Some 10 years ago as a naive Uni student I dabbled in trading Options. I was a client of a large broking firm and in hindsight, was trading on a whim and some shallow advice from my broker.
I was mostly writing call and put spreads to collect the premiums. Whilst I understood the derivatives I was trading, I had no knowledge of expectancy, money management etc. On occasions I was risking ~50% of my account ron single positions! This makes me quiver when I think back to it all now!
There was one super scary moment though. I had a call spread on RIO (e.g. short 5 x $50.00 calls on RIO, long 5 x $51.00 calls) and it was in the money (which you don't want when you are short a call credit spread).
I received a letter from my broker basically saying "RIO has conducted a share buyback (or similar corporate action) and as such, due to your position, you will be due to cover this position".
At the time, I thought very little of this. "My Broker will call me if there is anything I need to be aware of". My broker did call me, almost in tears "mate, sorry about this, I don't know how this happened, but due to this corporate action, you need to pay ~$50,000"
Did this mean if I had of been long I would have received $50,000?
Hmmmm, this is not the kind of thing a uni student wants to hear!
I wrote the firm a letter reminding them that they were a full service broker and that I was never warned of this; I would not be paying a cent. Luckily; I received a reply saying they would cover all exposure. I only heard back from that broker some 9 years latter when he started work at another firm (Will name names to any interested people). Apparently he copped most of the losses and I'm assuming also lost his job.
I'm about to dip my toe into trading again. This time I am well armed with knowledge about risk & money management, expectancy, etc.
I'm looking at CFDs to give me leverage and also shares to start investing.
My concern is, after almost being wiped out by this corporate action, how do I stop it happening again? I can pull letters out of the archives with exact details, but as I recall, it was basically a corporate action by RIO, and since I was short (wrote a call) on RIO that was in the money, I was then liable to the purchaser of the call.
So what would happen if I was short XYZ with CFDs and they had a similar corporate action? Would I have a chance to get out before being liable? Or once the action was announced I'd be stuffed? I'd obviously have stop losses in place to protect me from capital loss, but what about these other losses?
Also, if I start writing options again, how can I stop a similar thing happening again?
It's one thing to make 2R, 3R, 4R profits; but if a 30-50R loss comes along! Ahhhhhh!
Perhaps this is why paying an arm and a leg for brokerage is worth it, to have a professional warn me about things like this.