Podcast – Episode 025 – Credit Spread Horror Story with Jeremiah Wiser
Allen: Welcome everybody to another edition of the Option Genius Podcast. Today I have with me Mr. Jeremiah Wiser. And we’re gonna be talking about really how to overcome or get started again trading options after you have a not so auspicious beginning. That’s one thing we wanna talk about. And then the main thing we wanna really cover is Jeremiah has had a very interesting experience with one particular credit spread trade, that I believe everyone who trades credit spreads or or any kind of spread really would be able to benefit from, because it is something that we do not on a regular basis even think about or acknowledge or plan for. So I wanted him to share his story so that we could all learn from it, because this is something that I haven’t had experience to me. I’ve heard some stories in the past, but this is somebody who has actually had gone through this nightmare, so we’re gonna talk about what happened exactly, and how you can avoid it.
Allen: So Jeremiah, how you doing today?
Jeremiah: I’m doing well. I’m doing well. Thanks for having me on.
Allen: No, no. Thank you for coming. Thank you for volunteering your story, and because, you sent, when you sent me that email about what happened with the trade, and I asked you about if you wanted to be on the podcast, I knew you were very apprehensive in saying, “you know what? I’m not the super rich billionaire that you need to have on the podcast.” And I was like, “No, I don’t think that’s, every episode does not need to be talking to somebody who’s already made it.” You know? I admire what you are doing right now, the fact that you’re learning, the fact you’re going through the motions. And like you shared in your story that you had started trading options back in 2006 I believe, with about $20,000. And you proceeded to well basically, you did what a lot of people have done. And you did what I have done in the past, where we have really big goals, really big ambitions. We have a little bit of cash, and so we read up on books, and we watch videos, and maybe go to a seminar or two, and then we go all at it, and well, I’ll let you tell the story.
Jeremiah: Yeah, so back in around 2006, my dad introduced me to options, and gave me some books to read. And I read those, and got really excited about it. Thought this is a good way to make some money, get ahead in life, and I did it all the wrong ways. I bought the options in the front month, and I bought them really far out of the money. I had everything working against me. And so I was basically trying to hit home runs. And I did actually hit a few. You know, I had a 2100% gain on one. But that’s really a losers game when you lose 100% on all your other trades. So I ended up, ended up doing it the wrong way, doing it that way, and ended up losing all that money that I started out with. So I definitely don’t recommend doing it that way.
Allen: And from what you told me, you succumbed to what we call the shiny object syndrome, where you’re trying to do it, you’re trying to learn how to do it, but you get an email or an advertisement saying, “Hey, you know, we have this great system. We have this great thing. Why don’t you try this.” And then you go after that. And then a little bit later, maybe a month or two later, you get something else. “Oh, we have this other thing over here,” and then you kinda switch over there, instead of focusing on one track and focusing on one thing, you kinda bounced around from thing to thing to thing. Is that right?
Jeremiah: I did. I followed up all those shiny objects as you said, and tried a lot of different programs. But I also didn’t give any one strategy its due, and really see it all the way through. So I did spend a lot of money on programs like that as well.
Allen: Wow. Yeah. I mean, and you know, it happens to everybody. And it doesn’t happen to just traders. It happens across all these different industries. And I think that’s one of the reasons a lot of people just don’t get ahead in what they wanna do or they don’t reach that potential, ’cause they don’t just focus until it’s drilled down, and say, “You know, I’m just gonna focus on one thing that works, and but … So you come. So after that, so you lost, I think it was about $20,000. And you just gave up trading at all, right?
Jeremiah: I did. We, my wife and I hit really hard times, and not just in the trading, but in life in general, and I had to change a few things, and got out of option trading and trading in general for about 10 years until I kinda got my life back together. And then I, I got, it was something that I always knew I wanted to do, once I was first introduced to it, because this is something that’s just amazing, and it’s actually something I liked. I’ve done a lot of different jobs in my life, lots of different fields, and learned a lot of things I don’t like to do. But trading was something that I really enjoyed. I just needed to figure out how to make it work. I did take about 10 years off. And last year, started reading up again, with an emphasis on what did I do wrong the first time, and how can I do it right this time? So I did start trading again about last September, September of 2017, and I went with credit spreads this time, because I realized that that was a good way to go instead of having time work against me, I can have it work for me. That’s when I started into that. And that worked really well for actually 20 out of 21 trades were winners. But I had the one big loser that’s almost wiped everything else out, so.
Allen: Okay. So let’s talk about that one.
Jeremiah: So that one, this was the stock that, the stock ticker is DBZT, DBZ Technologies. It’s a biotechnology stock over in Europe. And on October 10th of 2017, I entered into a put spread that was quite a bit out of the money, about 27% out of the money. And it looked like a really good one, had a really good premium. This was before I had really any strategy to the way I did credit spreads. I just knew it was something that would work. But I didn’t have any really good entry or exit rules. And so I entered into the trade. They had just had some good news about their Viaskin peanut trials, and they were expecting to pass their FDA approval for their next phase. And so everything looked good. And I thought, well this is a good one to get into. So I got in about 10 days before the expiration. And then, it just went sideways, which worked out really well. And then expiration day came, and the stock closed. At this time, it was right around $47.80. And so it was a really good closing price. I close off my computer, ’cause my trade had expired.
Allen: You had sold the 35s, right?
Jeremiah: Yeah. So I sold the 35 30 put spread. So-
Allen: And this thing was like-
Jeremiah: I was short the 35.
Allen: So this thing was like 13 bucks out of the money.
Jeremiah: Yeah. It was way out there.
Allen: And that was a 19% return in 10 days.
Jeremiah: Yes. Potential.
Allen: Potential. That’s right.
Jeremiah: Yeah. Yep. So you know, it was one of those that, back then I didn’t realize that if the premium was really high with short amount of time, there’s probably a reason for it.
Allen: Right. No, but I mean, Yeah, there was a reason for it, and that would’ve been a red flag. So depending, if you had some more conservative trading rules in place, that might’ve been one that you would’ve skipped unless you were … But it seems like you had investigated the company, and you knew what was going on, so you were, you were okay with that risk. And you did the trade. Everything went well. Come expiration time, ding, ding, ding, the market is closed, and you’re 13 bucks out of the money, which is a good trade. 19%. That’s sweet. We’ll take it every single day if we could.
Jeremiah: Yeah. Yeah.
Allen: So what happened after that?
Jeremiah: So it worked out great.
Allen: Yeah. That was awesome.
Jeremiah: I turned my computer off. I thought, it’s done. Done deal. I’m good. Well, then I showed up, I turned my computer back on Monday, and found out that I’d been assigned a $35 put, so I just bought $3500 of this DVZ stock, and I didn’t know why. And I started digging into it, and it turns out that Friday, about a half hour after close, the news came across the Atlantic that DVZT had failed in their phase trial, and so the stock plummeted in after hours trading. It went all the way down to like $22.50 I believe it was. And so the guy on the other side of the trade didn’t wanna lose all that money, so he assigned the $35 put to me, and I didn’t realize this was happening, because I had turned off the computer.
Allen: But there was nothing you could do about it anyway, right?
Jeremiah: Well, I could have.
Jeremiah: I could have. I could’ve called, if I would’ve been paying attention, I could’ve called my broker, and had them assign my $30 long put to somebody else, and then I would’ve ended up with a $500 loss.
Allen: I see.
Jeremiah: But because I wasn’t aware that was going on, I ended up losing $1,250. So that’s, that hurt the account quite a bit. Whether it’s a small account or a large account, that’s a huge percentage lost. I think it was 298% loss.
Jeremiah: So, pretty big loss there.
Allen: So now you, now, so when this happened, you went and you called your broker, right, to find out what the heck was going on, like why this happened.
Jeremiah: I did.
Jeremiah: So I called them up Monday morning, and discovered what was happening.
Allen: Mm-hmm (affirmative).
Jeremiah: One of the things that options clearing corporations says is that they, the OCC, will automatically exercise any expiring options at close in the money by at least one penny.
Jeremiah: So I thought I was safe, because I should’ve been covered by that. So I discussed that with my broker to see why wasn’t I, why wasn’t my long put assigned to somebody that’s protecting me so I only had a $500 loss. And they didn’t know the answer to that, because they agreed with me that you should’ve been protected. So they had to go to their managers, and they’d never seen anything like this. And basically they had to like dig into it, and they had to call me back. And when they called me back … And so these are people that they’ve been in the industry for years and years, on the brokerage end, and they had never seen this happen before.
Jeremiah: But what it turned out, and I verified this with he Options Clearing Corporation after my call with the broker, that phrase where it says they will automatically exercise any expiring options that close in the money by at least one penny, the reason why I wasn’t protected was because my spread closed out of the money, and so that’s why I wasn’t protected. The price dropped after close, and so it wasn’t in the money when it closed. It was way out of there, out of the money. But then the price dropped after, and so that’s why it wasn’t protected.
Allen: So then when does your short put expire?
Jeremiah: So the options will expire on Friday for most stocks. I guess indexes are the day before. But they actually don’t settle until the next day, on Saturday. So in this case, that’s why you’re able to call into your broker and assign an option to somebody after hours, because they don’t actually settle until the next day on Saturday.
Allen: Right. So this is something that most people don’t understand, or they don’t even know. Like you mentioned, indexes will close trading the day before, Thursday nigh, or Thursday at the close, but they don’t settle until Friday morning. So the actual price that will be used for your option trades will be taken Friday morning. And regular equity options and stock options, even though they stop trading Friday, and the price is not gonna trade Friday at the close, they actually settle, like you said, on Saturday morning.
Jeremiah: Yeah. Yep, that’s correct.
Allen: So in this case-
Jeremiah: Or I guess-
Allen: Go ahead.
Jeremiah: Yeah, go ahead. No. So I would say on this, basically what happened is because I wasn’t protected because of that specific language by the OCC, because I closed out of the money, I needed to be paying attention to what was happening. And I just assumed that I was safe. And like I said, my brokers, they had never seen this happen before. They’re the professionals in the business for years. So what I assume was this was a very, very rare event. But yet it’s still something that, to look out for and to be aware of.
Allen: Yeah. I’ve never had this happen to me. You know, one of the things, I guess one of the ways to avoid it would be to know when news is coming out about your particular stocks, and if there is something of this nature, to stay away. Biotechs by themselves are a little bit risky. You know, the news could come out at any time, so they could shoot up or shoot down. So those are one of the things that I particularly don’t like to play with credit spreads. If I’m gonna, if I’m willing, if I’m in a gambling mood, I might buy some puts or buy some calls on them, but those are like few and far between. But I’ve never had this happen to me. It was like, it was really … So the biggest thing to me is not that, for me at least, it wasn’t that you know, that you didn’t get the benefit of the long put, right? The scary part to me was that you’re $13 out of the money on Friday afternoon when the market closes, and then this thing drops almost in half, or more than half.
Allen: They lost more than 50% of its value, and that is why that you had this big loss. So you did everything right, you know? It just happens that Friday afternoon … Like normally news doesn’t even come out Friday afternoon. Clinical trials and all this stuff, they don’t release that news Friday afternoon, unless it’s bad. And then they wait until after the market closes. So I don’t know, maybe somebody at-
Jeremiah: Yeah. And this is one over in Europe, so for them, they’re about six hours ahead, or somewhere around there. And so, they really released that news late on a Friday evening. But yeah.
Allen: So yeah. Okay. Maybe that’s part of it too. You gotta be very careful where the company [crosstalk 00:17:12].
Jeremiah: Yeah. And that’s one of the things. There are quite a few thing I learned from that. And one is, like you said, the biotechnology stocks, that’s not something I want to mess around with with credit spread, because they are so crazy. You are approved, or you’re not approved, and the stock price goes crazy one way or the other. And that was one thing I learned. Another thing was this was very lowly traded stock. And now I know better. That’s not something I want to be trading. Very low on the amount of trades. That’s another thing I wouldn’t go with. Another thing for me, since I don’t know a lot about other country’s stock markets and companies, and things like that, that’s not something I should be trading. So these American depository receipts, which is what DBZT is, I shouldn’t have been into it really, even though I knew some about the company, there’s not a lot I know about the country itself and their stock market. So until I find out more about that, maybe I shouldn’t be involved in that. There’s another thing as well.
Allen: Okay. So I think this is very enlightening for a lot of people. So anything else that you wanted to share, that you learned about this?
Jeremiah: I guess initially, don’t be greedy. If it’s too good to be true, I mean, I was 27% out of the money with 10 days til expiration, and I was getting $80, so 80 cents for the spread, for a $5 spread. That’s really, really high. So it’s not just that it’s a 19% potential return, but I was so far out of the money and so close to expiration that, what’s going on here. I should’ve found out some more details about why it was such an amazing return.
Jeremiah: Yeah, so-
Allen: Yeah, there’s nothing, there’s no free lunch, right?
Jeremiah: Yeah. That’s right. So-
Allen: Okay. And then there’s one more thing that you have here. It says that there’s one rule that I now have added to my trading that I will never, never break.
Jeremiah: Ah yes. So I no longer will allow any of my spreads to expire worthless. Because of this trade, and even though it’s a super rare event. And chances are going with the bigger companies in the U.S., you’d never see anything like this, it could still happen. So I just, I don’t let them expire worthless. I will actually exit the trade, whether I do it the day of expiration or earlier because I hit my target profit percentage. I just don’t let them go to expiration anymore. And that’s maybe everyone doesn’t want to do that. But for me, it gives me the peace of mind knowing that this will never happen to me again, because I’m out of the trade.
Allen: Yeah. That’s one thing that people ask me all the time, saying, “This thing is only worth 10 cents. Why are you exiting this spread? It’s worth 5 cents. Why are you getting out?” Or, “Hey, there’s still some time left. There’s still some money in this spread. Why didn’t you just get some more credit out of it?” And it’s the same thing. It’s like, “Hey, I’ve hit my target. I wanted to make this much. I made this much. And I don’t wanna take any more risks, because who knows what’s gonna happen tomorrow.” You could have like some kind of news coming out on the company. The, you know, even if it’s a bigger company, like back in the day, what was it Johnson and Johnson, they owned Tylenol, and there was a Tylenol poison scare, and the stock tanked. Anything can happen like that for any company. Steve Wynn, everything is going fine for that company, and all of a sudden, somebody comes out and says, “Hey, he raped me. And the stock tanks overnight. Chipotle. Look what happened to them. E Coli breakout in multiple stores, and stock tanks.
Allen: So there could be any reason for a stock to be dropping. And it doesn’t take a lot of proof even for a stock to drop. If there is a insinuation or if there is a news report, or if there is any kind of impropriety even suspected, people are gonna stop and drop that stock all of a sudden. They’re just gonna get out. So especially if you’re selling puts, you need to be really, really careful. And I think that’s a very smart thing to do, that when you hit your goal, get out. And even, like what do you set as your goal now for your credit spreads?
Jeremiah: I like to shoot for 10%. That’s one of those guidelines that I took from you, from your courses. Before, I found you, I didn’t know, I didn’t have any idea what to shoot for, what to look for, how to enter, how to exit. And so I actually found you after this experience with the DDZT, and it’s something I’m grateful for, because that gave me some guidelines. And that’s what I shoot for not is 10%, and just get out.
Allen: And then once you get out, do you continue to monitor the company?
Jeremiah: I do. I like to see where it’s going, because a lot of times there’s more trades that are available for that, and in coming months.
Allen: Mm-hmm (affirmative). ‘Cause I’m just thinking about it like, you know, you had a 19% potential return on this stock. So I’m assuming you had made 10% very quickly, and you could have taken the money, exited the trade, and been sitting pretty.
Jeremiah: Yes. And that would’ve worked, had I known these rules, these guidelines back then, then I would’ve and I would’ve been fine. The stock tanked, and that wouldn’t have affected me at all.
Allen: You wouldn’t even know that this would’ve happened. So maybe it was worth it. Maybe it was worth $1250 for that lesson.
Jeremiah: It was definitely a good education, so I’m glad I learned that up front getting back into trading rather than down the road when there was a lot more money on the line.
Allen: I agree with you. And I do appreciate you taking the time to come out and share with our listeners your story. And I’m hoping that they will take away some of these lessons, and you know, so $1250 you lost was a very expensive lesson. Hopefully the people that are listening to this will not have to pay for this lesson. Hopefully they will internalize it and take from it what they will. But we covered a lot of good things. We covered having a proper trading plan and rules before you get into a trade, having a good idea of what a company does, not trading something that you don’t really understand, knowing the option rules themselves, you know, like when can you be assigned and when you cannot be assigned, not being greedy. If it’s too good to be true, it probably is, and you might wanna skip that trade unless you really, really understand everything that’s going on, and why you should consider exiting a trade without going to expiration.
Allen: It’s the funny thing about that one is more, the only people that I hear that from are experienced traders. If they’re somebody brand new, somebody new, the coolest thing is to say, “Oh hey, you know what? I’m gonna go all the way to expiration. I’m gonna milk this trade for every single penny. And I don’t wanna pay the commissions to get out.” And I remember when I first started, that was such a cool thing to me, like, “Oh yeah. I’m just gonna get so much money, and just let it expire.” And poof, it disappears. It’s so cool. But after you do a few trades, some of those come back to bit you. So you make a lot of money and then something happens. It might not be like a, a trial that goes bad, but it could be something else. And the trade turns around. And that feeling, when you have a winning trade, and you don’t get out, but then the stock turns around, and that trade actually ends up as a loser, oh man, that’s a punch in the gut like you wouldn’t believe. So Jeremiah, I do appreciate you coming out here. Is there anything else you wanna share with our listeners.
Jeremiah: Not anything really in particular. I just appreciate you having me on, and I appreciate all the good information that you give out there to everybody free, and the stuff that we pay for as well. It’s very good information so … Like these podcasts, very good. I appreciate it.
Allen: Oh, thank you so much. You know, we’re just trying to get the word out there, get as many people, I mean, it’s scary how many people are in bad financial situations because of the way the financial system is structured today. So we’re just trying to help people out here. But thank you again for everything.
Jeremiah: Thank you Allen.
Allen: I appreciate it.
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Is there a way to tell your broker in advance to exercise your option in case it goes in the money after hours? At least this could have limited the damage, if the put option that was long had been exercised.
Or, could he have left an automatic order to exit the spread if the spread price went to $200 loss, even if it did so after hours?
This sounds a little fishy or there is more to the story than is explained here
Either the broker or the clearing company dropped the ball
According to their own rules any option that is in the money by a penny or more will be assigned so since the stock dropped that much both the short and the long were in the money and should have been automatically assigned There should be no need to call the broker to get the long assigned So the max loss should have been the width of the spread which was $500
Either the both expire out of the money or they both get exercised
Otherwise what is the point of the spread ? You might as well do a naked put if they are going to ignore their own rules
It’s not clear how how they can assign one and not the other
Sounds like a good candidate for a lawyer to get involved in