Spotify wipe out my gain in 1 night

The previous month, I receive a tiny profit from selling bull put spread. This month, I want to experiment with iron condor and going on something a little bearish.

My first bear call spread

Options trading with Spotify is previously one of my fastest gains. Looking at the range and flat volume that Spotify has been trading, I pull the trigger on selling: Bear call put of 330 call/340 call, 45 days to expiry with 1.30 credit.

Here are the greeks of my Spotify trade:

Delta Gamma Theta Vega
-4.73 (Beta weighting of -0.36) -0.09 2.26 -4.39

The values related to volatility are:

Implied volatility IV percentile
47.52% 32%

This is when Spotify is trading at 284.03. 15% increase before this position could come and haunt me.

As if I know how to read the chart, "Well, Spotify seems to be at a price point touching resistance, and it has gone down 7 points. it will go down like it has been doing. This will be an easy trade." No, I don't know how the chart works and I cannot tell from the chart.

True enough, I wake up the following day to a small tidy profit of $10. Other positions have a few dollars gain/loss here and there but nothing too much of a concern. At this point, I have used up most of my buying power and can only monitor the trades in the next few days. It's going to be an easy month, or so I thought.

On the second day of selling my bear put spread, Spotify goes on a steroid-fuelled hike, up 12%. It will go down. The market is random. Maybe, it will come down. At least that's what I tell my self as I look at the green candles on my screen.

-- The Motley Fool

I watch the screen as the loss jumps in value. From $15 to $60 to $120 to $240 to $330, in one night.

My 330 short call register a loss of $1570, when the market price jumps from $5.05 to $20.75. I always do spread, my 340 long call went upwards, with a gain of $1310, with the market price jumping from $3.75 to $16.85.

The spread has saved me from blowing up.

Options buyer vs options seller

If only I have bought the call option from the start or buy back my short call option in time, I will have profited crazily from it. This makes me realise how options buyers profit. Some broad assumptions will be:

  • Options sellers make frequent and small gain with a high probability but could potentially lose a good percentage when things go against them
  • Options buyer make frequent and small losses but could potentially gain a good amount when things go their way.

Theta
Why is that so is because in option pricing model there is a time component: theta. With each passing day, the value of the options will decay if all else stay constant. In other words, the positive theta value causes the options price to drop. So in general, an option seller has the passage of time in their favour.

Gamma
However, when our positions have a positive theta value, it has a negative gamma value. Gamma value is the rate of change of an options delta. In simpler terms, it means a negative gamma means a huge move in the underlying will hurt you if you but a positive gamma means a huge move will benefit you.

Unless there are huge implied/realised volatility expansion and price movements in the market, the passage of time will benefit the option sellers. Since volatility is priced into an option price, high implied volatility will also mean the option is pricier.

Lessons learned

I'm deeply humbled by this experience I have this early in my trade before I start to increase my size and position. In options trading, there is no definitive right or wrong because there are many variables in play. Randomness dictates that one can be profitable for a long time before a single rare event reverses everything.

I believe certain strategies fit better in certain market conditions. And if I want to be a trader of longevity, I might not necessarily have to utilise all of them but it will be good to know that I have tools that I could fall back on.

Back to my trade, what I did to salvage my trade is to leg into an iron condor by putting on a bull put spread of 250P/260P. Receiving a 1.16 credit to reduce my max risk on the position from 870 to 754, and similarly allowing me to roll the leg up for credit should I need to do so.

That's it, I'm hanging tight onto my seat to making notes on the nuances of my Spotify trade, hopefully discovering nuggets of wisdom along the way by managing this position.

Till my next portfolio update.

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