unlimited loss, and this is how it relates to the timebomb analogy.
Read more here:
My Nvidia Time Bomb (-USD141.5k Unrealised Loss & Counting) | Why You Should Never Sell Naked CALL | The Danger Of Short Selling
If I had done nothing at that juncture when Nvidia was trading at USD875, my loss today, when Nvidia was trading at USD131.88 (pre-split price USD1318.8), would amount to USD216k.
What Is The Risk?
The biggest risk of holding such a position is early assignment, which in my situation would make the unrealised loss become realised loss. Early assignment happens when the buyer of the CALL contract chooses to exercise it early and this may happen when the share price increases so much that the strike price is deep In-The-Money (ITM).
In a usual CALL options contract, the seller of the CALL contract will sell 100 shares at the agreed strike price when an early assignment happens. However, since I do not own the Nvidia shares, I have to buy 200 shares (or 2000 shares post-split) from the open market to make up for the shortfall and then sell at the agreed strike price.
Another scenario of early assignment can happen when my unrealised loss keep mounting and eating away my excess liquidity, to a point where excess liquidity becomes zero and the brokerage is forced to liquidate the position, thus turning unrealised into realised loss.
How Do I Repair This Naked CALL Trade?
I was naked on 2 SELL CALL contracts, which meant I was short of 200 Nvidia shares. I started repairing the trade by buying Nvidia shares on every dip to make up for the shortfall of shares. However, that was a very slow process and required a huge capital to eventually cover all my naked shares (USD900 x 200 = USD 180, 000)
I then came up with another method to resolve the issue faster. I converted one of my named SELL CALL contracts into a SELL PUT contract, using the premium collected from the SELL PUT contract to cover the premium required to buy back the SELL CALL contract. Thus, I did not need extra capital for the trade since both premiums canceled out each other. Surprisingly, the trade did not eat up any excess liquidity as maintenance margin was negative.
Read more about the method here:
I Found A Way To Fix My Broken Covered CALL & Naked CALL Positions, While Releasing Stuck Shares, Unrealised Profits, Without Hurting Liquidity
After this trade, I was left with only one naked SELL CALL contract. I could not repeat this trick again as the maintenance margin would increase significantly if I had used the method again.
After a few months of buying Nvidia shares, I was only short on 50 shares for that last naked SELL contract.
Stock Split
The stock split came as a welcome news as it helped to further fix my broken CALL position. After the 1-for-10 stock split, my 0.5 naked SELL CALL contract became 5 naked SELL CALL contracts. That allowed me convert these 5 naked SELL CALL contracts into 5 SELL PUT contracts using the above method.
Further explanation here:
The Nvidia 1-to-10 Stock Split Will Help To Fix My Nvidia Broken Naked CALL Situation
So, from 10 to 12 June 24, I converted the remaining 5 naked SELL CALL contracts into SELL PUT contracts that would free off my obligations for my SELL CALL contracts.
[10 June 24] Convert 3 SELL CALL to 3 SELL PUT
[11 June 24] Convert 1 Nvidia SELL CALL to 1 SELL PUT
[12 June 24] Convert Nvidia SELL CALL to SELL PUT
This means I am no longer have naked positions for my SELL CALL contracts. All my current 15 SELL CALL contracts are covered by 1,500 Nvidia shares that I owned. So, in the event of early assignment, I am still able to fulfill my obligation for these 15 Covered CALL contracts and do not need to buy shares from the open market at whatever share price it is at that point in time.
What Is The Risk Now?
Even though I am not at risk for USD216k (and counting) unrealised loss, there is still some risk left in this trade. It also has something to do with early assignment. My breakeven price for 1500 Nvidia shares is USD53.09 but the strike price for my Covered CALL contract is USD26. Thus, if the buyer decides to exercise all 15 contracts, I would have a realised loss of (53.09 – 26)*1500 = USD40,635. But I would like to think that this risk is manageable as the contract will only expire in 2.5 years and there is significant time value left in the contract. The buyer would be better off selling his options contract than to exercise it.
I share more about how to mitigate early assignment risk in this article:
What Is Early Assignment Risk In Options Trading? Who Is Affected & How To Mitigate It?
Another risk that I can think of is that after converting 15 SELL CALL contracts into 15 SELL PUT contracts with relatively high SP, I am now on USD272k worth of margins of selling PUT. If somehow the stock market crashes, and that these PUT gets assigned, I would have to cough out this amount to buy the shares, which would likely get me into margin call.
If the worst case happens, I would probably sell off all the shares that I am assigned, and activate my emergency funds in Singapore Savings Bond (SSB) and sell off whatever shares that I can sell that point in time, to raise funds to cover my deficit. Based on these 2 mentioned risk, it is obvious that I am not totally out of the woods yet. But if the bull market is to continue and Nvidia is also slow and steadily increasing it’s share price, then I should be quite safe for the time being.
Concluding Thoughts
Back in early 2023, where Nvidia was facing oversupply and lack of demand for its graphic cards and was trading around USD100+, few would have predicted that they would shortly lead the AI revolution and 13x just a year later.
I made the biggest mistake of my options trading journey by selling Covered CALL on Nvidia before it bottomed and selling these Covered CALL positions at low strike prices, hoping to earn more premium but it got me stuck when the share price skyrocketed.
Another big mistake that I made was to sell away my shares to capture the profits as I thought back then that Nvidia would not trade above USD500. That was a terribly wrong move as I got into a situation with unlimited loss as Nvidia’s share price kept going up, so did my unrealised losses in my naked CALL positions.
I hope you find this sharing useful, whether if you are trying to fix a broken sell CALL trade or even contemplating going naked on your options contract. I hope you do not walk my path and avoid all those pitfalls that I have encountered.
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