Sunday 17 September 2023

Selling Covered Calls for 2 months | What I have learned and mistakes done

I have been doing some covered calls since July and it’s been a learning experience as I earn some side cash on the side and maybe also some losses? There have been times when I did things in a rush and it ended up with me having to lose some profit which I will share more. In the end, if I did not panic, it would have turned out fine.

Selling covered calls on………

TSLA and PLTR. Most of the premiums are from TSLA since it is a volatile stock and it is a popular stock for options since the premiums are rather huge compared to others. PLTR is a smaller value as I don’t hold as much of it as compared to TSLA. 100 shares of TSLA is very different in absolute value against 100 shares of PLTR.

Panicked when the market price came close to the strike price, rolled it at a loss and bought eventually bought it back at a loss as well

I started selling covered calls in mid July and it was great in the beginning as the market was a sideways market for TSLA and PLTR, it was a slightly downward market meaning that selling covered calls were good as price got lower, I can readjust it and earn more premium as the market price got lower.

On 21 August 2023, Tesla experienced a jump up in prices and it did scare me as I saw it go substantially nearer to my strike price. My strike price was about $10 in difference from the original market price but as Tesla shares are exceptionally volatile, the market price went up.

I panicked and rolled it up towards another week with a slightly higher strike price but I realised that I should have not as now I will need to wait another week for it to expire and with the price rising at a rapid pace, it might zoom past my strike price even before the week comes.

I then proceeded to buy back the covered call and recorded a loss. Eventually, I realised that I should have just left it to expire because even though the market price was near the strike price because it eventually did not hit it and even if it did and someone took over my shares, I could have sold a cash secured put for it. I learned through that and I think there will be many more lessons but it was a great learning point.

Lost my shares

As Morgan Stanley released a report on Tesla’s Dojo Supercomputer on a Sunday, 10 Sep 2023, the stock soared in the week of 11 Sep 2023. I had a covered call with a strike price of $267.5 which was exercised and currently, as of 16 Sep 2023, Tesla is at $274 after market.

I shall see on Monday how the shares are and sell a cash secured put. Selling a cash secured put means that I can choose a price that I would like to buy 100 shares at with a premium received but the buyer will be the one who has to exercise it for me to be able to get the 100 shares at my strike price.

I checked with chatGPT and got the following response since it will be my first time selling a cash secured put, “If you have sold a cash-secured put option (also known as writing a put), you do not have the right to exercise it. Instead, the buyer of the put option has the right to exercise it if they choose to do so. As the seller, your obligation is to buy the underlying asset at the strike price if the buyer decides to exercise the option. You are at the mercy of the buyer's decision, and you must fulfill this obligation if exercised, but you cannot initiate the exercise yourself.” I will maybe update on this if I have the time.

More to come

It’s been a period of learning and I kinda get it but of course with TSLA being a very very volatile stock/company, anything can happen within the span of a week. It’s been interesting and I will continue to learn and share updates on it.

I read up a lot before embarking on this but I realised that the best way to learn is to experience it and you will get a better gauge of it. Exciting journey and I will keep exploring and learn.

1 comment:

  1. So is your Telsa strategy to sell a naked put with strike price at around $265 (currently now 274) that was similar to covered call strike price OR to sell the put closer to current market prices ?

    I understand your covered call strategy (And lets assume you really you are 100% covered call ie hold same number of stock + call that was exercised ) but since the call now is exercised, you are actually back to neutral position in Telsa. (ie not impacted if Telsa market price goes down or up).

    And if you now sell a naked put (ie without the underlying stock), do note you are opening your sell to a position that if Telsa really tanks, your position may be worse than before. Cos while you have premiums from both call and the puts from above, you are now holding on to stocks that is worth less than what you can buy from the market. And those loss can grow deep if Telsa goes down a lot.

    I think the strategy for naked puts are rather different from covered call . For naked puts, you must really be very market news sensitive as these naked puts will be activated immediately when a bad news comes up. That was the premium is for. Also check the earnings dates of Telsa. Cos if it is near the earning released dates, you are going in for a wide ride. I dont think their results will be that great this quarter so i will be a bit more mindful. A covered call strategy is better. And personally, i will wait for the stock to tank then employ back the covered call strategy. But that is my view.