Wiki Selling TSLA Options - Be the House

[EV forever]

After watching a lot of OptionsAlpha videos and playing around a bunch in thinkorswim (used it years ago when I, uh, made crappy choices). Interestingly, you've got to read the comments. OptionsAlpha has one video on paying earnings, but if you read the comments they say they no longer recommend that.

I'm going to keep selling PUTS to get back into TSLA. I'm reconsidering my buying calls (e.g. 800 or 850 calls) on the other side that are intended to avoid missing out on a big run up. It worked last week, but the IV is so high it's really betting against the house. I'd probably be better off selling a call this week. I can sell a 750 put for $36, a a 800 call for $22 and anywhere between $692 and $858 and I make a profit. I'm rooting for it to drop slightly and get assigned the shares. And if it moves strongly one way, I can close that profitable side and reopen it closer to the new stock price to help mitigate damage.

One thing OptionsAlpha drives home, and I've certainly experienced, is being on the selling side of high IV is the long term money maker. With earnings not too far away, and IV really high, selling puts/calls looks like the better plan. I don't think the stock has reason to move much before earnings...though that was true the last 2 weeks ¯\_(ツ)_/¯

When IV drops down to lower levels, I might take my wheel sold each week (e.g. the sold 750 put this week) and buy whatever option that would get me that's 90 days out or so. I'll lose out on the slow growth of the wheel, but accumulate longer term options. If I can do that for a few weeks, I might have 4x options that are 60-90 days out paid for by the wheel PUTs. I could potentially get into a position where a giant jump in stock due to something like a good earnings puts me in a winning lottery ticket position. The downside is, of course, spending those wheel PUT premiums.

I am very much inclined to agree with you. So far, I have finished only the Beginner module - so probably don't have all the information. But, one thing that seems to come across - I am not sure the current time is right to apply these strategies. The main point OptionsAlpha drives home is that difference between IV and HV - that overall IV is always higher than HV which leads to higher premiums. So strategy is to sell at the higher IV with higher priced premiums

Well, here is the graph for Tesla for the last two years - with earnings events indicated. Currently, IV is much lower than HV, plus it is not really following similar trend as shown by OptionsAlpha - that IV is almost always higher than HV. There are long periods when HV is much higher for Tesla. Regarding earnings, it is not very clear that at least for the last two earnings, that IV dropped after the earnings report. In fact, after the 4Q2019 earnings report on 1/30/20, IV spiked up dramatically.

So my conclusion is similar to yours, this is not the correct time to start the selling options regularly strategy for Tesla. I think that for the next week till earnings Tesla stock price will be held within a range below 800. After earnings, where I am expecting a positive surprise, the stock price will likely spike up again. So I may consider just buying a few long calls to play the lottery for the earnings.

Sometime later - maybe end of May - I will re-consider the idea of selling options for income. For me, since I am not looking to buy any more stock, selling covered calls against the stock I already own will probably work well. But, I do want to complete the course - I find it very useful in boosting my understanding.

@adiggs any suggestions?

 

[ckessel]

Currently, IV is much lower than HV, plus it is not really following similar trend as shown by OptionsAlpha - that IV is almost always higher than HV.

IV is still quite high and when I bring up ImpVolatility and HistoricalVolatility it shows they're about equal right now. I'm not really sure how to use the graphing tools though, so I'm not sure why ours don't match. IV (and HV) are much higher than the last year, so selling PUTS and/or CALLS still seems like a good idea to me.

Edit: Ah, figured out how to tweak the HV graph to match yours. Regardless, IV is still high compared to the historical average. Not as high as it's been in the last few weeks, but still up there.

 

[saniflash]

Regardless, IV is still high compared to the historical average.

I agree that IV is on the higher side right now that's why I've been doing buy writes for a few weeks now. They currently net between 3.5-4.5% weekly return on capital employed.

protection:
I often add an OTM put and sometimes an OTM call to the buywrite to protect (to a certain extent) against violent movements down (as we know them too well from TSLA ) as well as up.

Eg. last Fri you were able to buywrite (i.e. buy 100x TSLA and sell 1x CALL ATM, e.g. $750) with expiration this Fri which yields 200%+ annualized return (non-compounding) even if you add a $665 PUT.

 

[adiggs]

I'd probably be better off selling a call this week. I can sell a 750 put for $36, a a 800 call for $22 and anywhere between $692 and $858 and I make a profi

In case you haven't already seen this (and for anybody else reading), this is called a strangle. In particular, you're selling a strangle (as opposed to buying a strangle).

A straddle is made up of a put and a call that are ATM. A strangle is where you widen those two out. It's a skewed strangle when the 2 options are OTM by differing amounts.


A benefit of selling a strangle is that the two protect each other to at least some degree. In your example, if the shares trade above $800, then at least for awhile, the 750 put will be decreasing in value (good for you as option seller) and offset some of the gain in value (bad for you as option seller) of the 800 call.

I've begin doing something like this, but I'm far OTM and both legs are fully protected (cash for the puts, shares for the calls). That's probably not a strangle any more as it's far more capital intensive.

 

[ckessel]

Yea, strangle. Went incredibly poorly this morning due to my inexperience with ThinkOrSwim. Accidentally sold a 730 CALL rather an a PUT in addition to the CALL at 770, didn't realize until the stock had shot up $20. Sold the PUT finally when I realized it and set a GTC on the original mistaken CALL, but now I'm heavy on sold CALLS and the way the stock is moving this could be a disastrous week for me.

Sucks, I must have practiced the order 50 times this weekend in thinkorswim, never made a mistake until this morning.

 

[adiggs]

...


So my conclusion is similar to yours, this is not the correct time to start the selling options regularly strategy for Tesla. I think that for the next week till earnings Tesla stock price will be held within a range below 800. After earnings, where I am expecting a positive surprise, the stock price will likely spike up again. So I may consider just buying a few long calls to play the lottery for the earnings.

Sometime later - maybe end of May - I will re-consider the idea of selling options for income. For me, since I am not looking to buy any more stock, selling covered calls against the stock I already own will probably work well. But, I do want to complete the course - I find it very useful in boosting my understanding.

@adiggs any suggestions?

That's an interesting graph. Having the HV show up higher than IV is unexpected to me (or even nearly the same).

One observation is that TSLA volatility is insanely high compared to the market. The examples on OA are all in terms of IV that's more like 20 or 40. So even now where HV exceeds IV, IV is high either way, though it's not necessarily high relative to Tesla's history.


For the conclusion, I think that's the right conclusion in the context of the OA trading strategy. That trading strategy is a bunch of risk defined trades or low risk trades (such as a strangle where one side offsets losses on the other side, when the underlying trades out of the range), and is designed to collect a smallish amount of premium with high repetition (my take on it). For that strategy to work, you need IV higher than HV, and relatively high for the security being traded. That's one reason they trade a large number of different securities - they want to be pretty neutral to the market overall.

In my case, I'm sticking to one underlying stock due to the high level of information I've accumulated over years of following the company.


I think that the wheel is more forgiving on the HV / IV relationship, especially for further OTM that I'm doing. I'm sort of indifferent to HV - I collect premiums more like monthly (or 2x/month) in relatively small amounts by being far OTM. That's still yielding 1-5% / month, while keeping my risk of exercise really small.

@saniflash is selling weekly options, though selling an OTM put and buying a further OTM put is a credit spread. The benefit being you've got a risk defined trade that will also shrink the amount of margin required to perform the trade. OA does a lot of these credit spreads in their trading strategy.


My final observation, and this might be more specific to me - I seem to be excellent at picking things that will go down in value. That's bad news for buying options, but it's excellent for selling options!

And I'm really happy to hear people are going through that education. I found an interview on OA where somebody adapted what they learned on OA to an OA style trading strategy focused on the wheel. I'll dig that up and post the link.

 

[adiggs]

Quick thought - I mention the names of trades, not because you need to know the name of a trade to do the trade, but because if you know the name of the trade, then it's easier to search the Internet and find out a lot more information specific to that trade. Sources of risk, methods for altering the trade in the middle, near / far OTM, etc..

 

[adiggs]

The puts I sold for this week are decaying rapidly to 0. Far enough today (down to 13% of their original value) that I would otherwise close them now, and sell the next option (probably the May month expiration). In this case though, I'm going to allow them to continue decaying and probably close them out tomorrow.

I originally chose this week's expiration with the thinking that I didn't want to hold over earnings, and I didn't want a longer dated option in case <stuff>. On the put side, I'm playing earnings as conservatively as possible by not playing at all.


I'll close out tomorrow, and then on Friday I'll be looking to sell the next batch of puts once I see how earnings are received.

 

[ckessel]

Regarding earnings, I'm really on the fence about what to do there as well. If the IV continues to decline this week, I may try buying for earnings. It's weird to think of IV dropping right before earnings, but it seems to be headed that way.

If my PUTs don't get fired this week, I might sell them again before earnings and spend all the premium on calls. Either I get stock because ER drops things, which is fine, or the calls might hit the lottery. Or...nothing happens . Sort of a net neutral position for me.

 

[EV forever]

That's an interesting graph. Having the HV show up higher than IV is unexpected to me (or even nearly the same).

One observation is that TSLA volatility is insanely high compared to the market. The examples on OA are all in terms of IV that's more like 20 or 40. So even now where HV exceeds IV, IV is high either way, though it's not necessarily high relative to Tesla's history.


For the conclusion, I think that's the right conclusion in the context of the OA trading strategy. That trading strategy is a bunch of risk defined trades or low risk trades (such as a strangle where one side offsets losses on the other side, when the underlying trades out of the range), and is designed to collect a smallish amount of premium with high repetition (my take on it). For that strategy to work, you need IV higher than HV, and relatively high for the security being traded. That's one reason they trade a large number of different securities - they want to be pretty neutral to the market overall.

In my case, I'm sticking to one underlying stock due to the high level of information I've accumulated over years of following the company.


I think that the wheel is more forgiving on the HV / IV relationship, especially for further OTM that I'm doing. I'm sort of indifferent to HV - I collect premiums more like monthly (or 2x/month) in relatively small amounts by being far OTM. That's still yielding 1-5% / month, while keeping my risk of exercise really small.

@saniflash is selling weekly options, though selling an OTM put and buying a further OTM put is a credit spread. The benefit being you've got a risk defined trade that will also shrink the amount of margin required to perform the trade. OA does a lot of these credit spreads in their trading strategy.


My final observation, and this might be more specific to me - I seem to be excellent at picking things that will go down in value. That's bad news for buying options, but it's excellent for selling options!

And I'm really happy to hear people are going through that education. I found an interview on OA where somebody adapted what they learned on OA to an OA style trading strategy focused on the wheel. I'll dig that up and post the link.

Yep - TSLA IV and HV are both insanely high. Further, IV is in the 57th percentile, which per OA is good for a credit strategy.

After my post last night, I tried running similar graphs on other stocks - almost everything I searched currently has HV >> IV. That includes AAPL, MSFT, SQ, COST and GOOG that I am interested in owning, but also several other random ones that I checked. This probably reflects the crazy market that we are currently experiencing.

So today for the first time ever, I sold a call for April 24th @850 for $12.00 to leverage the stock I already own. Kept the expiration date very close as I don't want to carry this into the earnings next week. So I currently have sold two options for credit - not sure if this combination has a name. Next week on 29th prior to earnings I plan on buying some lottery ticket calls.

Sold Put for May15 @ 500 for $11.50
Sold Call for Apr24 @ 850 for $12.00

 

[ckessel]

Well, those sold calls aren't going to end up hurting me. I got out of the mistaken one at break even. I bought back my sold 770 call at a cost cheap enough to cover the bought 800s (vertical spread, sold 770, bought 800s). So, all sold calls closed at this point are at a tiny profit. I'll hold my bought 800s for the day hoping for a rebound, then sell those to enhance the overall vertical spread profit.

The sold 745 PUT is well negative, but that one is the wheel buy so I'm fine with that. If it stays below $745, I'll effectively buy in at $711 given the premium. Going into earnings week holding shares I bought at $711 is perfectly fine by me.

 

[adiggs]

Well, those sold calls aren't going to end up hurting me. I got out of the mistaken one at break even. I bought back my sold 770 call at a cost cheap enough to cover the bought 800s (vertical spread, sold 770, bought 800s). So, all sold calls closed at this point are at a tiny profit. I'll hold my bought 800s for the day hoping for a rebound, then sell those to enhance the overall vertical spread profit.

The sold 745 PUT is well negative, but that one is the wheel buy so I'm fine with that. If it stays below $745, I'll effectively buy in at $711 given the premium. Going into earnings week holding shares I bought at $711 is perfectly fine by me.

I suddenly find myself worried today that the 500 puts I sold that expire this week are going to finish in the money. I tried to close them out at .17 this morning and missed that by 1 penny. Now they're trading at .90 or so just an hour later as TSLA is down $70.

This is my 3rd or 4th object lesson in the last month or so about worrying about pennies when I've decided to enter or leave a position.

That's probably an overreaction on my part, but my larger thesis is that the market is going down, a lot. I'm forecasting S&P 350 (down 90% from the high water market earlier this year); I don't have a sense of whether that is a year or a month, with a bias towards a year. But I'm also worried that information flow is a lot faster today than it was in the early '30's, and thus this could happen really fast.

In this kind of downdraft, I expect TSLA to outperform by a huge margin. But that means something more like TSLA at $280-380 (the previous trading range), down 1/2 to 2/3rds within an overall context of the market being down 90%. That's my definition of 'outperform by a huge margin'.

I offer this as an alternative hypothesis to consider. I'm happy to provide links and views into this hypothesis if anybody is interested.

 

[ckessel]

I suddenly find myself worried today that the 500 puts I sold that expire this week are going to finish in the money.

That's more or less the point of the wheel, buying with a discount via the PUTs. If you end up just not buying and pocketing the premium, great, it's just effectively reducing your cost basis for when you do eventually get assigned.

For me, with the wheel, if I sell a PUT it's with the mindset that I was going to enter a "Buy at this price, good-til-cancelled" anyway, so the put premium is just a bonus for doing what I was already going to do.

I try to approach my sold calls similarly, I ask "What price would I be happy to sell at this week?" and then sell the call for that price.

If you're selling puts/calls with the idea of just making money on the option rather than getting in/out of the stock, that's not really the wheel. I mean, in the abstract, it's all trading options, but I'm trying to trade with a purpose in mind. If I buy an $850 call, it's not with the idea in mind that I want to buy the stock at $850, I'm buying lottery tickets.

If you're really expecting us to hit $300, just sit on your cash, that'll outperform the downward market you're expecting better than pretty much anything else.

 

[adiggs]

That's more or less the point of the wheel, buying with a discount via the PUTs. If you end up just not buying and pocketing the premium, great, it's just effectively reducing your cost basis for when you do eventually get assigned.

For me, with the wheel, if I sell a PUT it's with the mindset that I was going to enter a "Buy at this price, good-til-cancelled" anyway, so the put premium is just a bonus for doing what I was already going to do.

I try to approach my sold calls similarly, I ask "What price would I be happy to sell at this week?" and then sell the call for that price.

If you're selling puts/calls with the idea of just making money on the option rather than getting in/out of the stock, that's not really the wheel. I mean, in the abstract, it's all trading options, but I'm trying to trade with a purpose in mind. If I buy an $850 call, it's not with the idea in mind that I want to buy the stock at $850, I'm buying lottery tickets.

If you're really expecting us to hit $300, just sit on your cash, that'll outperform the downward market you're expecting better than pretty much anything else.

Completely agree with this.

With the 2 week option, I was getting away from the wheel to some degree, trying to nick a few pennies from the market (which I succeeded at). My guess is that my next puts that I'll sell on Thursday or Friday will be May expiration, and down at $400 or 375 strike (bottom of the current trading range). That's where I'd love to get assigned

I expect to close the May 1500 calls on Thursday or Friday, and sell something much closer - say the 1000 strike, and probably the June expiration for extra premium, under the hypothesis that these will fade in value very quickly (and starting at a higher and further strike will create more value).


I like that we're trading the same strategy, with such divergent details. You're trading very close to ITM - something I can see myself doing in the future. But I'm not ready to do that today. If were doing the same strategy and details, then there wouldn't be much here to learn

I'm trading far OTM with assignment being my backup position, and premium collection being my primary objective.

 

[ckessel]

Completely agree with this.
I like that we're trading the same strategy, with such divergent details. You're trading very close to ITM
...
I'm trading far OTM with assignment being my backup position, and premium collection being my primary objective.

We're mostly just differing on risk/volatility. I tell myself that, on a down swing, I'm no worse off that if I just bought and held the whole time. With that in mind, I'm willing to accept large premiums with high levels of volatility.

You're taking a steadier approach, growth without risk of catastrophe. If there is a big down swing, you'll come out far ahead of me and be in a position to take advantage of the much depressed stock price. If there isn't a down swing, all that IV premium I've accumulated would put me in a better position.

Neither really is better, depends on your total portfolio and the risk level where you work the best.

In poker, there are conservative money making approaches and very aggressive/loose ones that work. I tended towards the former strategy, which might sound odd given my trades. I didn't play many hands in poker, but I did put a lot on the line when I felt I had the advantage. With TSLA IV as high as it is, my inclination is to push that advantage.

If the IV gets really low, I may well reverse that with bought calls far out on both money and timeline (e.g. maybe LEAPs).

 

[adiggs]

One thing I've been thinking about since I started this, and thinking more about today, is that I'd like to get my approach to be increasingly formulaic. If I were following OA closer, I'd be aiming at the .15 delta puts and calls for an overall 70% trade likelihood of success.

I find those strikes to be too close for my taste, but the .10 delta carries some huge premiums (relative to what I've been doing so far), while also being further out - closer to where I'm comfortable. The .05 deltas; closer to where I've been trading so far have smaller premiums.


I remind myself that trading at the .15 delta month after month -- if I'm only selling puts, that's about a 1/6th chance of exercise on expiration (I can closer early of course). That's 2 times / year - I just can't pick which months.

If I'm selling strangles (both sides), then .30 is about a 1/3rd chance of exercise on one side or the other (given that I hold to expiration. That's an exercise per quarter (which is why I'm staying further out than .15 delta/ Probability ITM.


The point of this all being - I can use the delta as a proxy for Probability ITM (as priced by the market), to get more precise than my gut for where to place my sales.

 

[adiggs]

Accidentally sold a 730 CALL rather an a PUT in addition to the CALL at 770

I've done this. I was fortunate to realize this immediately after the mistaken trade and was able to close the position and open the correct position and only lose some slippage from the bid/ask. I like learning from small money mistakes, and I inspect my trade tickets more closely as a result

 

[adiggs]

I closed the previous positions and opened new positions using the May 1 weeklies.

Sold May 1 500 strike puts for $4.50 (nearly 1% for 1 week!)
Sold May 1 1000 strike calls for $5.50

The puts have a .054 delta (5% ITM) and the 1000 strike calls have an .08 delta (8% ITM).

Share price when I made these trades was ~ $720.


I think I'm liking these weekly .05 delta trades. The upside to me is that the commitment is short (1 week roughly). I had originally thought that I wanted to avoid the weeklies due to the much more frequent trades (too much work). I may be singing a different tune soon.

Primary reason for doing the weeklies here is that I plan to close these next Wednesday when the actual earnings announcement comes, as opposed to the earnings announcement I was thinking was today (I thought today was the 29th - time is weird for me right now, working from home ). I don't want long dated options over earnings. I like the rapid time decay in the last week. I don't like how close these options are to the current share price.

 

[ckessel]

I got out of all my extraneous sales at break even or better, yay volatility!

I'm back to just my sold wheel 745 PUT. It had a $33 premium, so it's looking good right now. I'll miss out if it jumps about $778 by the end of the week, but oh well. Buying calls to cover that possibility are still too darn expensive due to the IV.

 

[adiggs]

I got out of all my extraneous sales at break even or better, yay volatility!

I'm back to just my sold wheel 745 PUT. It had a $33 premium, so it's looking good right now. I'll miss out if it jumps about $778 by the end of the week, but oh well. Buying calls to cover that possibility are still too darn expensive due to the IV.

For a put, you keep the premium above the strike. $745 in this case. Or is that really a Call?