Selling call options can seem like a straightforward way to generate income, especially when you own the underlying stock. However, my recent experience with Alibaba (BABA) has taught me that this strategy comes with significant risks, particularly when the market moves against you. Here’s my story and a cautionary tale about the dangers of selling call options.

I held 300 shares of Alibaba, which I had purchased at $130 per share. Feeling confident about my position, I decided to sell 3 call option contracts with a strike price of $135, receiving a premium of $3 per share. At the time, this seemed like a great idea. I had an $8 buffer ($135 strike price minus my $130 purchase price plus the $3 premium), and I was earning additional income from the premiums. What could go wrong?

Everything changed when Alibaba’s stock price surged to $140. Suddenly, my comfortable buffer was gone, and I was facing the reality of having to sell my shares at $135, missing out on the additional gains. Stupidly, I sold my shares at $140, locking in a profit but leaving significant naked call options on the table. The emotional toll was heavy, and I spent sleepless nights worrying about the potential losses.

But the story didn’t end there. Yesterday, during Asian trading hours, Alibaba’s stock price skyrocketed to $149.  I am facing a loss of $3,300, with the possibility of even greater losses if the stock continued to rise. The anxiety was overwhelming. Fortunately for me, the stock price dropped back to around $140 by the end of the day, but the experience was a stark reminder of the risks involved in selling call options.

Here are some key lessons I learned from this experience:

1. Limited Upside, Unlimited Risk: When you sell call options, your potential profit is capped at the premium you receive, but your potential losses can be significant if the stock price rises sharply. In my case, the $3 premium seemed attractive, but it paled in comparison to the potential losses I faced when the stock surged.

2. Emotional Stress: The psychological impact of watching the stock price rise and knowing that your losses are mounting can be incredibly stressful. The sleepless nights and constant worry are not worth the relatively small premium received.

3. Market Volatility: Stocks like Alibaba can be highly volatile, especially during different trading sessions. The rapid price movement during Asian trading hours caught me off guard and highlighted the unpredictability of the market.

4. Opportunity Cost: By selling call options, you may miss out on significant gains if the stock price rises above the strike price. In my case, I had to sell my shares at $135, missing out on the additional $14 per share when the stock hit $149.

In conclusion, while selling call options can be a tempting strategy to generate income, it comes with substantial risks. The potential for significant losses, emotional stress, and missed opportunities make it a strategy that requires careful consideration and a strong risk management plan. My experience with Alibaba has taught me to approach selling call options with caution and to always be prepared for the unexpected.