If I have a chance to turn back time and with today’s knowledge and experience, I would avoid these 3 beginner mistakes and they are selling ITM PUT, selling ITM CALL and buying OTM LEAPS. I will elaborate on each one and how avoiding these strategies may help you avoid some pitfalls in your options trading journey.
Selling ITM PUT
Back in 2021, I sold quite a number of ITM PUT contracts, in exchange for high yield premiums. The strike price is usually higher than the share price at the time the contract was opened, which means the share price has to close higher at expiration in order for me to pocket the premium without buying the shares.
Back then when it was a bull market, I was okay for the contract to expire in-the-money and I had to buy the shares in return. I was able to sell Covered CALL since the share price hovered around my breakeven price. However, as the share price started to plunge, especially in the bear market of 2022, I realised selling CALL near my breakeven price yield very little premium. Furthermore, I was stuck with much paper loss, because I bought those shares at a higher price and the share price had plunged.
Therefore, the learning lesson is not sell at a higher strike price for the higher premium but as a result, suffer the higher risk of getting assigned and be stuck with the shares when the share price started to correct/ plunged.
A better method that I later discovered would be to Sell OTM PUT, which I called the SOP strategy, to have a higher chance of success with a margin of safety.
Read more: My Options Trading Strategy For 2023 | Introducing SOP Options Trading Strategy
Selling ITM CALL
When the stock market plunged in 2022, I was not only stuck with many shares with unrealised loss, I couldn’t sell any CALL contracts that was near my breakeven price. I had to sell at a strike price that was way lower than my breakeven price so that I had a decent return on premium.
However, that is always a risk when the market rebounds and we get caught offguard. We either have to sell at a ridiculously low level, which would have realised our unrealised losses, or roll them to a later date with a slightly higher strike price.
I made this mistake of selling Nvidia just before it bottomed in 2023, at a low strike price of USD10+, and the share price had never dropped to that price ever again and kept going up higher. My unrealised loss in my options contract kept going higher when Nvidia’s share price kept going up. At the same time, I was not able to realised my gains on my actual shares because they were all locked in options contracts.
Read more: Nvidia Catch-22
I eventually sold my shares because I wanted to free up my capital and created a timebomb as I was naked on 2000 Nvidia shares and Nvidia kept rising to a new high each time.
Read more here: My Nvidia Time Bomb (-USD141.5k Unrealised Loss & Counting)
Buying OTM LEAPS CALL
In 2021, I made quite a lot of money by buying and then selling OTM LEAPS CALL because the market kept rising non-stop in a red hot bull market. These OTM LEAPS CALL were much cheaper than their ITM LEAPS CALL counterpart and can sell for a huge profit when the share price increases rapidly within a short time.
1st Year Options Trading Recap: The Journey Towards S$217,509 Profits In 2021
However, as the prices started to correct or stay stagnant over a period of time, all these OTM LEAP CALL contracts lost much of their value over time. This is because the option contract has zero intrinsic value and the premium is made up of only extrinsic value. So, every day, the premium drops due to time lapse. The only way for OTM LEAPS CALL to be profitable is for the share price to keep rising over a short time to compensate for the drop in premium due to time decay.
A better way of buying LEAPS CALL is to buy at higher delta, which also has a lower theta (time decay), so the contract loses very little time premium over the most part of the contract. ITM or ATM LEAPS CALL are generally more expensive to buy but they come at a lower risk.
Concluding Thoughts
Though there is no way I could turn back time and avoid those mistakes, I hope this sharing is useful, especially to newbies who have just started on options trading. Hopefully, you will avoid these pitfalls that I had while self-learning on my own.
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