My Greatest Option Loss (So Far….)

For a small account, I incurred one of my biggest loss (so far) on options trading. Made a gross loss of about $193.

As shown below, I sold a call spread on pharma / biotech company KALV, as the chart clearly shows a bearish direction on 25 Jan 2021. It has a high rich IV / IV rank to consider a short strategy. A week later, there was huge gap up due to some positive developments on a drug research. It’s so damn gappppp up that it blew past all my strikes.

I was trying to roll up or forward or even trying to create an iron condor or fly but it does not make commercial sense to do (e.g generating sufficient credit to reduce risk or cost). As all possible means fail, I was praying hard on probability to play out towards my favour but obviously it didn’t. I closed the trade at max loss (+ few dollars to offset illiquidity of this underlying).

What did I learn from here?

  1. For small account – greater emphasis on defined risk option positions. Had this trade been a naked position, I would have to say goodbye to options trading FOREVER;
  2. Illiquid and small cap stocks like KALV – harder to implement options adjustments. Should consider more liquid stocks, bigger cap and monthly options;
  3. Beware of biotech or pharma stocks – they may gap up or down…..;
  4. Try to read news or blogs or anything web-related that may possibly indicate the risks ahead for entering the option trade;
  5. If probability seems far from playing out in your favour, may be should just cut loss at max 2x or 3x of your premium received.

Disclaimer: This is not an investment advice or endorsement. Please refer to general disclaimer of this blog. If in doubt – please consult with your licensed financial planner or adviser.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s