I bought my Tesla CALL options at the worst possible time when Tesla reached its peak price of this year at around USD270 and started correcting. It was one of those days where Tesla’s share price dropped by more than 10% in a single trading day.
Trade Details:
[11 July 24] Bought Tesla CALL & Nvidia Shares
BOUGHT 10 TSLA Jan17’25 610 CALL @ 3.9
I bought 10 Tesla contracts at USD390 per contract and paid a total capital of USD3.9k, with strike price USD610 and expiration date on 17 Jan 25. On the same trading session, I was down by more than USD1k.
My First Attempt To Repair The Trade
I later tried to average down by buying more similar contracts at the following share prices that Tesla was trading at:
232.9, 196, 204.5, 214.79, 228.92, 247.5, 248.3, 224
Breakeven Price
Over the past few months, I have accumulated 100 contracts at an average price of USD64.4 per contract, down significantly from USD390 per contract. However, the contract value is only USD9 per contract, which represents a 86% loss.
Why It Came Down So Fast?
Even though Tesla’s current share price of USD 220.70 was only down by 18.5% from it’s yearly high of USD270, my contract was down by 86% due to the following reasons:
- By buying a CALL option, time becomes our enemy; the longer the contract drags, the more money we will lose, even when the share price remains the same. The only way to profit is for the underlying share price to keep increasing in a short period of time, or for it to turn from Out-of-The-Money (OTM) to In-The-Money (ITM).
- As my CALL options are deep OTM, i.e. strike price (USD610) is much higher than current share price (USD220), it does not have any intrinsic value and is all extrinsic value. Thus, the theta (rate of time decay) is higher and the contract is losing higher time value every day, as compared to the ITM type of options contract.
My Second Attempt To Repair The Trade
As the contracts get nearer to expiration date (from July to August to September and now October and only 3 months remaining), the option contracts will decay even faster when they are 30 to 45 days to expiration date.
Thus, if Tesla’s share does not increase exponentially to counter the exponential drop in contract premium, then all these 100 contracts are likely to reach $0 value about 1 month before expiration date.
Repair Strategy: Convert Broken Buy CALL To BULL PUT Spread Contracts
In order to construct this repair trade, I have 3 criteria to follow:
- Longer Expiration Date
- No Extra Capital Invested Into Trade
- Max Gain Must Exceed My Current Capital
Firstly, I wanted a longer expiration date to allow Tesla more time to recover and delay getting to that last 45-day timeframe where options contracts expire exponentially in value.
Secondly, I do not wish to invest extra capital into this trade anymore as I already have USD6.44k invested in this failed trade.
Thirdly, the max gain must exceed my invested capital. Otherwise, it would be a losing trade to begin with, regardless of the outcome.
Repair Strategy Trade Details
With the above 3 criteria in mind, this is the new options contract that I have constructed:
Strategy: BULL PUT Spread
Expiration Date: 20 Jun 25 (244 days contract)
Strike Prices: BUY 340 PUT, SELL 350 PUT
No of Contracts: 10
Max Gain: USD10000 – USD6440 = USD3560 (55% gain on capital)
Max Loss: USD6440
Max Gain happens when Tesla closes above USD350 on 20 Jun 25,
Max Loss happens when Tesla closes below USD340 on 20 Jun 25.
I am likely not going to wait till expiration date to close the contract unless Tesla keeps going up. Most likely, I will close these contracts with minimal loss or at breakeven point.
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Why BULL PUT Spread As The Repair Strategy?
The thing that is not too ideal about vertical spread options strategy is that the max gains are limited, unlike single leg options. However, the advantages are that time is in my favour and as time passes, I gained in time premium (fork out less premium to close the contract). The volatility of the 2 legs in a spread also cancel out each other, thus it is safe from spike or drop in IV. Lastly, I get to collect advance premium in a credit spread, which is earning interest on my brokerage account.
Read more to understand the BULL PUT Spread strategy in this article:
How Does Bull PUT Spread Work?
Concluding Thoughts
OTM CALL options are really good to capture the short term upside of momentum stocks with minimum capital. However, if the contract drags or the underlying share price drops drastically, then the contract loses much of its premium. I hope that through this article, you understand the risks of buying CALL options and also gain some inspiration on how to repair your broken trades. If there is further questions, please feel free to get in touch with me.
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