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My trading record (2021-08-23, short call Didi)

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Explain the reasons for short call Didi options and share the advantages and disadvantages of this strategy.

Abstract: Explain the reasons for short call Didi options and share the advantages and disadvantages of this strategy.

Transaction detail

What I want to share with you today is the transaction I made on August 23. The details are as follows:

Short put option

  • Didi Global Inc (US stock code: DIDI)
  • 300 option units
  • Expiration: 2021-09-24
  • Strike price: US$9
  • The underlying stock price at the time of trading: US$7.5
  • Option value: US$0.45
  • Commission fee: US$2.12
  • Total premium collected: US$132.88
Didi Global Inc (DIDI) stock 3-month chart
Didi Global Inc (DIDI) stock 3-month chart
Image source: https://seekingalpha.com/symbol/DIDI/chart

A quick review of short call option strategy

First of all, if you are not sure what a short call is, you can check my previous article “Basic option strategies – long call, short call, long put and short put“, you can also view the actual option operations that I have done before in “My transaction Record“.

To put it simply, short call is an operation method to look down the underlying stock. When the underlying stock price does not rise over the strike price at expiration, the premium will be your net profit. In contrast, if the stock price rises over the strike price at expiration, you will have to sell the stocks to the long-call-holder at the strike price. But I said in the previous articles that you can’t just think about making a premium when doing short calls. You should always think about the worst-case scenario and be prepared for both directions.

Covered short call vs Naked short call

Basically, there are two situations for short call. The first one is that you already have the underlying stock with the number of shares corresponding to the call. This situation is called a covered short call. Another situation is that you do not hold the corresponding number of stocks for that call. This is called a naked short call.

The risk of opening a naked short call is much higher. If the stock price rises sharply above the strike price of your short call, and you do not own the corresponding quantity of stocks, you must buy the stock at the high market price and then sell at the low strike price. It is conceivable that if there is a similar rise like Tesla stock last year, you will have the opportunity to lose a lot.

On the contrary, the risk of opening a covered short call is relatively contained. Because you already hold a corresponding quantity of stocks, even if the stocks rise sharply on the expiration, you don’t have to buy at a high price, you can directly sell your holding stocks at the strike price, of course, you will lose the potential increase of the stock price, but at least the risk of your potential loss can be calculated in advance, so you will not be surprised too much by the dramatic rise.

Why did I short call Didi?

The short call of Didi I did this time is a covered short call, because I was just forced to execute the short put last week to buy 300 shares of Didi Chuxing at US$8. After that, I found due to the great fluctuation of DIDI, the corresponding option premium value is also very good. Therefore, this time I plan to do a covered short call of these 300 shares of Didi. The exercise price is US$9 and the return rate of premium received is about 5%. I think this return in one month is pretty good. In addition, if it can be sold for US$9 a month later, I will be very satisfactory as that is a 12.5% increase in stock price.

Although the short call is generally looking for the downside movement of the stock, I really hope that DIDI can rise by the end of next month so that I can sell DIDI at the strike price at US$9 in a month. Of course, if DIDI really continues to fall, I will be a bit disappointed. But my personal feeling is that basically almost all the bad news about DIDI’s situation should have been reflected, and I guess it should almost reach the bottom. However, even if DIDI continues to go lower and lower as this is not impossible, so I have controlled this part of the position to account for only a small fraction of my portfolio, and I do not intend to increase this quite speculative part of the position. After all, appropriately allocating your portfolio funds is the key to long-term success.

Comments and sharing

If you have any questions, please feel free to leave a message or comment below, I will reply you. Or if you find anything incorrect in the article, please let me know and learn from you. If you find it interesting or it may help you in any sense, please share with other people.

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