I bought 10 Tesla OTM CALL (20 Dec 24, SP 460) on 3 July to capture the upside of Tesla, whose share price rose by more than 40% in less than a month after announcing better-than-expected delivery results. Each CALL contract costs USD400 and I paid a total of USD4,000.
When the CPI results was announced on 11 July 24, Tesla share price in the earlier trading hours hit USD270 and my CALL contract was worth USD800 per contract, which meant that it was a 100% profit if I had chosen to sell the CALL contracts at that juncture. However, I did not sell it as I expected Tesla’ share price to soar higher, as the CPI results was good. Instead, I bought another 10 CALL contracts at a total of USD3,900, because Tesla’ share price was still rising.
Share Price Plunged
After reaching USD270, Tesla’s share price started to plunge and ended the day more than 8% down, closing around USD240. As a result, my profit dropped from USD4k to USD400, a 90% drop. My newly bought 10 CALL contracts dropped 50% in value to USD2,000.
Risk of Buying CALL
The buy CALL strategy is the powerful strategy when it comes to capturing the gains of a rapidly booming stock but the opposite can happen too when the share price started to plunge as the contract loses its value rapidly. I bought Out-of-The-Money (OTM) CALL contracts for a lower premium but it is especially time-sensitive as there is no intrinsic value. In the event where Tesla’s share price stays sideways, it will still drop in value due to higher theta decay.
Concluding Thoughts
It is satisfying watching the profit increase when Tesla’s share price has a big increase but on the other hand, it is agonizing watching the profit vaporize in a single day. I wanted to take profit earlier but was hoping that it would rebound in the later half of the day, on the news of a good CPI reading. But it did not. However, it was still a happy ending as Tesla’s share price rebounded the other day and I closed the contract with a USD1k profit.
So, if you are buying single leg options, always bear in mind the risk you are taking and set your stop-loss. If you are the kind who is unable to exit, then be mentally prepared for the max loss.
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