Vegas, Volatility, and the NVDA Nightmare
In 2022, I was on top of the world in the trading realm. My main options selling account had netted a 38% annualized return, while the S&P 500 had tumbled by 19%. I strutted into 2023 with a swagger, cockiness in tow. Trading, I thought, was a game I had mastered, and I could almost taste the sweet freedom of retirement. I envisioned myself selling options from a beachside hammock or at least from the comfort of my home office.
Breaking the Cardinal Rule
My strategy was simple yet effective: selling Strangles on individual stocks. The plan was always to exit before earnings announcements, avoiding the heightened volatility they often bring. This strategy hinges on the stock price staying within a specific range, ideally moving sideways, enabling me to collect a profit neatly.
Below is an example of a Strangle: a stock is currently trading at $80, and the expectation is that it will maintain its course within the Strangle’s designated range, between $100 on the upside and $60 on the downside.
Unfortunately, in the spring of 2023, I broke my cardinal rule. Distracted by a work trip to Las Vegas, I left Strangles open on NVIDIA Corp (“NVDA”), a stock mired in artificial intelligence hype with a looming earnings announcement. My initial bet was for NVDA to stay within a $40 range. Little did I know, while I was immersed in the Vegas buzz, NVDA’s stock price was preparing to leap.
The Vegas Surprise
Wrapping up my trip, I was greeted by a financial shock. NVDA’s stock had not just breached my set range but had soared way over the expected move overnight, from around $305 to $379. And it didn’t stop there. Over the next three months, NVDA continued its meteoric rise, peaking around $500. My position, which was once hovering around breakeven, plummeted to a staggering $25,000 loss. Profitability on my overall portfolio seemed like a distant dream.
The Rescue Operation
In a state of panic, I reached out to the CEO of TastyLive (Tom Sosnoff) who replied later that night. (In a world where billionaire CEOs are as accessible as a fortress, the CEO of Tasty stood out with a same-day reply, shining a spotlight on Tastytrade’s unparalleled dedication to their customers.) His advice was consistent: stay mechanical. This meant rolling up puts, extending expiration dates, and waiting for the stock to stabilize. There was some comfort in knowing that I wasn’t alone in this predicament; even Mr. Sosnoff himself was nursing a bad NVDA trade at the time.
Without going into every painstaking detail, employing TastyLive’s mechanics religiously over the following months, I managed to pare down my loss from $25,000 to $3,000.
Deciding to Bail
As NVDA approached another earnings announcement, I faced a decision. I could extend the term and continue wrestling with this volatile stock, hoping to break even or eke out a small profit. However, tired and wary of another potential gap-up and potentially bigger loss, I decided to close the trade and accept a $3,000 loss on this position. After all, another artificial intelligence hype story could easily send NVDA soaring again.
This experience was a hard but valuable teacher. Here’s what I took away:
· No More Strangles on Individual Stocks: Especially not on stocks in hot industries like AI. The unpredictability is just too high. I’ve shifted to ETFs, which generally tend to be more stable than individual stocks.
· Stay Vigilant While Traveling: Reducing trades or at least monitoring them closely is crucial. Never neglect the account.
· Stay Small: This principle saved me. My initial NVDA position was just ~1–2% of my buying power in this account, allowing me the flexibility to manage the trade through its tumultuous journey.
· The Power of Options Selling: Unlike buying options, selling gives you tools to maneuver and potentially turn a losing situation around. (Had I purchased an option that turned sour, my only recourse would be to sit tight and cross my fingers, hoping it wouldn’t expire completely worthless.)
As of now, this options-selling account is only up about 5% this year, trailing the S&P 500’s stellar 20% YTD gain. It is unlikely I’ll hit my target return of 18%; however, I have survived to trade another day. (Conversely, my wife’s retirement account, where we mainly sell Cash Secured Puts and Covered Calls is up an impressive 18%.) This journey has been a testament to resilience in the face of market unpredictability. Happy trading, and remember, the market always has a lesson to teach.