Lost thousands with a Call Vertical Credit Spread on Microsoft. After nearly 200 trades I have taken my first loss and it is a big one. The Ex-Dividend date has hit me again. This time it has cost me quite a lot. The ex-dividend date is the date that the investor needs to own the stock to get the dividend. The ex-date was 8/18/21 and the stock was assigned on 8/17/21. I got an email in the middle of the night that the shares were assigned.
I thought I could roll the Call Vertical Credit Spread contracts on 8/18/21 and still had some time. I also thought that the early assignment risk was low because the MSFT dividend yield was small. I was wrong with my assumptions. I need to not try to trade near an ex-dividend date. Most likely will always trade a week or so before. Also, no relation that I can find between a low dividend and not exercising a contract. For now, I am going to assume someone will assign to get the dividend.
When I checked my Schwab account, I noticed that MSFT in my account was showing as -100. I had no idea why this was occurring. I knew that a sold option contract showed as -1 but no idea why a stock was showing as negative. Below you can see what it looks like.
I called Schwab and asked a few questions. I found that the shares were borrowed and that MSFT was an easy-to-borrow stock. Schwab account support shared that this was due to me having a margin and a lot of cash in the account. I had enough to cover the outstanding 100 shares of MSFT. It was also shared that this was one of the few calls that ended in a good way. It was mentioned that most calls require margin calls or other actions by the investor to right the account. This was all new to me. I did find a good article about burrowing shares (short selling), you can find it below.
More about Short Selling (Borrowed Stock)
My loss currently is $3073.23. I decided to include the premium from rolling and the sale of the outer arm call that I purchased. However, keep in mind that I have not purchased the shares yet and have not sold the 295 calls. Hoping to do both this week. So, this is not currently my true loss. I do think it will be close to $3k. Here are the calculations and information about my rolls.
I do want to mention that I have been averaging about 2k in premium each month. So this is like losing two months of premium. I could have minimized my loss earlier by not trying to roll so much. When I rolled, I was unable to increase the strike price by much and lowered it for two of the rolls. I also increased the spread. Looking back this just dug a bigger hole. Should have taken a smaller loss earlier. I released another post that shares how I was able to roll my ARKK position to get out of trouble. (How to Roll Options) This did not work so well with MSFT.
The monthly income is what is important to me. I need about 2k a month and do not want to earn more than 2k monthly due to having an ACA health plan. I get subsidies and if I earn too much they would go away. However, with the loss, I can make more over the next couple of months and in a way eliminate the loss. For instance, if I earned an extra $750 a month, I should be able to cover my loss and not be impact the ACA subsidies.
I have learned a lot from this loss. Going forward I will no longer use the Call Vertical Credit Spread. This type of trade is not safe enough for me. I am going to stick to Covered Calls, Cash Secured Puts, and Put Vertical Credit Spreads. Also, going to be even more diligent about ex-dividend dates and trade the week before. Finally, not going to go crazy with rolling. Will take a loss if I cannot improve on the strike price and gain a premium.
Below is a video I did on my YouTube channel discussing my loss. It has more details that I might have missed here. Also, as always join the mailing list and if you want to try this and want some hand-holding, please check me out on my Patron page!
Thanks, and Happy Investing
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