Advanced TSLA Options Trading

[Jonathan Hewitt]

I decided to go with $215 strikes (short Feb $215 call/long Mar $215 call.) I got filled for $2.09. The current predicted breakeven values (assuming no change in volatility) is $195-$239. The individual volatilities were 39% for the February call and 37% for the March call. I think it's probably more important to pay attention to the individual volatilities than TSLA as a whole so I wanted to record these numbers for future reference.

I would be surprised if volatility went down from here so the breakeven range should increase but even if it doesn't I feel that is a pretty good range based on recent price action. If one is more concerned about downside risk (which would REALLY increase volatility) then you could choose the $200 or $205 strikes, for example. This is what I have down in the past as a way to offset my bullish positions. You should get about the same total width of breakeven range but the top and bottom values will be shifted down. Based on what is looking like a second great quarter for TSLA in a row and the recent bullish double bottoming ~$180 I decided to go slightly above the current share price.

One thing that I wanted to mention that was a factor the last time I did this kind of calendar was TSLA moving their earnings up a over a week earlier than normal. This allowed the short option to retain more value ahead of earnings than when earnings is later. I'm curious where earnings will fall this time. I only made 33% that time whereas when earnings was later I made 109%. Volatility was also slightly higher in the higher % win case also but I don't think that was the only factor. TO emphasize how low volatility is notice how I paid $2.40 and $2.45 for this trade the last two times. This time I got it for $2.09! In other words, if volatility only goes to the low level it was at before delivery numbers/earnings the last two times that would be $2.40, a $.31 gain, or ~15% return.

Volatility might still stay low for the next week because of the holidays but I wanted to get the trade on now because it can't really go much lower and I don't want to miss out on this trade.

I hope no one blindly follows me into this trade but instead takes my posts as educational material and maybe some people can educate me, as well. If you do put in the trade and it turns out great, good on you, I don't want any thanks. If it fails miserably then that is also on you. There is a chance TSLA totally bombs the quarter and the share price goes low enough that the calendar becomes worthless. There is also a good chance they nail it out of the park so well that a short squeeze occurs and the spread becomes worthless. I think the most likely occurrence is in between those two and that I make a good return on the calendar but that is the risk I am taking. With all that in mind I would not do more than 1 or 2% of my portfolio in this trade.

Another thing I've never mentioned before is commissions. If you have high commissions then low cost calendars don't work real well for you. For example, $10 in and $10 out would eat up ~20% of your profits if you had a 50% return on 1 a one lot. If you lose money then it adds insult to injury. To make this kind of trade worth doing you need low overall commissions or a single ticket charge with low per contract charges and you do several contracts.

 

[neroden]

Very interesting. I just checked, and it looks like for your trade, call calendar spreads make more sense than put calendar spreads because the difference between the Feb and Mar call prices is less than the difference between the Feb and Mar put prices.

If you were making the opposite bet by entering your position at high volatility and betting that volatility would drop, you'd probably want to do it with puts.

 

[Crowded Mind]

I decided to go with $215 strikes (short Feb $215 call/long Mar $215 call.) I got filled for $2.09. The current predicted breakeven values (assuming no change in volatility) is $195-$239. The individual volatilities were 39% for the February call and 37% for the March call. I think it's probably more important to pay attention to the individual volatilities than TSLA as a whole so I wanted to record these numbers for future reference.

I would be surprised if volatility went down from here so the breakeven range should increase but even if it doesn't I feel that is a pretty good range based on recent price action. If one is more concerned about downside risk (which would REALLY increase volatility) then you could choose the $200 or $205 strikes, for example. This is what I have down in the past as a way to offset my bullish positions. You should get about the same total width of breakeven range but the top and bottom values will be shifted down. Based on what is looking like a second great quarter for TSLA in a row and the recent bullish double bottoming ~$180 I decided to go slightly above the current share price.

One thing that I wanted to mention that was a factor the last time I did this kind of calendar was TSLA moving their earnings up a over a week earlier than normal. This allowed the short option to retain more value ahead of earnings than when earnings is later. I'm curious where earnings will fall this time. I only made 33% that time whereas when earnings was later I made 109%. Volatility was also slightly higher in the higher % win case also but I don't think that was the only factor. TO emphasize how low volatility is notice how I paid $2.40 and $2.45 for this trade the last two times. This time I got it for $2.09! In other words, if volatility only goes to the low level it was at before delivery numbers/earnings the last two times that would be $2.40, a $.31 gain, or ~15% return.

Volatility might still stay low for the next week because of the holidays but I wanted to get the trade on now because it can't really go much lower and I don't want to miss out on this trade.

I hope no one blindly follows me into this trade but instead takes my posts as educational material and maybe some people can educate me, as well. If you do put in the trade and it turns out great, good on you, I don't want any thanks. If it fails miserably then that is also on you. There is a chance TSLA totally bombs the quarter and the share price goes low enough that the calendar becomes worthless. There is also a good chance they nail it out of the park so well that a short squeeze occurs and the spread becomes worthless. I think the most likely occurrence is in between those two and that I make a good return on the calendar but that is the risk I am taking. With all that in mind I would not do more than 1 or 2% of my portfolio in this trade.

Another thing I've never mentioned before is commissions. If you have high commissions then low cost calendars don't work real well for you. For example, $10 in and $10 out would eat up ~20% of your profits if you had a 50% return on 1 a one lot. If you lose money then it adds insult to injury. To make this kind of trade worth doing you need low overall commissions or a single ticket charge with low per contract charges and you do several contracts.

As I've said before, I'm just starting to learn more about these kinds of paired trades. Do you have a spreadsheet to calculate your breakevens and your max profit, or how are you getting those numbers?

 

[Jonathan Hewitt]

As I've said before, I'm just starting to learn more about these kinds of paired trades. Do you have a spreadsheet to calculate your breakevens and your max profit, or how are you getting those numbers?

My brokerage platform has a calculator. The numbers I quoted assume no IV change. If IV does change you get different values but it can calculate that, too. You can use websites like www.optionsprofitcalculator.com also. I used them all of the time until I switched to my current brokerage where it already knows my position so it's easier to pull up my P/L curves.

I apologize if these images look huge on anyone's screen, I'm taking them at home on my 4K monitor and I promise they take up a small fraction of my screen!

The way my brokerage does profit and loss curves is it shows a thin line, which represents today, and a thick line, which represents the predicted P/L curve for expiration. What should happen if time passes and nothing else changes is the thin line will SLOWLY march it's way towards the thick line until expiration, at which point they match.

Here's with me not fiddling with projected IV (AKA it assumes IV does not change):

Notice how your P/L is relatively flat over such a huge range of share price. That's what I meant by this being a pure volatility play as share price changes aren't going to help much and since I am not holding until February Theta isn't going to help as much as it does for other setups (though it will help a good amount!). If volatility continues to drop this becomes a big loser quick.


Here's what it looks like with me putting in a projected IV of 50% (the minimum level it got to before earnings every time this year):

Notice how if IV were to jump to 50% on these options today (AKA the THIN line) AND share price was still at it's current value then you immediately would have a profit of $1.65 for the option you spent $2.09 on. $1.65/$2.09=78.9% profit. You also have a breakeven from $174 to $281 (the portion of the thin green line that is green). If we can get a month of time to pass, the share price stays in the same general area, and IV shoots up to 50% then I should be able to get over 100% return. The reason I am using 1 month in this example is that is when earnings are supposed to be. Volatility usually drops after earnings and you don't want to hold onto this trade while volatility is dropping! Let's say I go to the extreme as far as time passing and you WERE to hold on this spread until the February call expired and IV was still at 50% (now I am talking about the THICK line) then you would have a profit of $9.82. $9.82/$2.09=470% profit. This second scenario is super unlikely for many reasons, the main one being the February call will expire after earnings and IV will likely be low again so I will not hold onto the spread for that long. The second reason is this maximum profit is only realized EXACTLY at a share price of $215. You still have some pretty crazy profits on either side of $215 for a calendar but not nearly as impressive.

Ok, this last one is if IV shoots up to 60% right now:

TSLA has only been at or above 60% IV a couple times this year and only briefly each time so this is probably a pipe dream scenario but it shows some possible profit on the high end. The today profit at 60% is $2.37 (114%). If this were to happen a month from now I would guess it would be >150% thanks to Theta decay.


Speaking of Theta decay, I am seeing a theta decay of $.0249 per day. In other words, if volatility doesn't change and the share price doesn't change then this spread becomes more profitable by 1.1% more for each day that passes! Not bad.

I hope I didn't make this trade sound too good as you CAN lose 100% of invested capital in it. I really want to emphasize this because there's always one person out there who thinks "wow, the share price doesn't even have to move and I could make a 100%+ return! I could get rich, quick!" I am only using ~2% of my "fun" account for this trade so that it doesn't hugely impact me if things don't go according to plan (and 2% is probably too much). I am actually tempted to do a lot more because it has been good to me twice in the past and I don't see a huge chance of losing big on the trade but I want to do it a few more times first and even if it keeps working I would not do more than 5% of my account. I could totally be missing something or things totally beyond my control could occur that shoot the share price out of the breakeven range. You don't want to be caught with a lot of money on this trade if something great or horrible happens because unlike shares, once the options expire they are gone forever, and unlike LEAPS, you only get until March for these options to regain value whereas with LEAPS you get 1+ years to hope and pray for a return to your profitable range. The good news about an upside move is I may lose all my money on this trade but my other positions would make crazy good money.

Hopefully this helps and sorry for it being so long.

 

[Jonathan Hewitt]

I wanted to provide an update on the January/March $200 Calendar spread. This is different than the February/March $215 Calendar that I just put on last week.

So the good news is TSLA has been super strong recently and is basically going straight up. This is bad news for calendars which require the share price to stay in a certain range. The Jan/March $200 calendar is getting near the end of it's profitable range on the upside, assuming no increase in IV. If it breaks this range then you have two options:

1.You can hope the share price falls back down or IV inreases, which should result in a nice win on this spread. If it doesn't fall back down or IV doesn't increase enough you chalk the loss up as a hedge against more bullish positions.
2. You can close the calendar early.

When I put on this trade I was planning on sticking with plan #1 but now that I have my Feb/Mar $215 calendar on I don't want too much money on calendars right now. If I didn't have the extra calendars I would probably be sticking to plan #1. The strength of TSLA share price has also surprised me! I did not expect such a straight move up from the $180 area. Another thought is it's always good to take profits when in doubt because of the whole "bird in a hand is worth two in the bush" saying.

I'll be watching the 200 day SMA and if it breaks through convincingly then I might close the spread at that time.

Here's what my brokerage platform is showing for this spread. Notice how if time goes by that the spread will not become that much more profitable because it is so far from the $200 strike. We are basically relying on an increase in IV to help us or a fall in share price to help us.

Here's how an increase in IV could change the picture and really help out. It makes things a lot better. Notice the increased profit range as well as the higher potential profits:

I expect IV to sharply increase with the release of the delivery numbers. I also expect a large share price movement. If the movement is down this trade could do very well. If it is up then it could very easily become a loser. If it stays in place then it will do well also.

 

[Jonathan Hewitt]

Ok, I closed the Jan/Mar $200 calendar for $5.95 while I could still eke out a very minor profit. I had spent $5.82 on it. It might still do well but I had too much on calendars and I like the Feb/Mar $215 better.

I am keeping my Feb/Mar $215 call calendar as it is looking very good still.

 

[Jonathan Hewitt]

Here's an update on my Feb/Mar $215 Call Calendar Spread. Assuming I could get filled mid-market, my spread is now worth $2.925. I had paid $2.09 for it so I am sitting on a 40% profit right now. The crazy thing is that this is in spite of volatility doing NOT do what I wanted it to. Thanks to the huge upswing IV has remained very low. Usually when an equity rallies the IV goes down so this is not surprising considering the large run we've had.

Looking at the individual volatilities on my calls they are currently 37.4% for the Feb and 37.93% for the Mar. They were originally 39% and 37%, respectively, so even though IV didn't go up like I wanted at least the option I am short (Feb) went down while my long March option stayed the same. That effect is part of while I am up 40% on the spread, the rest of the reason is because of Theta (time) decay.

As far as what to do from here, it would be very smart to close the spread now if this was a large part of my portfolio or if I were risk averse. What I would love to do is to close the spread and reopen it at a higher strike but the options are not very liquid and I would lose a lot on the Bid/Ask by closing the trade and opening a new one. Because of this I intend to keep it open as a hedge because if TSLA drops it will make a lot of money for me while I lose on my bullish positions. It will also make me more money if the IV actually goes up like it's supposed it (no guarantee here, though). The problem will be if TSLA continues to rise and IV remains flat or actually drops. Both of these situations will lead to me losing my profits or even losing my initial investment into this spread. As you can see here the sweet spot is at the chosen strike ($215) but the profitable range is very large. If IV spikes up as we approach earnings the home run range will increase further.

 

[ZenMan]

So I have some LEAP calls that will expire in the money tomorrow (200 strike price). I sold some calls against the LEAPS that in likelyhood will also end up in the money (240 strikes).

This is at Interactive Brokers. Do I need to do anything? I'd assume IB would exercise my long LEAPS at 200 and then use those shares to satisfy the short calls I sold at 240? So in the end I end up with $4000 per contract?

I also have a bunch of common. I'd like the long calls and short calls to offset each other and not affect the basis of my long term shares. Hope someone can let me know if I have to do anything tomorrow to make sure my preferred method of settlement occurs. (Short calls to net against long leaps instead of against common).

Thanks.

 

[MikeC]

So I have some LEAP calls that will expire in the money tomorrow (200 strike price). I sold some calls against the LEAPS that in likelyhood will also end up in the money (240 strikes).

This is at Interactive Brokers. Do I need to do anything? I'd assume IB would exercise my long LEAPS at 200 and then use those shares to satisfy the short calls I sold at 240? So in the end I end up with $4000 per contract?

I also have a bunch of common. I'd like the long calls and short calls to offset each other and not affect the basis of my long term shares. Hope someone can let me know if I have to do anything tomorrow to make sure my preferred method of settlement occurs. (Short calls to net against long leaps instead of against common).

Thanks.

That's correct that the 200s and 240s will disappear and you'll net $4k per contract. That's assuming it stays above 240.

If it ends up under 240, obviously the 240 expires worthless but you'll need to sell the 200 or it will exercise - if you don't sell it, you'll end up with 100 new shares of TSLA but you'll be out $20k.

 

[Menifeer]

So I have some LEAP calls that will expire in the money tomorrow (200 strike price). I sold some calls against the LEAPS that in likelyhood will also end up in the money (240 strikes).

This is at Interactive Brokers. Do I need to do anything? I'd assume IB would exercise my long LEAPS at 200 and then use those shares to satisfy the short calls I sold at 240? So in the end I end up with $4000 per contract?

I also have a bunch of common. I'd like the long calls and short calls to offset each other and not affect the basis of my long term shares. Hope someone can let me know if I have to do anything tomorrow to make sure my preferred method of settlement occurs. (Short calls to net against long leaps instead of against common).

Thanks.

You should contact the broker to learn what their normal operating procedure is.

You may learn that the assigned $240's would be offset first by your long shares and not by the $200's.

You may also find that you'll be in a "boxed" situation (both short and long positions remaining in the account, with interest being charged on the short position).

Talk to the broker and let them know how you want the transactions handled.

 

[Menifeer]

So I have some LEAP calls that will expire in the money tomorrow (200 strike price). I sold some calls against the LEAPS that in likelyhood will also end up in the money (240 strikes).
...
Thanks.

One more thought...

It sounds like you don't want to acquire more shares, so have you considered closing both positions and not allowing them to be exercised & assigned?

If that's the case, you could enter a "spread" order to buy back the $240's and sell the $200's and a price difference of just under $40/share. The $240's will probably have a good bit of premium in them until the closing minutes, but should be worth just about $40 less than your $200's at closing (assuming TSLA remains above $240).

 

[neroden]

So I have some LEAP calls that will expire in the money tomorrow (200 strike price). I sold some calls against the LEAPS that in likelyhood will also end up in the money (240 strikes).

This is at Interactive Brokers. Do I need to do anything? I'd assume IB would exercise my long LEAPS at 200 and then use those shares to satisfy the short calls I sold at 240? So in the end I end up with $4000 per contract?

I also have a bunch of common. I'd like the long calls and short calls to offset each other and not affect the basis of my long term shares. Hope someone can let me know if I have to do anything tomorrow to make sure my preferred method of settlement occurs. (Short calls to net against long leaps instead of against common).

Thanks.

I don't know whether you HAVE to call, but it never hurts to call and give specific instructions. Why not just do so and ease your mind?

 

[ZenMan]

I don't know whether you HAVE to call, but it never hurts to call and give specific instructions. Why not just do so and ease your mind?

Thanks to everyone who posted. I did call IB and the long option will automatically be exercised if it is $0.01 in the money. The short call will probably be exercised by the call owner. On Sunday after the options are exercized they told me to login to the IB account management, then reports, then tax reports, then tax optimizer and I can specify what shares were sold (called away). I plan on keeping my Friday afternoon free so I can watch and possibly close out one or both sides prior to expiration.

 

[Jonathan Hewitt]

Here's an update on my Feb/Mar $215 Call Calendar Spread. Assuming I could get filled mid-market, my spread is now worth $2.925. I had paid $2.09 for it so I am sitting on a 40% profit right now. The crazy thing is that this is in spite of volatility doing NOT do what I wanted it to. Thanks to the huge upswing IV has remained very low. Usually when an equity rallies the IV goes down so this is not surprising considering the large run we've had.

View attachment 210914
View attachment 210916

Looking at the individual volatilities on my calls they are currently 37.4% for the Feb and 37.93% for the Mar. They were originally 39% and 37%, respectively, so even though IV didn't go up like I wanted at least the option I am short (Feb) went down while my long March option stayed the same. That effect is part of while I am up 40% on the spread, the rest of the reason is because of Theta (time) decay.

As far as what to do from here, it would be very smart to close the spread now if this was a large part of my portfolio or if I were risk averse. What I would love to do is to close the spread and reopen it at a higher strike but the options are not very liquid and I would lose a lot on the Bid/Ask by closing the trade and opening a new one. Because of this I intend to keep it open as a hedge because if TSLA drops it will make a lot of money for me while I lose on my bullish positions. It will also make me more money if the IV actually goes up like it's supposed it (no guarantee here, though). The problem will be if TSLA continues to rise and IV remains flat or actually drops. Both of these situations will lead to me losing my profits or even losing my initial investment into this spread. As you can see here the sweet spot is at the chosen strike ($215) but the profitable range is very large. If IV spikes up as we approach earnings the home run range will increase further.

View attachment 210915

So much for my 40% profit! As the stock price zoomed up the profit percent went down and down util around $250 it was back to even. I was impressed that it was able to maintain breakeven all the way up to $250 despite hardly any rise in volatility. As it passed $250, however, it quickly went to somewhere around a full loss. I'm not sure exactly because the bid/ask spread was wider than what I originally paid for the spread. I planned to hold onto it anyway because with earnings coming up there it could have served as a good hedge. This plan was killed on Friday when I got assigned on the short leg and ended up short a crazy amount of TSLA stock (This sounds really bad but because I still was long a bunch of March $215s it didn't affect much other than the margin requirement). At that point I decided to close the short position and sell the March calls and call it a day.

It would have been nice to have sold the spread back when it was up 40% but like I said when I entered the trade if it ended up losing because TSLA went up I would make much more on my long positions, and I did.

Oh, and a IV update. It's still very low, especially with earnings being close. I normally like to write puts when IV spikes before earnings but I don't know if the risk/reward is there with IV being as low as it is. It's interesting that the crazy IV spike thanks to the dip to $140 last year is almost off the 52 week history.

 

[neroden]

Oh, and a IV update. It's still very low, especially with earnings being close. I normally like to write puts when IV spikes before earnings but I don't know if the risk/reward is there with IV being as low as it is. It's interesting that the crazy IV spike thanks to the dip to $140 last year is almost off the 52 week history.
View attachment 214495

I'm still writing deep OTM puts to claim time value and volatility value with money which I'd otherwise keep in cash (cash I expect to spend in the next year).
If the stock really does drop below my deep OTM strike price... well, then I'm OK with a margin loan to buy more. So.

 

[Jonathan Hewitt]

For those wondering whether they should "buy the dip" or not there is another option, specifically selling them. The last time Implied Volatility exceeded where it is at now in the last year was July 2016. In other words, you are getting paid very well to sell options right now. As you can see in the chart below Implied Volatility exceeds historic volatility most of the time so odds are in your favor.

 

[neroden]

Sadly I am running out of additional cash to back my cash-secured put sales... I've been avoiding spreads because of the fscking complicated tax treatment of straddles...

 

[MikeC]

Does anyone know what "AM-settled" means in the screenshot below? I've never seen it before.

 

[ggr]

Does anyone know what "AM-settled" means in the screenshot below? I've never seen it before.

View attachment 235472

Interesting. Not surprisingly, it means that the price for settlement is established in the morning, but my understanding was that this only applies to index options, not to options on individual stocks.
Stock Options Settlements - AM Settlements - PM Settlements
Certainly in my experience TSLA options are settled on market close, and should be PM settled. So I don't understand what's going on here.

 

[MikeC]

Interesting. Not surprisingly, it means that the price for settlement is established in the morning, but my understanding was that this only applies to index options, not to options on individual stocks.
Stock Options Settlements - AM Settlements - PM Settlements
Certainly in my experience TSLA options are settled on market close, and should be PM settled. So I don't understand what's going on here.

Thanks for the response. Came across the same explanation as you did, but doesn't make sense why they would do it for TSLA right now, esp when they never have before. The brokerage is Schwab in case anyone is wondering.