I have one trade that stands out head and shoulders above the rest as my number one F-up. I really screwed this one up.
Financially, it was my best trade of the year. Probably my best trade in several years…
But it still stands out as my worst trade of all time.
This was circa 2013. I had recently moved to Boulder, CO and life was good. New vistas, new friends, new environments, new everything.
And one thing I did which was new for me (at the time), was I had come up with a long-term bullish thesis on a stock. And over the course of a couple days, I wrote up about 5 pages of notes on my yellow legal pad outlining exactly how I’d play my bullish thesis using options.
The TL;DR version of my strategy is that I was going to purchase slightly out-of-the-money long calls with about a month until expiration. And then if/when the stock traded up and through the strike price of my long calls, I would take that opportunity to roll those options up and out to the next monthly series, using the proceeds from the sale of the existing ITM options to purchase as many new OTM options in the next month as possible. (For example, I’d sell 5 calls with Feb expiration for $5.00 a contract, then buy 7 calls with March expiration for $3.50 apiece. My position would grow in size, and I’d even extract a little leftover credit. Wash, rinse, repeat all the way to the moon.)
This was a super-aggressive, GO FOR IT! trade.
Lo and behold, after first initiating this position with the stock trading around $40 per share, it started quickly going my way.
I felt like a genius and my position ballooned in size.
What started out as a 4-figure investment was now worth well into the 5-figures.
After about 6 weeks of this position doing everything I hoped it would, I was now faced with an upcoming quarterly earnings announcement.
As is typical during times like this, the implied volatility of options had rapidly increased as the earnings date approached.
That’s when I got scared.
What if this stock tanks after earnings? I’ve got so much open profit here… I can’t risk losing it! This is my best trade in forever!
The open P/L was quite literally burning a hole in my pocket. I started this campaign with the stock at $40, and now it was trading at $70. My position size, measured in total call contracts, was something like 20x what I started with. And their expirations were now several months in the future.
So I got the wild idea of selling weekly covered calls (expiring a couple days after the earnings event) to “take risk off the table.” My thinking was: if the stock tanks, I’ll at least keep all this juicy premium from these weekly calls I’m selling. And surely, the stock won’t rise too much from here after an already incredible 6-week run! I’ll be able to buy these short calls back cheaper, post-earnings, after the inevitable IV crush that always happens after events like this.
The stock closed the day before the earnings announcement at around $70 per share. Then the earnings were released.
And then the unthinkable (to me) happened:
The market loved the numbers and the stock opened the next day near $100 per share. And never looked back.
I was assigned against my short calls that were expiring in two days, and I had to sell all of my long calls in order to satisfy the margin call. I gained zero benefit from the explosive move because of the short calls.
I held my head in shame and was demoralized for months after this trade. I literally left LIFE-CHANGING profits on the table. We’re talking more than a million dollar profits that I would’ve earned if I hadn’t gotten “cute” with my position and instead stuck with the plan that I had so carefully constructed, adhered to up to that point, and was already yielding fantastic profits.
That stock in early 2013 was Tesla.
And that position that I first initiated at $40 per share maintained momentum all the way north of $300 per share from where I exited.
My strategy would’ve crushed it.
I’m getting upset all over again relating this story to you now.
But the lesson is now permanently ingrained in my brain: STICK TO THE GODDAMN PLAN!