Advanced TSLA Options Trading

[FluxCap]

Of interest from a trader I follow occasionally re: market pricing IV too low for TSLA:

Risk Laboratory: Ophir Gottlieb: * Tesla Motors (TSLA) - Risk Mis-priced Again; Stock Booms on New Model. And Now, What?
(article from 8-6-14, but interesting still)

 

[chickensevil]

You can keep them for as long as the market is open, and there are buyers for your calls, just as for any other security. You can't trade options after hours. As for strategy, it's anyone's (or yours, really) guess. You want to maximize profit, so just sell them when they reach maximum value


Yes, you run that risk with covered calls. BTW, in that case, the selling of shares from under you happens automatically (after expiration.)

Please do yourself a favour and peruse the site I recommended earlier. You will see, at a glance, the effect of time on the price of the option, which is dramatic. That will help you with the timing of the exit.

I did, and thank you for the link it is a pretty nice calculator. I will probably just go based on my feeling for where I think it will go, and sell when it hits the point that it seems like it has ran its course (within the confines of that option). I plan to just take about 1k go until I run out of cash... although if I manage to double it, I will certainly just back out the initial investment so I am basically playing with the house's money (minus taxes)

 

[Jonathan Hewitt]

So basically, I have to sell my Option off each time before expiration or it will expire worthless? Hrmmmm. Very well then... is there a strategy to how long you could reasonably hold an option before you get locked out? 1 day? 1 hour? 5 minutes? (as in time left before expiration)

I wouldn't want to risk covered calls on the chance that they get pulled away from me. Then I would have to deal with having the sell, trying to buy back shares, and such.

I did weekly covered calls a few weeks ago for a $220 strike I think. TSLA was about .10 ITM at that strike or so but the premium was still like .60 or something stupid right up until the minute before the bell so I ended up getting lucky and bought them back at .30 or so with a market order to make sure it went through even though it ended only a few cents ITM...I knew they were trying to pin it near the .00 but I almost lost all my shares! Sometimes you can get the strike and the timing right and still be wrong

 

[chickensevil]

I did weekly covered calls a few weeks ago for a $220 strike I think. TSLA was about .10 ITM at that strike or so but the premium was still like .60 or something stupid right up until the minute before the bell so I ended up getting lucky and bought them back at .30 or so with a market order to make sure it went through even though it ended only a few cents ITM...I knew they were trying to pin it near the .00 but I almost lost all my shares! Sometimes you can get the strike and the timing right and still be wrong

So you basically were trying to hold it as close to the bell as you could just so you didn't have to pay a lot to get your shares back? That's ballsy... Reminds me of bidding wars on eBay items and waiting until just the last second to put in your bid.

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Something I have learned as I have messed around a bit with a test account is certainly how quickly in one day you can go way up or way down... You really have to get the call right or you lose big time! I hope I have enough nerve to do this haha! We shall see. In a few days when my money clears I think I'll start with something that is a bit off in timing. Like 2 or 3 months... Maybe just before the next ER... Since I am not willing at this point to risk the ER.

 

[Jonathan Hewitt]

So you basically were trying to hold it as close to the bell as you could just so you didn't have to pay a lot to get your shares back? That's ballsy... Reminds me of bidding wars on eBay items and waiting until just the last second to put in your bid.

My shares would have been called away if I did not buy them back. I could've taken a small loss 10 minutes before the bell but because "i was right" I didn't want to and managed to walk away with a small gain...Sanity wise it would've been better to take the loss

 

[pz1975]

So you basically were trying to hold it as close to the bell as you could just so you didn't have to pay a lot to get your shares back? That's ballsy... Reminds me of bidding wars on eBay items and waiting until just the last second to put in your bid.

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Something I have learned as I have messed around a bit with a test account is certainly how quickly in one day you can go way up or way down... You really have to get the call right or you lose big time! I hope I have enough nerve to do this haha! We shall see. In a few days when my money clears I think I'll start with something that is a bit off in timing. Like 2 or 3 months... Maybe just before the next ER... Since I am not willing at this point to risk the ER.

Just some advice: if this is the first time you are buying options, start with a single Jan16 LEAP and go from there. Shorter-term options seem cheaper but have much greater chance at big losses. I think most of us have learned this lesson the hard way. Short-term options are good when you think there is a high chance of an imminent positive or negative catalyst.

 

[chickensevil]

Just some advice: if this is the first time you are buying options, start with a single Jan16 LEAP and go from there. Shorter-term options seem cheaper but have much greater chance at big losses. I think most of us have learned this lesson the hard way. Short-term options are good when you think there is a high chance of an imminent positive or negative catalyst.

With Tesla isn't there always an imminent catalyst? Haha! I have considered that, but I really don't want to risk more than about 1k right now to sorta just throw away, and it is touch to find a ~10$ Leap that seems reasonable. I mean sure I could buy a 480$ Leap, but the chances of the stock hitting 500 is about the same as it staying right where it is right now... So I was thinking something a bit more short term. With there still being some potential movement upward between now and Q3 ER I think I might be OK with that bet. At the very least I should have enough time and the stock is volitile enough that I feel like I could set a reasonable limit and jump out early if need be. Baby steps, I suppose, right?

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Unless someone really wants to convince me we will see 500$ with a year and a half... Stranger things have happened

 

[gym7rjm]

With Tesla isn't there always an imminent catalyst? Haha! I have considered that, but I really don't want to risk more than about 1k right now to sorta just throw away, and it is touch to find a ~10$ Leap that seems reasonable. I mean sure I could buy a 480$ Leap, but the chances of the stock hitting 500 is about the same as it staying right where it is right now... So I was thinking something a bit more short term. With there still being some potential movement upward between now and Q3 ER I think I might be OK with that bet. At the very least I should have enough time and the stock is volitile enough that I feel like I could set a reasonable limit and jump out early if need be. Baby steps, I suppose, right?

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Unless someone really wants to convince me we will see 500$ with a year and a half... Stranger things have happened

I built a no cost $500-$510 spread just for kicks.

I'm not sure it will go that high by Jan 16, but at some point in the near future -- Model 3 pre-orders?? -- people will see the true potential that Tesla will have. I still think estimates are way too low for how many cars Tesla will be building in the future. We'll see a big pop when trajectory aligns more with Tesla 3.0. Not betting the house on this happening before 2016, but it doesn't hurt to have some relatively low risk / high return positions.

 

[AlMc]

With Tesla isn't there always an imminent catalyst? Haha! I have considered that, but I really don't want to risk more than about 1k right now to sorta just throw away, and it is touch to find a ~10$ Leap that seems reasonable. I mean sure I could buy a 480$ Leap, but the chances of the stock hitting 500 is about the same as it staying right where it is right now... So I was thinking something a bit more short term. With there still being some potential movement upward between now and Q3 ER I think I might be OK with that bet. At the very least I should have enough time and the stock is volitile enough that I feel like I could set a reasonable limit and jump out early if need be. Baby steps, I suppose, right?

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Unless someone really wants to convince me we will see 500$ with a year and a half... Stranger things have happened

If you buy this LEAP you are probably not going to see $500, but if you buy the option when TSLA is $260 and it goes to $320 in 2-3 months the price on that option may have gone up 50-60% and you sell it WAY before expiration.

 

[InTheShadows]

If you buy this LEAP you are probably not going to see $500, but if you buy the option when TSLA is $260 and it goes to $320 in 2-3 months the price on that option may have gone up 50-60% and you sell it WAY before expiration.

I was thinking the same thing. I personally am not buying leaps right now. I learned that lesson in the spring. If we have another big up day today I will likely sell a leap or create a delayed bull call spread.

 

[Chickenlittle]

My shares would have been called away if I did not buy them back. I could've taken a small loss 10 minutes before the bell but because "i was right" I didn't want to and managed to walk away with a small gain...Sanity wise it would've been better to take the loss

And if called away, bought back with the money you got from the sale of stock, plus you kept the money you sold calls for and cost small amount it rose above the strike

 

[chickensevil]

If you buy this LEAP you are probably not going to see $500, but if you buy the option when TSLA is $260 and it goes to $320 in 2-3 months the price on that option may have gone up 50-60% and you sell it WAY before expiration.

I guess this is a mindset I haven't quite gotten down yet, that will likely come as I get into this a bit more. That actually seems like a pretty decent strategy. Because actually, if I bought that today and we hit 320 in 2-3 months... lets say Nov 28, that would actually be an 81% return. I might actually just do that... it might be worth the 10$ price.

 

[AlMc]

I guess this is a mindset I haven't quite gotten down yet, that will likely come as I get into this a bit more. That actually seems like a pretty decent strategy. Because actually, if I bought that today and we hit 320 in 2-3 months... lets say Nov 28, that would actually be an 81% return. I might actually just do that... it might be worth the 10$ price.

BUT...The 'gamble' is that TSLA does not trade sideways for some time and the time value eats away at your option price. I had that happen with my Jan15 300s that were down as much as 70% at one point and are just now entering 'break even'. Kessel sold his at 30-40% loss. I am holding mine for now but if we get a big dip then I am SOL.

The way I started is Sleepyhead suggested I buy one OTM option and just watch the price change over time and with TSLA price fluctuation.

 

[Chickenlittle]

BUT...The 'gamble' is that TSLA does not trade sideways for some time and the time value eats away at your option price. I had that happen with my Jan15 300s that were down as much as 70% at one point and are just now entering 'break even'. Kessel sold his at 30-40% loss. I am holding mine for now but if we get a big dip then I am SOL.

The way I started is Sleepyhead suggested I buy one OTM option and just watch the price change over time and with TSLA price fluctuation.

It's human nature but now excitement here about learning about options and investing in them with ATH. Time to do that was when it dipped on fires or recent drop to 190s. Would be happy to sell you the ones I picked up then

 

[AlMc]

It's human nature but now excitement here about learning about options and investing in them with ATH. Time to do that was when it dipped on fires or recent drop to 190s. Would be happy to sell you the ones I picked up then

Agreed. I did not buy the J15 300s at ATH, but when it dropped to about 220, as I recall. Then it dropped to the 180s and I was in deep red. While it recovered time value ate away at any gains with rising TSLA. Now close to 'break even'.

Luckily, I added other long options in the 180s, so they have more than made up for any losses.

IMO, this may not be the best time to buy LEAPS. I will wait till J17s are out and look again at them at that time.

For Chickenevil it appears he just wants to 'wet his beak' by trying a single option that he knows may be a total loss just as a learning experience.

 

[The Blue Owl]

I was thinking the same thing. I personally am not buying leaps right now. I learned that lesson in the spring. If we have another big up day today I will likely sell a leap or create a delayed bull call spread.

Not encouraging anyone to buy or sell anything, but just wanted to point out that one big difference between now and the spring is that TSLA implied volatility right now is at historic lows. Before the most recent implied volatility drop, I used to take into account only time to expiration to gauge the range of outcomes for my options (and the projected price of the stock, obviously.) However, IV has a huge influence on the price of options, everything else being equal.

 

[chickensevil]

For Chickenevil it appears he just wants to 'wet his beak' by trying a single option that he knows may be a total loss just as a learning experience.

Yeah, seriously, losing 1k means I skip eating out for a little while and I would be back where I started. I am not really risking anything serious here. Overall this seems like a not so great time to buy for a serious play. I can see the stock easily going up into 300 or back down to 230 (I think we have a pretty solid bottom around there at the moment with the whole 100k production rate that is going to happen in 2016.) But the market has a mind of its own sometimes...

 

[sleepyhead]

Well my thought was that instead of selling your LEAPS to book short term gain, if you need money or book some profit, you can sell higher strike calls with same expiration to get some money. Since you have not booked any profit, you don't pay taxes. This conversation belongs to advance options thread and do read it to understand more about options before making a move.

If you have LEAPS and want to take profits without paying gains, then yes you can sell higher strike calls against those LEAPS to collect cash and create a spread, but:

1. If you sell a deep ITM call against those LEAPS then you will be taxed on those gains anyway, since IRS considers selling deep ITM covered calls (I think it applies against underlying stock position as well, but can't remember for sure). Deep ITM is considered anything more than 1 strike ITM, but nothing is set in stone and is open to interpretation by the IRS.

E.g. you have J16 $200 LEAPS and want to sell a covered call, you can do so and not pay taxes as long as it isn't Deep ITM. TSLA is at $255.36 right now, so if you sell the $255 or above then you don't pay taxes. $250 might be okay, but is open to interpretation. $245 might not be okay and you will be hit with a tax bill.

2. If you sell a call against your LEAPS then you may lose LTCG (long term capital gains) benefit of LEAPS if short call is held for less than 12 months.

E.g. If you have J16 $200 LEAPS and sell a J16 $260 LEAPS against it, then you are okay. No tax paid today, since it isn't deep ITM. If you hold this delayed bull call spread for more than 12 months, then you can cash out and pay LTCG on entire spread.

But if you Had that $200 LEAPS for 6 months now, and you sell a J16 $260 against it today, then the clock resets and you need to hold another 12 months to get LTCG treatment. So if you sell 8 months later, you are forgoing LTCG even though you held the long LEAPS 14 months, and will have to pay STCG tax instead on gain.

Alternatively, if you have J15 LEAPS that you held for 14 months now; you can sell them today and claim LTCG. But if you sell a $260 J15 against it today to create a delayed construct bull call spread, then your holding period resets and you are screwed. You will then incur STCG on all of this.

In the end the tax code is extremely complex. I have done a lot of research on this topic and this is how I understand it. I may have misinterpreted IRS language, which is extremely easy to do, so please consult your tax advisor; although I guarantee you that he will not know the correct answer either...

 

[justdoit]

If you have LEAPS and want to take profits without paying gains, then yes you can sell higher strike calls against those LEAPS to collect cash and create a spread, but:

1. If you sell a deep ITM call against those LEAPS then you will be taxed on those gains anyway, since IRS considers selling deep ITM covered calls (I think it applies against underlying stock position as well, but can't remember for sure). Deep ITM is considered anything more than 1 strike ITM, but nothing is set in stone and is open to interpretation by the IRS.

E.g. you have J16 $200 LEAPS and want to sell a covered call, you can do so and not pay taxes as long as it isn't Deep ITM. TSLA is at $255.36 right now, so if you sell the $255 or above then you don't pay taxes. $250 might be okay, but is open to interpretation. $245 might not be okay and you will be hit with a tax bill.

2. If you sell a call against your LEAPS then you may lose LTCG (long term capital gains) benefit of LEAPS if short call is held for less than 12 months.

E.g. If you have J16 $200 LEAPS and sell a J16 $260 LEAPS against it, then you are okay. No tax paid today, since it isn't deep ITM. If you hold this delayed bull call spread for more than 12 months, then you can cash out and pay LTCG on entire spread.

But if you Had that $200 LEAPS for 6 months now, and you sell a J16 $260 against it today, then the clock resets and you need to hold another 12 months to get LTCG treatment. So if you sell 8 months later, you are forgoing LTCG even though you held the long LEAPS 14 months, and will have to pay STCG tax instead on gain.

Alternatively, if you have J15 LEAPS that you held for 14 months now; you can sell them today and claim LTCG. But if you sell a $260 J15 against it today to create a delayed construct bull call spread, then your holding period resets and you are screwed. You will then incur STCG on all of this.

In the end the tax code is extremely complex. I have done a lot of research on this topic and this is how I understand it. I may have misinterpreted IRS language, which is extremely easy to do, so please consult your tax advisor; although I guarantee you that he will not know the correct answer either...

Thanks for sharing @sleepyhead. This was something I was looking into also. I have some Jan 2015 $200's that I'd like to start taking some profits from but if I wait another 3 months I'll qualify for Long term gains. I thought about selling Jan 2015 $230's or something to create a spread and take some profits but that'd reset my clock for long term gains. So possible options I'm considering are
1. Just waiting 3 months before selling and rolling forward and out
2. Just creating the spread (at least on some contracts), taking the tax hit but hoping the additional profit would be worth it
3. Exercising the contracts close to expiration and buying the shares for $200 and holding.
4. Selling a March 2015 $230+ call which I'd close out when

Regarding option 4, does that also reset the clock for long term capital gains? I haven't been able to find out if the clock is only reset if you sell a call with the same expiration. Kinda hoping this is a small work around

 

[sleepyhead]

Thanks for sharing @sleepyhead. This was something I was looking into also. I have some Jan 2015 $200's that I'd like to start taking some profits from but if I wait another 3 months I'll qualify for Long term gains. I thought about selling Jan 2015 $230's or something to create a spread and take some profits but that'd reset my clock for long term gains. So possible options I'm considering are
1. Just waiting 3 months before selling and rolling forward and out
2. Just creating the spread (at least on some contracts), taking the tax hit but hoping the additional profit would be worth it
3. Exercising the contracts close to expiration and buying the shares for $200 and holding.
4. Selling a March 2015 $230+ call which I'd close out when

Regarding option 4, does that also reset the clock for long term capital gains? I haven't been able to find out if the clock is only reset if you sell a call with the same expiration. Kinda hoping this is a small work around

It is really complicated and best to consult a tax advisor, since I am not 100% sure and may be giving bad information. But here is how I see it:

First of all, if you sell $230's against your J15 $200 LEAPS, they are considered deep ITM and you will treated by the IRS as someone who just cashed out the J15 $200's, so you will trigger short term capital gains automatically by doing this. Result = STCG in 2014; how much exactly I don't know because you did not cash out 100%, so most likely the amount that you collect from selling the $230's.

1. Best option IMO if you think that TSLA will go higher. If you don't then sell now and roll forward now and pay STCG. I almost never let taxes dictate my trading strategies, because what if TSLA tanks to $180 over the next 3 months?

2. If you create spread now, then you will be paying STCG on whole thing since only 5 months left till expiration. If you hold till January, then you will not have to pay taxes until April 2016. But remember it can't be a deep ITM option, so you would have to sell a $255 or more strike price as of today

3. Also best option along with 1. If TSLA keeps going up then convert in 2015 to not have to pay taxes in 2014. Risk is that TSLA tanks and you lose everything.

4. Your J15 will not hedge that March call and you are exposing yourself to unlimited losses. Calendar spreads will also trigger clock reset, so that is not a work around.

Here is what I do sometimes:

Buy J16 late last year and then continously sell covered calls a month or so out on those J16's to generate income. Then middle of 2015 I will sell a J16 against that J16 to setup a bull call spread. Clock resets and I can cash out in middle of 2015 at LTCG or hold to expiry and get LTCG in 2016, which means paying taxes on it in April 2017.

But to be honest, I never let tax decisions affect my trading. I just do what is best at the moment and let taxes take care of themselves. Way too easy to lose a ton of money trying to save 10% on taxes.

In your case, I would just roll them now or sell them outright when you think we peaked. If you think that TSLA will continue going up for the rest of the year, then simply hold. But if you are unsure and are waiting 3 months to get LTCG before rolling, then that is way too dangerous. What if TSLA tanks again in Oct-Nov. You will only have 2 months left till expiration and not enough time for the calls to recover.

It is best to roll 4-6 months before expiration. In your case waiting for LTCG is way too risky.