Accidentally Risking Half a Million

Accidentally risking half a million- how often does that happen? Never in my world, for one. One tiny mistake in a butterfly spread on UVXY.

This is my experience on one of my scariest trade risks to date.

I always seem to learn best by losing. More than any 'trading course' could teach. One of my flaws is the need to learn quickly- being impatient- even if it means I need to skip a few chapters.

This incompetence isn't welcome in the trading world by a long margin. Knowledge equals profits: ignorance equals loss.

I've only recently started options trading. Quickly jumping from one level to the next while skipping a few steps led me to multi-leg strategies. The long-call butterfly caught my attention. The ability to make profits out of any market direction during current volatility seemed like a superpower. And without learning all the fine details, I hopped on the opportunity to make a quick bet on UVXY on Friday, 18th February 2022. I opened a long-call butterfly (17/17.5/18). The P/L graph looked perfect. A risk of $7 for a profit of $70 felt like hope against my daily losses amid Ukraine and American Inflation. Being heavily invested in TQQQ, my current P/L Open was experiencing huge losses on a daily. So opening 250-500-250 contracts was my 'all in' to make a quick $17.5k at most.

Until 3 PM, all was going well with a positive P/L Open. Not knowing how a butterfly spread is closed, I thought I was supposed to hold it till expiration. And that's what I did. At expiry, my P/L Open showed $1200- seemed great for a first-time butterfly strategy. However, my $17.5 and $18 calls expired worthless. I didn't realize till Saturday that my $17 call got assigned. To my surprise, I had 25000 shares of UVXY worth $425,000- causing a margin call of about $200,000. On Friday at 7 PM, UVXY showed a price of about $17.7. The onset of the Russian invasion meant UVXY could soar into next week. But for the sake of my position, the markets still had three days to hear any good news from the Kremlin. All this meant my account was in grave danger. There was a chance UVXY would drop dead Tuesday morning after Presidents' Day 2022. And for every dollar it fell, I'd have to shell out $25,000. The news of war kept coming over the weekend, making the world and my portfolio with it a tense place.

With the dawn of Monday, all world markets seemed to crackdown. Russian markets were down 17%. These dips gave me some confidence for Tuesday, hoping to exit my position with no profit no loss at a minimum. But as the markets opened on Monday, futures seemed to climb back up. And I got no big jumps in UVXY as I had hoped. My broker let me know to close the position before noon due to the margin call. I got tired of waiting around and exited half an hour or so before noon for a profit of $9750.

I should have closed the trade well in advance of expiration. This trade could have gone wrong at any point. Now I know to investigate any strategy thoroughly before I decide to enter. I am one of the few lucky ones.