You are talking about margin requirements while the people you are talking with are referring to max cash required to cover a sold put if TSLA went to $0/share. You would, of course, receive a margin call before that if you were using margin rather than cash to cover the put. I find it troublesome that you are selling naked puts and aren’t immediately understanding what the other posters are saying here.
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Advanced TSLA Options Trading
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You are talking about margin requirements while the people you are talking with are referring to max cash required to cover a sold put if TSLA went to $0/share. You would, of course, receive a margin call before that if you were using margin rather than cash to cover the put. I find it troublesome that you are selling naked puts and aren’t immediately understanding what the other posters are saying here.
Jonathan Hewitt
Active Member
Unless TSLA went towards $0/share overnight. Companies can and will declare BK on the weekend or outside market hours. If that happens the market will open and you will have a negative account balance if you are as leveraged as rdalcanto in one underlying. It doesn't even have to be a BK event. A black swan like Elon dying from a heart attack or an earthquake destroying Fremont over the weekend could possibly drop TSLA something crazy like 50% or more when it next opens for trading.
Agree 100%. I'm not throwing stones at rdalcanto because I almost lost my account to OTM naked puts in 2014 when a stock went BK before I fully understood the risk they present and don't want to see a repeat. I love naked puts and they are an awesome tool just like how a circular saw is an awesome tool. Very powerful and worth using but without a full appreciation of it's power it can get ugly real quick.
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I'm on vacation, and don't know how much I want to type on my phone with all the wrong auto corrects.... I'm afraid I still won't explain this well enough.
I used to sell Puts that were around 20 dollars below current SP, and about 4 weeks out. I would only sell 10, and would either roll if necessary, or pick up the 1000 shares and then use them to sell Calls. But I found the constant work stressful. If you notice, the cost of a Put that is out of the money the day or week of expiration is basically nothing if it is far enough out of the money, and only the cost of the gap when in the money on expiration day.
In January, when Elon said Tesla would definitely be at 5000/wk Q1 and 10000/wk Q2, I calculated that there was No Way the SP would be below 350 in January 2019. So I sold lots of Puts (Jan 2019) that I figured would stay out of the money, or if they ended up in the money, I could buy them back just before expiration using the proceeds from the sale (again, when you get close to expiration, a Put that is in the money is only the cost of the gap, so a 350 SP Put had break even at 300, and ten contracts would only cause me to lose $20000 if it went down to 280. I sold 40 contracts with a SP of 220, Jan 2019, where I would not lose any money closing them out unless the SP is under 180 at expiration. In total I made around $500,000 selling these and other Jan 2019 Puts at various strike prices up to 350. In Fidelity, they would total and show up in my Positions as -500,000 (that number would go to zero with time decay if they stayed out of the money). I had cash to buy half of them back at the same price, and lots of stock I could sell if necessary. But then we had a rapid 50% decline in the stock price. My 220 Puts stayed out of the money, but their negative value doubled, and the cash/stock required to secure them went to 6 times the original amount. My paper losses on stock, calls, and those increasing negative Puts went well into 7 figures, so I no longer had enough cash and stock value to secure the Puts, even though some were still out of the money, and none were expiring for 9 more months.
I'm trying to explain that you not only need to have the money to buy back the Puts (not to buy all the shares), but basically 6 times their value (because of Margin requirements 3x the new value) to cover a 50% drop in stock price if the worst happens. My problem is that I believed Elon when he revised the ramp the first time, and didn't think there was anyway the stock could go under 300 with 5000/wk in Q1. To be honest, when he changed it a second time and lowered it to 2500/wk, I still didn't think we would go under 300.
Next year, I will still sell Puts 6-12 months out, but I will not exceed proceeds that are more than 1/6 my account value in case the stock drops 50% again, so I'm not forced to sell stock or bring in more cash.
I used to sell Puts that were around 20 dollars below current SP, and about 4 weeks out. I would only sell 10, and would either roll if necessary, or pick up the 1000 shares and then use them to sell Calls. But I found the constant work stressful. If you notice, the cost of a Put that is out of the money the day or week of expiration is basically nothing if it is far enough out of the money, and only the cost of the gap when in the money on expiration day.
In January, when Elon said Tesla would definitely be at 5000/wk Q1 and 10000/wk Q2, I calculated that there was No Way the SP would be below 350 in January 2019. So I sold lots of Puts (Jan 2019) that I figured would stay out of the money, or if they ended up in the money, I could buy them back just before expiration using the proceeds from the sale (again, when you get close to expiration, a Put that is in the money is only the cost of the gap, so a 350 SP Put had break even at 300, and ten contracts would only cause me to lose $20000 if it went down to 280. I sold 40 contracts with a SP of 220, Jan 2019, where I would not lose any money closing them out unless the SP is under 180 at expiration. In total I made around $500,000 selling these and other Jan 2019 Puts at various strike prices up to 350. In Fidelity, they would total and show up in my Positions as -500,000 (that number would go to zero with time decay if they stayed out of the money). I had cash to buy half of them back at the same price, and lots of stock I could sell if necessary. But then we had a rapid 50% decline in the stock price. My 220 Puts stayed out of the money, but their negative value doubled, and the cash/stock required to secure them went to 6 times the original amount. My paper losses on stock, calls, and those increasing negative Puts went well into 7 figures, so I no longer had enough cash and stock value to secure the Puts, even though some were still out of the money, and none were expiring for 9 more months.
I'm trying to explain that you not only need to have the money to buy back the Puts (not to buy all the shares), but basically 6 times their value (because of Margin requirements 3x the new value) to cover a 50% drop in stock price if the worst happens. My problem is that I believed Elon when he revised the ramp the first time, and didn't think there was anyway the stock could go under 300 with 5000/wk in Q1. To be honest, when he changed it a second time and lowered it to 2500/wk, I still didn't think we would go under 300.
Next year, I will still sell Puts 6-12 months out, but I will not exceed proceeds that are more than 1/6 my account value in case the stock drops 50% again, so I'm not forced to sell stock or bring in more cash.
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hacer
Active Member
hacer
Active Member
So that is 4000 shares @ 220 = $880k. I wrote that selling these is no more risky than owning that much stock or having a GTC order to buy that much stock. To have such a GTC, you would need cash or margin of $880k in your account, so why did you say I was "not accurate" when you experienced a need for $600k equity/margin to cover what you sold? What I said was totally accurate. You should have anticipated that required margin (it could go as high as $780k because the $100k you brought in) but should not be possible to go higher. Certainly when the stock is far from the SP, the change in equity/margin is quite large as the stock moves, but as it gets deep in the money, the rate of increase in margin required goes way down. It should never be allowed to exceed the amount required to accept exercise, which can happen at any time and which you have no control over. So if Fidelity really does use a fixed 3 * price of option regardless of the cost of exercise you need to find a new broker, but I highly doubt that they do that. If Tesla dropped to 100 yesterday, those puts would have been $120 in-the-money and had very little time premium; buying them back would cost something like $488k (assuming $2 time premium) so if Fidelity really requires 3x that would mean they want you to have $1.5 million dollars equity/margin to cover a position that if you were completely wiped out could never cost more than $880k and that would be absurd so I doubt that they require that. However with the stock trading less than $30 from the strike and the price moving close to that amount in a single day Fidelity has a very reasonable view that these puts are in danger of immediate exercise and therefor you need to have equity/margin to cover that. The reality was they didn't require quite that much but it was still enough to force you out. While maybe you were surprised by the stock movement, you shouldn't have been surprised by the broker's margin call.
Wow, just Wow! You got burned and you still want to play with fire. Margin requirements has little to do with the proceeds you take in; it has everything to do with the value of stock you're trying to control. From your statement you'd consider selling 555 Sept'18 50 Strike puts for $0.90, netting $49,950 so long as you had $300k equity/margin in your account. I imagine your broker wouldn't even accept such an order, since you'd be trying to control $2.75 million worth of stock with only $300k. Please take some time to understand how options/margin work before you wipe yourself out.
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I did not mean to imply fixed at 3x, but that seemed to be as high as it went. Varied by the Put. The lower strike price Puts needed higher level of cash/stock relative to the value of the Puts which surprised me.
I disagree that you need to be able to cover the entire cost of the shares, because you can sell them instantly. You have to be able to cover the cost of closing out the option at a loss, which is why they keep a high margin requirement, in case it moves quickly, or the difference in price of buying and selling the shares as the price is dropping.
I disagree that you need to be able to cover the entire cost of the shares, because you can sell them instantly. You have to be able to cover the cost of closing out the option at a loss, which is why they keep a high margin requirement, in case it moves quickly, or the difference in price of buying and selling the shares as the price is dropping.
Jonathan Hewitt
Active Member
Ah, so HERE is the problem. You were assuming margin was based on "value" of the put. "Value" of a put does not determine margin required.
Margin required at Fidelity for naked puts is 25% of the underlying stock value, minus the out-of-the-money amount, plus the premium, or 15% of the strike price, plus the premium (whichever is higher).
Margin Requirements RBR tables | Fidelity Investments
One last danger of writing contracts: you are not in control of if/when they are exercised. And they can be exercised and assigned to you while the market is closed. It's rare, but there are reasons to do it.
Menifeer
Member
The assignment possibility can be reduced/eliminated by not allowing the time premium to approach zero. That could mean exchanging for a later expiration or a different strike price.
In a happier time, I sold Mar 23 $325 Puts for $8. I have since rolled them three times and now they expire Jun 15. Assignment is unlikely since they have several dollars of time premium. If/when that premium gets in the $.50-1.00 range, I'll roll again.
With each roll, I got an infusion of cash and lessen the liklihood of assignment. My break-even point now equates to a share price of $304.50.
The account also has an improved look - I know better, but it appears that I was clever enough to sell those Puts at the current price!
Jonathan Hewitt
Active Member
If you are afraid of macro slides you can short calls against your long calls. You will still lose value on your long calls if we keep going down but you will profit on the short calls losing value. If TSLA doesn't move at all time decay of the short calls will help offset time decay of your long calls as well. The main negative of doing this is you will limit your upside but unless we get a crazy short squeeze this isn't a big deal. You are trading the chance of "infinite profit" for a much higher chance of making money. Just be smart with your strike selection.
You can use same expiration to form a vertical, or different expirations to form a diagonal. Diagonals are more advanced and harder to do well with of but can potentially work out a lot better than plain vertical call spreads.
Jonathan Hewitt
Active Member
As expected, July 2018 options are available now.
Unexpectedly, March and June 2019 options are available, too! LEAPs for months that aren't January?
Trying to come up with a strategy to take advantage of this but haven't come up with one yet. March 2019 could be good as it should be after the very profitable Q4 ER.
Unexpectedly, March and June 2019 options are available, too! LEAPs for months that aren't January?
Trying to come up with a strategy to take advantage of this but haven't come up with one yet. March 2019 could be good as it should be after the very profitable Q4 ER.
Jonathan Hewitt
Active Member
This is the advanced option thread, so please follow at your own risk.
With TSLA Volatility at the highest it's been over the last year with the exception of the recent drop to ~$250 it may be worth putting on a strategy that takes advantage of high IV.
Enter the Butterfly. One way to think of the butterfly is a long call spread and a short call spread, where the short strikes share the same strike. You make the most money on a long call spread if it's all ITM, the most on a short call spread if it's all OTM. These two strategies conflict each other so the Butterfly makes max profit right in the middle of these two, or exactly at the short strikes. Because you will almost never expire right at the short strike you will take profits at a percentage of the max profit.
One reason this is a great earnings trade is most long strategies are negatively affected by a IV decrease whereas a butterfly is usually set up to benefit as IV comes down. The closer an option strike is to the current share price the more extrinsic value it has. So if you choose a short strike not too far from the current share price, there is a LOT of extrinsic value that will go away thanks to two options being at the short strike. The way OTM long option won't have much value and if you choose an ITM long option it will have a decent amount of intrinsic value instead of all extrinsic value. Another great reason this is a good earnings trade is that most you will lose is 100% of what you risk. If there is a huge move up or down you might lose less than short puts, short calls, or stock, etc.
You can set it up so that the middle short strikes are right at the share price for maximum gain from IV collapse or move the short strikes up or down to be more bullish or bearish. You can also move the long strikes wider or narrower. As you move the long strikes out you have to put up more capital and have more to lose but your chance of losing 100% is drastically reduced. If you move you long strikes in closer you are putting up less capital, will have a much higher percent return if it is profitable, but you will much more likely lose 100% of your debit paid.
Here is an example of a slightly bullish BF, buying one June $275 call, shorting two $325s, and buying one $375 for a total debit of $17.5
Max profit will be at June expiration at $325. Breakevens are at $292.5 on the low side and $357.5 on the high side. To lose 100% TSLA would have to end in June above $375 or below $275. This seems like a reasonable range to expect TSLA to stay in between now and June based on recent developments. Achieving the max profit is not likely but shooting for 25% of the max profit is very reasonable. 25% of max profit would be a 46% return on your investment. You could either take this off right after earnings to make any money there is from an IV collapse or if you think TSLA is going to stay in the $275-$375 range keep it on and let theta decay do it's work.
If you are already super leveraged bullishly you can shift all the strikes down so that if TSLA drops in price you make money. You can also choose weekly expiration or May expiration to achieve a faster IV collapse but there will be less Extrinsic value to collect. You can also do multiple and layer, for example using some more bearish for short term expiration and some more bullish for longer term expiration.
Note: you WILL lose 100% using this strategy time to time so do NOT leverage up. This is a trade that should at most use 1% of your buying power in large accounts and AT MOST 5% in a small account, though I recommend much less.
With TSLA Volatility at the highest it's been over the last year with the exception of the recent drop to ~$250 it may be worth putting on a strategy that takes advantage of high IV.
Enter the Butterfly. One way to think of the butterfly is a long call spread and a short call spread, where the short strikes share the same strike. You make the most money on a long call spread if it's all ITM, the most on a short call spread if it's all OTM. These two strategies conflict each other so the Butterfly makes max profit right in the middle of these two, or exactly at the short strikes. Because you will almost never expire right at the short strike you will take profits at a percentage of the max profit.
One reason this is a great earnings trade is most long strategies are negatively affected by a IV decrease whereas a butterfly is usually set up to benefit as IV comes down. The closer an option strike is to the current share price the more extrinsic value it has. So if you choose a short strike not too far from the current share price, there is a LOT of extrinsic value that will go away thanks to two options being at the short strike. The way OTM long option won't have much value and if you choose an ITM long option it will have a decent amount of intrinsic value instead of all extrinsic value. Another great reason this is a good earnings trade is that most you will lose is 100% of what you risk. If there is a huge move up or down you might lose less than short puts, short calls, or stock, etc.
You can set it up so that the middle short strikes are right at the share price for maximum gain from IV collapse or move the short strikes up or down to be more bullish or bearish. You can also move the long strikes wider or narrower. As you move the long strikes out you have to put up more capital and have more to lose but your chance of losing 100% is drastically reduced. If you move you long strikes in closer you are putting up less capital, will have a much higher percent return if it is profitable, but you will much more likely lose 100% of your debit paid.
Here is an example of a slightly bullish BF, buying one June $275 call, shorting two $325s, and buying one $375 for a total debit of $17.5
Max profit will be at June expiration at $325. Breakevens are at $292.5 on the low side and $357.5 on the high side. To lose 100% TSLA would have to end in June above $375 or below $275. This seems like a reasonable range to expect TSLA to stay in between now and June based on recent developments. Achieving the max profit is not likely but shooting for 25% of the max profit is very reasonable. 25% of max profit would be a 46% return on your investment. You could either take this off right after earnings to make any money there is from an IV collapse or if you think TSLA is going to stay in the $275-$375 range keep it on and let theta decay do it's work.
If you are already super leveraged bullishly you can shift all the strikes down so that if TSLA drops in price you make money. You can also choose weekly expiration or May expiration to achieve a faster IV collapse but there will be less Extrinsic value to collect. You can also do multiple and layer, for example using some more bearish for short term expiration and some more bullish for longer term expiration.
Note: you WILL lose 100% using this strategy time to time so do NOT leverage up. This is a trade that should at most use 1% of your buying power in large accounts and AT MOST 5% in a small account, though I recommend much less.
Coming back here and seeing people discussing cash-secured puts and naked puts, I'll just state that my current policy is to have the ability to cover the exercise of all my short puts 1.5x over with *non-TSLA* stocks & bonds which have relatively low volatility. (If I do have to cover, I'll be all in on TSLA, after considering taxes from the sale of other stocks. I doubt I'll have to cover given my long dated expirations and low strike prices, but this is my final backstop against ending up in debt.)
I've been shorting puts on TSLA for some years now. I usually stagger over 3-6 months at deep OTM and have been collecting premium 100% of the time so far. Would you mind sharing your short put strategy to see if I can improve mine?
dmunjal, your strategy is probably better than mine. I tend to sell shallow OTM. Usually I let them expire, occasionally I let them execute, but sometimes I've rolled them down and out (not my preferred choice).
My strategy has unfortunately been affected by all kinds of external considerations related to my cash flow and positioning of margin capacity in different accounts, so I haven't been able to have a steady, reliable position size, which would probably allow me to follow a better strategy. I've had to change strategy on the fly as I have unexpected updates to cash flow needs, which is really undesirable (this led to some of the down-and-out rolling rather than allowing execution).
My strategy has unfortunately been affected by all kinds of external considerations related to my cash flow and positioning of margin capacity in different accounts, so I haven't been able to have a steady, reliable position size, which would probably allow me to follow a better strategy. I've had to change strategy on the fly as I have unexpected updates to cash flow needs, which is really undesirable (this led to some of the down-and-out rolling rather than allowing execution).
Hi Guys,
Very informative thread. I read last few pages. I have also joined the joined. I have just shorted 1 Oct 2018 $120 PUT for $2.
I am with interactive brokers and my core holding is long only ETFs for the very very long term.I have no cash. I am trying toAn use the leverage against my portfolio (Reg T margin not portfolio margin) to have some fun with shorting puts. My total portfolio value is $175K
Any suggestions on what puts I can sell and yet not risk getting assigned, and how much? My current SMA and excess liquidity is very good at about 100K. So I think I can short a few more PUTs, but I dont think I will as it could be risky. Any thoughts?
Thanks in advance!
Very informative thread. I read last few pages. I have also joined the joined. I have just shorted 1 Oct 2018 $120 PUT for $2.
I am with interactive brokers and my core holding is long only ETFs for the very very long term.I have no cash. I am trying toAn use the leverage against my portfolio (Reg T margin not portfolio margin) to have some fun with shorting puts. My total portfolio value is $175K
Any suggestions on what puts I can sell and yet not risk getting assigned, and how much? My current SMA and excess liquidity is very good at about 100K. So I think I can short a few more PUTs, but I dont think I will as it could be risky. Any thoughts?
Thanks in advance!
If you want to eliminate risk of getting assigned, just pick a strike price below which you believe the stock will not go, even in the worst scenario you can think of. So, for instance, if you were quite sure the stock won't go below $250, you could sell puts at any price below $250 and be pretty sure that you won't get assigned.
You still want to carry enough margin capacity to carry the puts, however. If you've got a total portfolio of $175K, I would not want to sell puts with an total execution value of more than half that ($87K), to be *really really sure* of avoiding margin calls.
Your current put would cost $120 * 100 = 12K if it executed.
One $250 put would cost $250 * 100 = 25K if it executed.
So just add it up and keep it at a low enough level that you're comfortable.
Now, the margin capacity required to carry the puts is generally a lot less than this but this is the *maximum* margin capacity required to carry it, since this is your maximum exposure; no matter how low the stock goes, your maximum exposure is "have to buy it at that price".
You still want to carry enough margin capacity to carry the puts, however. If you've got a total portfolio of $175K, I would not want to sell puts with an total execution value of more than half that ($87K), to be *really really sure* of avoiding margin calls.
Your current put would cost $120 * 100 = 12K if it executed.
One $250 put would cost $250 * 100 = 25K if it executed.
So just add it up and keep it at a low enough level that you're comfortable.
Now, the margin capacity required to carry the puts is generally a lot less than this but this is the *maximum* margin capacity required to carry it, since this is your maximum exposure; no matter how low the stock goes, your maximum exposure is "have to buy it at that price".
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