Some surprises are nice to wake up to in the mornings. Others aren't so exciting. This morning was the latter.
Yesterday, I was feeling pretty good about the GoPro (GPRO) calendar spreads. I added to them in the afternoon was sitting with a nice starter position with an average cost hovering around $0.60. I intended to try and build the position to a good size, but only executed 25 yesterday. A few traders I talk to were also looking at similar trades when the discussion of risk came up.
I saw the biggest risk as getting the short calls exercised. If the short calls were exercised against us, then we would be short stock. Given the stock is impossible to borrow, that would mean having to close the trade within the day and possibly early in the morning. But since expiration was several weeks away, I didn't see it as likely. Of course, what did I wake up to this morning, but 19 short calls in my account had been exercised. Glory be, I opened this morning short 1,900 shares of GPRO. What fun. I didn't have a margin call, but also knew I didn't have a borrow available to me for any type of overnight or longer trade. Plus, with the borrow costs being so high, I don't know if I would have wanted to carry the shares overnight. The shares weren't uncovered since I was long the November $75 calls as well, but clearly I needed to address the situation.
To me, this one was simple. Before the open I pulled up the covered call portion of my trade platform. Rather than panic and try to cover the stock, then sell the option or roll the dice and cover in premarket the short, then look to sell the call after the open, I wanted a single transaction to close both sides. Granted, if I timed a premarket cover just right, then timed my call sale just right, I could have made some nice coin. Then again, if I mistimed one, or both, things could have turned ugly in a hurry.
The key was not to panic. Simply access what you need to do, plan it out, then do it. For me, it was waiting for the options to open and see where the buy 100 shares of GPRO, sell 1x November $75 call had its bid and ask. Like just about every other trader out there, I didn't want to lose money on the transaction, so I wanted my execution to be at or below $74.40 if at all possible. That would get me back the $0.60 cost I put into the trade. Granted, I would still be down commissions, but I wanted to avoid any execution at or above $75 if possible. I was willing to risk $0.60 on the trade, but really didn't want to lose it overnight.
Generally, you won't have to execute over $75 on a trade like this, but the option pricing on GPRO has been a bit wild given the hard-to-borrow nature of the stock along with its volatility. The bid-ask spread was extremely wide on the open with the bid less than $73 and the ask more than $75. This is one of those great examples of when NOT to use a market order. I could have seen executions as high as $75.50 had I approached it in this manner, which would basically be panicking. Instead, I entered multiple orders in lots of five ranging from $74 up to $74.50 to start. I knew the $74.50 execution would be a small loss, but it would remove some pressure and demonstrate to the broker-dealer I was moving to close the position and address the situation.
To make a long story, a little shorter, I was able to close out the position within 19 minutes of the open for a breakeven trade. Certainly not ideal, but also not tragic. It does make for a great lesson as well though. This was a setup that looked like a fantastic risk-reward and one almost too good to be true, but not quite there. Still it is a reminder to understand any and all possible risks with a trade no matter how remote you see them because you just may wake up to a surprise you aren't prepared to handle.