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Advanced TSLA Options Trading
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Jonathan Hewitt
Active Member
You get the best theta decay per day the sooner the expiration, you get the most premium the further you go out. Generally the optimum balance of good theta decay but still getting enough premium to increase your chance of profit falls at ~45 days out. Unfortunately this is right after earnings so if the stock doesn't move the premium might not go down much or at all as IV creeps up. If TSLA moves up, however, you will make money based on share price movement. Because we are so close to earnings you could just write an August or September put anyway, or you can wait until the day Earnings will be coming out.
As far as strike, it's really just how aggressive you want to be. 0.3-.35 delta puts are usually great choices to sell just based on statistics. Some people like to looks at technical levels and sell puts based on those. If you are bullish you can also sell ITM puts. This is basically the same thing as buying 100 shares and selling a covered call as far as P/L, The cool thing is it takes a lot less margin to do this than buying 100 shares and selling a covered call but be careful as it's easy to over-leverage yourself doing this.
OTM puts: highest probability of winning, least amount of profit
ATM put: These are the puts that will make the most money if share price does not move because ATM options have the most extrinsic value
ITM put: These have the potential to make you the most money if TSLA moves up but have the worst statistical chance of profit.
I think we are on the lower end of where TSLA should be trading right now so ITM strikes in the $350-$360 area look great to me (I find .3-.35 delta for a calls but then choose that strike for my put). I like to usually do OTM and ITM puts, that way if TSLA does move down hopefully at least one of my strikes still makes money. Doing that is synthetic covered strangle.
As a reminder to everyone, you can get into trouble and Bankrupt your account writing lots of puts. Only write as many puts that if TSLA has a major drop you can keep rolling the puts out in time until TSLA comes back up. Even safer is to have enough cash to take the shares. Unlike calls that expire worthless, you can keep rolling a put and collecting more premium as long as you have enough capital to maintain your position.
I have an IRA account that holds about 1/2 Tesla, the other half is pretty conservative stuff. I think the time is right to leverage up; I was going to sell some shares and buy ITM LEAPS ($300 strike, not that that matters). Anyway, I asked Wells Fargo who hold the IRA to increase the account to level 2 options. After a day or two I got back the answer that the most they'd allow for an IRA was level 1, which only allows buying protective puts or selling covered calls. So I talked to Morgan Stanley who hold some of my other investment accounts, and got exactly the same answer, with a little more color: apparently there are recent new regulations from Dept of Labor that forbid it. But I'd swear I've heard other people here who do more advanced option trading in their IRAs. If anyone is doing that, please tell me who handles the IRA for you? Maybe you're grandfathered, but I'd at least like to find out.
Schwab- Level 1 allows long dated calls- further, you can sell shares and convert to those (LEAPS) immediately without waiting for settlement days.
In addition IRA (Roth and otherwise) can move to Level 2 - at Schwab that means you can do anything except uncovered call writing.
Level 1 there is sufficient for what you describe and is allowed..
I've done Level 2 and lots of day trading within (Roth)IRA at Schwab for years.
Just called them- they know of no new requirement- the only restriction for IRA is uncovered call writing
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Thanks for all the replies. E*Trade also allows everything except writing naked calls. Since that's where most of my assets are (for hyster... err, historical reasons) that's where I'll go.
Dennisj00
Member
If it’s covered, it’s not really naked haha. I know covered is technically with a short, but still.
Agree, I've been selling covered calls for years. My most recent was the September 325's for $8572.
That is what I thought, but not accurate. With Fidelity, if you sell naked Puts with $25,000 in income, you need $50,000-$100,000 to cover it. If the stock drops like just happened, and that Put is now worth $50,000, you suddenly need $100,000-150,000 in your account. I ended up requiring well over 7 figures to cover my Puts at the same time as my account was dropping 50% in value, forcing me to sell some stock and buy back some of the Puts at 100% loss. A painful lesson. I will still sell them in the future, but far fewer so that I don't get a margin call if the stock drops 50% on me again.
hacer
Active Member
Well that is an absurd policy of Fidelity if true, but it sound's like you're misunderstanding what I wrote. Example you sell 1 put with a strike price of $250. This means you have agreed to buy 100 shares of the stock for $250.00/share. If the put is exercised the most money you could ever need would be 100x$250 = $25,000.00; theoretically the stock you receive could be worthless so you stand to lose at most that amount of money. Actually it's a little bit less because when you sold that put, it may have been trading at, say $9.50 which would mean you received $950.00 cash (less commision) for the sale, so you'd worst-case need $24,100.00 in the case that the sales + exercise commission amounted to $50.00
There's no chance you did something really, really naive, like think that 1 contract meant one share, and so sold 100 contracts (10,000 shares of stock) worth?
IRA accounts aren't eligible for any margin, but it is still possible to sell "naked" cash-covered puts in such accounts; you must set aside the full cash to cover the exercise price + commission, but nothing more.
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Zhelko Dimic
Careful bull
Original poster said that if you sell one put, at $250, you need $25000 to cover. This is worst case scenario, put being executed, stock going to 0. But one put would net you few hundred bucks, maybe a grand or two, depends on strike/time.
To get 25K income as you said you did, you need to sell lots of puts, and margin requirement should bear little relevance to how much money you raised, it's a percentage of strike price, i.e. money you'd need to spend to have all puts execute against you. If you thought put price x 2 is safe, oh my, I'm sorry about it.
One way to think about it is that brokerage wants to make sure you have enough liquidity to weather 30, 40, 50 or 60% in equity price, and that they wouldn't be on the hook for any of it if you got cleaned. And relevant to that, remember TT007? When brokerage gets nervous, they can cash you in even if you don't have formal margin call yet. There is a whole risk-assessment department whose job is to 'adjust' risky positions that may lead to the loss for the brokerage, and they are merciless. They sold couple of my innocent, in the money, profitable calls, at the worst possible price, while I was looking to sell them, just because there wouldn't have been enough money in the account to execute them. They did it at 11am on the day of expiration, even-though I had hours to deal with them... Unfortunately, contract allows them to do stuff like this...
I'm sorry if I wasn't clear. I was originally looking at it as 1 Put=100 shares or 250k at 250 SP. But that is not what Fidelity uses to calculate the amount of cash or stock you need. It is what the contract is worth that counts. So if you made $10,000 selling Puts for next January, you need 2-3x that amount in your account in either cash or stock (options don't count). If the stock drops 50% and that Put is now worth -$20,000, you need more money in your account at the same time as your account is losing value because of the dropping stock price and the increased negative value of your Put. One of my trades netted me $100,000, which shows up as -$100,000. As the stock dropped, it showed up as -$200,000 and I needed $600,000 in margin to secure it.
More edit: The Strike price doesn't matter. It is what the contracts are worth to buy them back. Multiply that number by 3. And that number doubles if the Put value doubles, which is what happened when the stock dropped 50% in the last couple weeks.
P.S. Sorry. I'm typing on my phone
More edit: The Strike price doesn't matter. It is what the contracts are worth to buy them back. Multiply that number by 3. And that number doubles if the Put value doubles, which is what happened when the stock dropped 50% in the last couple weeks.
P.S. Sorry. I'm typing on my phone
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Fidelity shows cash covered puts would need 100*250 = 25k to cover. Was the problem that this 25k is considered at risk, therefore not available to use in margin calculations? If so, the effect would be to drop your buying power by 2x (or whatever it is).
Zhelko Dimic
Careful bull
You're looking at this trough the wrong prism, one of how much money put is worth. I find that very dangerous way to assess risk. Please check mine and OP clarification, I think that point of view is the right way.
I sell naked puts too, but I would not dare sell puts worth 100K, without at least 10M in that account...
hacer
Active Member
First off, 100 shares at 250 SP is $25k, not $250k.
Let's look at what it takes to receive $100,000.00 from the sale of Tesla puts:
You could've sold 10 contracts of the Jan 2019 $350 Strike puts, trading yesterday (and part of Wednesday) around $100.00 (that is $10,000/contract * 10 contracts). Doing this means you agree to buy 1000 shares of Tesla stock for $350/share so you could need $350,000 - $100,000 = $250,000 to cover it. So if that's what you did, the margin requirements are absurd. But those contracts didn't double recently.
Or maybe you sold those $350 Strike puts weeks ago when they were at-the money and trading for ~$30. That would mean you sold 33 contracts, so you could be on the hook for up to $1.15 million, the margin seems reasonable. Those puts doubled in the last few days and could correspond to your description above.
Perhaps you sold April 20 $310 Strike puts on March 15 for $13.85. In order to bring in $100,000 that would mean you sold 72 contracts which would mean you agreed to pay $310 per share for 7,200 shares of Tesla or $2.232 million dollars. $600k margin would be cheap for that. Those particular puts did approximately double mid-Wednesday and so they're the best fit I found to your description above.
So rather than me speculate, why don't you tell us specifically what contracts you sold, and how many of them. It really sounds like you were using extreme leveraged but didn't seem to know it.
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