Advanced TSLA Options Trading

[Jonathan Hewitt]

Latest update on my August/September $215 put calendar: It is now worth even more at $4.80 per contract, or a 95.6% return. If you remember, I was concerned IV would drop and it did. It actually went up to ~63%, then ended lower than last week (was 58.6%, now 53.85%). If I am looking at it correctly, the reason it went up despite IV going down is that Theta Decay provided more value to the calendar than it lost from IV going down. Now that we are getting closer to the short option expiring it will be decaying a lot faster. My platform shows a Theta of $6.39/day for the spread.

If I was risk adverse I should have sold a long time ago. My prediction is IV will stay more or less in the same range until earnings and that I will continue to make money due to time decay. IV may go up and down due to the master plan coming out tonight and SCTY acquisition based news but I don't expect any huge changes. There will probably be a large IV drop after earnings so I currently plan to sell this calendar the day of earnings release.

While I haven't closed the trade yet I think I can say at this point that this is definitely worth trying again. For those who have been interested in this trade I will definitely try to set it up again just like I did this time, ~2 weeks before delivery numbers release. Hopefully IV falls enough after earnings to give us a good setup as it has in the past. If IV remains high after earnings due to the SCTY acquisition then it may not make sense to repeat the trade. I will be sure to monitor the situation and post here my findings.

 

[VanE]

I moved this discussion out of the short term thread.


I've never actually done complicated options trades like this. Actually this is relatively simple spread compared to people who do iron condors etc, but my point is that my options trades are usually one-sided. But your example piqued my interest, and I have a spare afternoon.

First, I tried to reproduce your actual numbers. Now, my broker is ETrade, and maybe the quotes are broker specific. And, I'm completely ignoring the TSLA part of your logic above, just talking about the raw SCTY trade.

The first thing is that your $8.15 was the last trade of the $240 puts. However, the Bid/Ask is $6.80/$7.80. That is, the stock moved without the options trading again. Realistically you might get $7.30 for this put (the average of the bid/ask spread).
The $21 puts did trade. The b/a spread is $5/$6, last trade $5.50 as you show.

Above, you calculate maximum risk as $3 (which is the difference between the two strike prices) less $1.80 (the money you already got), so the maximum loss is $1.20. The maximum return is when you get to keep all of that $1.80. So your maximum loss is actually 67% of your maximum gain. Failing to take into account the lack of trading of the write-side option is where your calculation went wrong. You would be right if you could actually execute the trades as you wrote them, but without further movement in the underlying stock you'll never be able to do that. Actually, movement in SCTY will tend to move both ends of the trade, so you'll probably never be able to do it. In fact, even my trade might be impossible.

This is one of my big problems with "paper trading", which a lot of people recommend to beginners. It is easy to convince yourself that you'd have made a fortune if only you had real money, but in reality either the trades wouldn't ever have happened or you'd get the timing wrong or something. All you can count on is that you'll never make as much as you thought you would. And the fortune you make may be negative .

The good thing about this is that, like you, I followed the link to optionsprofitcalculator.com (thanks @MitchJi) and learned a lot about how the time value affects early exit from a trade like this. Suppose the deal goes through and on July 30 SCTY goes instantly to $26. You could probably exit both puts and get 12.5%, in only 3 weeks. Of course you'd make a lot more by ignoring the lower strike, and just selling the at-the-money puts, but then your downside insurance is all gone. If the deal tanks and SCTY goes down to $21, I can probably exit for only 15%. Note the disparity... time value works against us here.

The next good thing is that I knew ETrade allowed me to do these kinds of trades, but I'd never tried one. The way it works is I enter both ends of the spread, but instead of pricing the individual trades I just say "I want to get $2" (a little up from $1.80). This makes my downside $1 and upside $2, for a slightly better outcome. Of course the trade might never execute. I put it in for 10 contracts of each. We'll see, and I'll report back.

Thank you for your reply! It is indeed just a simple put spread. I've looked at my analyses again and, like you said, I used the wrong numbers, I took the numbers of the last trades, instead of the bid/ask numbers, those numbers are a lot closer together and make it thus not quite as profitable.

The problem for me with only selling the put is that the margin required for the trade by my broker is immense! It is more profitable for me to buy a lower put and let expire worthless.

Wow, that is a great option of ETrade. My broker unfortunately doesn't allow two-legged option strategies, so I have to buy the put option first and then sell the higher put option.

 

[neroden]

So, I've sold some SCTY puts (backed by loads of cash so I don't need to worry about the margin requirements). I'm more conservative than Mr. Hewitt so I've been happy with much lower returns, such as 25% (40-60% or more annualized).

The interesting thing, and the thing which causes me to consider this *advanced* options trading, is that SCTY options are all very thinly traded. I've had to feed them onto the market rather carefully; it can only take so much each day, I've had to spread it around to different strikes, and I'm sure the market makers are getting a pretty good deal out of me. I was doing this before with TSLA puts and they were very liquid by comparison, with much greater improvements being possible over the bid. It seems to me at this point that it's unwise to open an options position unless Open Interest in that particular option is at least 10 times the position you're taking, and 100 times is a lot better. It also seems much better to trade positions which have already traded the same day.

SCTY put premiums are still huge but they seem to be shrinking fast. The SCTY/TSLA arbitrage gap in the stock prices is also shrinking. I think this has to do with news reports making the merger seem more and more likely.

 

[Jonathan Hewitt]

So, I've sold some SCTY puts (backed by loads of cash so I don't need to worry about the margin requirements). I'm more conservative than Mr. Hewitt so I've been happy with much lower returns, such as 25% (40-60% or more annualized).

After making a ton of money buying options in 2013 and then losing a lot of money buying options in 2014 and 2015, writing options makes up the bulk of my portfolio right now. Some of them plain, others part of more advanced trades like ratio spreads. After I've done a few more of those trades and am more comfortable with using them with TSLA maybe I will write about them here.

For now, one thing I have slowly realized over the last couple years of just writing plain puts is that sometimes they will increase in value (a loss to me) or not lose much value even with only small changes in stock price. This effect is because of Vega/Volatility. If the share price drops and volatility goes up then you get a double whammy. All of a sudden your put is super red. I never really paid much attention to why this effect was so pronounced before because I would just try to make sure I sold the puts on large drops and hope for the best. This works great when I time bottoms right, which isn't that often. I am hoping that by paying attention to Volatility that I can be more successful. The calendars that I am experimenting with will gain value (positive effect to me) if the puts gain value (negative effect to me) due to a Volatility/Vega increase. So even if the calendars I own are up 50-100% over a time period due to a Vega increase it's likely that the puts I wrote are losing me money over that time period. The best case scenerio is nothing happens to Volatility or share price because then BOTH positions makes money due to time decay. The calendars are meant to only be a small percent of one's portfolio because they are more risky than the puts but I think they will help smooth out your returns, especially when used when we know volatility will probably go up, like before the delivery numbers.

With all that said, I think selling longer dated cash secured puts is a great strategy and a lot easier to implement. Anything more than 10% total account annualized return with minimal effort is awesome. I may go back to just going that route depending on how things go...

 

[neroden]

Soooo, in hopes of getting TSLA stock at a discount, I sold some September and January cash-secured equity puts on SCTY which were in the money. (The premiums were so ridiculously high that if they were executed, I was effectively buying SCTY below $22, which if the merger goes through, is equivalent to buying TSLA below $180.)

With the potential stock runups related to the merger, I'm beginning to think they have decent odds of expiring out of the money. Even the $35s. I'm kind of disappointed. I guess that's the risk one takes with writing put options.... the risk of losing the upside of outright stock ownership. On the other hand, I've already been paid the premium, so I really can't complain too much.

 

[Mario Kadastik]

I'm kind of disappointed. I guess that's the risk one takes with writing put options.... the risk of losing the upside of outright stock ownership. On the other hand, I've already been paid the premium, so I really can't complain too much.

Well now imagine me in 2013+ when I first decided to buy a Tesla I also decided to buy TSLA. It was trading at ~$28. So I sold a bunch of puts at the money every month expecting to get hundreds of shares of TSLA, but instead getting the premium and the puts expiring OTM. I was too, oh well at least I get free premiums and I've already made 60% of what the purchase price of the shares would be so I'm super well off...

Then the squeeze happened and instead of benefiting on the 10x share rise I got 0.7x out of it... I can't afford to buy multiple hundred shares of TSLA now, but had I just gone through and bought those 300 shares when I had planned instead of selling the puts I would be far far better off today

 

[neroden]

I bought shares first, after realizing that they were less than a quarter of what I thought was a reasonable valuation. But I didn't buy enough and I'm still kicking myself. I bought more after that, including some which are still out of the money. It was only after the stock price exceeded my (pessimistic) valuation model that I started looking seriously at options as an improvement over good-until-cancelled limit orders, and discovered the monumentally high premiums on put options. Right now, about 10% of the entire portfolio I manage is in TSLA or SCTY stock outright, so I'm being a bit conservative before buying more, and the puts are one way to do that.

When the price dipped to $150 in February I was out of town and couldn't follow the news or trade (as I had anticipated). I figured my short puts would be executed, since they were heavily in the money. However, the guys on the other side didn't exercise them. :sigh: Apparently almost all long put holders don't even look at the stock price until the day before it expires; a lesson for me.

 

[Jonathan Hewitt]

To tie up loose ends I closed the $215 put calendar yesterday for $5.12 per spread before a volatility crush happened. I had paid $2.45 a spread so 109% profit. I should have held onto it because today it is trading for $5.75! I think this is explained by the IV on the August going down a lot more than the September. Apparently I have a lot to learn! In the future if I do this trade again maybe I will sell half and hold half through earnings.

I put on a trade yesterday before the end of the day using weekly puts. I constructed a very complicated "Spiked Lizard" which consists of 6 total options across 4 different strikes. It has no risk to the upside but you will potentially be assigned 200 shares on a large drop. In this case a drop below $209.32 would have gotten very painful very quick. I got very lucky we didn't get such a drop. Here is how it turned out:

 

[neroden]

Wow, you're willing to try much more complicated things than I am. I just keep loading up on puts. I may end up getting assigned a million dollars in stock, but based on my long-term analysis, I'm OK with that.

The IV must have dropped massively in recent days, and I can't really figure out why. The put premiums have been shrinking weekly, by a *lot*. Can't figure out what's causing it to happen. They'll probably get too low for my taste soon.

 

[Jonathan Hewitt]

As promised, here I am ~2 weeks before delivery numbers. I am debating on when to put on my Volatility based trade at this point. I think it will be successful again based on today's conditions but waiting until tomorrow or next week might be better. Let me describe my purposes and intent for this trade again as a refresher.

-I will short the sooner month option and be long the longer month option.
-Like last time, I've decided to make the time to expiration of the sooner month option larger than the gap in between the two options. This allows me to pay little money for the spread in comparison to the price of each individual option. This is because ~90 day options and ~60 options do not have a large difference in value. In this case I will be using November and December.
-It's a Volatility based trade. This means that if Volatility goes up the trade should make me more money, if Volatility goes down I should lose money. To be more specific it actually depends on the Volatility of each option but they should mostly track together. This confused me last time for a bit as last time the short option had it's volatility climb faster than the long option right before earnings, which made sense once I noticed it but I didn't consider it up front.
-Pretty much every time since Tesla started reporting delivery numbers at the end of the quarter volatility increased starting ~2 weeks prior to delivery numbers being released. Just because this has always happened before doesn't mean it will continue to happen.
-Both the option I am short and the option I am long will lose money over time, but the closer dated option will lose money faster. In other words, I am guaranteed to make money on this trade as time passes IF nothing else changes. Things WILL change but at least this aspect of the trade makes it similar to paddling downstream instead of paddling upstream. Buying straight calls is like paddling upstream.
-I have a brokerage platform that lets me trade spreads and saves commission over individual trades. Putting an order in for each option individually is at best a pain in the butt, and at worst will cause you to lose money.
-This trade will be a small part of my portfolio. It should be less risky than short term calls but I am treating it like short term calls as far as how much money I'm willing to risk.
-Strike selection doesn't matter a ton (except in hindsight). I don't know if TSLA is going up or down so I plan to choose an ATM strike.
-If Tesla goes to the moon this trade will lose me money but my short puts and LEAPS will make more money than I lose on this trade so I am ok with that.
-If Tesla has a big but not huge drop in price this trade should make me money. This is because big drops cause Volatility to go crazy. This should counteract some of the money I will lose on my short puts.
-If Tesla has the floor fall out underneath it then I will lose money on this trade despite volatility going up but at least I will not lose more than I spent on the trade.
-As a summary, this trade does best if share price doesn't more than +/- $20 (possible), Volatility goes up (very probable), and time passes (Guaranteed!)
-I am probably missing some important points but this post is already crazy long.
-If I decide to go ahead and put on this trade I will let everyone know shortly after doing so.
-This is not a trade recommendation. I am not sharing this for people to blindly copy my trade. I'm hoping people can add to this discussion and either decide this trade looks good for themselves or come up with their own trades. Helping me do better trades in the future would also be nice. I can NOT predict the future and I've only done this trade once so do not think I am confident in everything I have shared. If you do blindly copy this trade then it's all on you when it crash and burns.

As far as when to put on the trade, if you look at Volatility it is the lowest today that it's been in the past week but it was lower at the end of August. It's still at a good point but 5-10% lower would be ideal.

 

[neroden]

Please remind me exactly what you're doing, because you left out a key piece of information. Is this correct:
Short November Call
Long December Call
?

Or are you doing:
Short November Put
Long December Put
?

Both are typically debit trades, but they have somewhat different behavior.

I am confused by your claim that both options will lose value over time; the short position gains value for you (by losing value for the guy on the other side of the trade).

Obviously if you're doing one of these you're doing something really complicated:
Short November Call
Long December Put
(I can't imagine why anyone would do this)

Short November Put
Long December Call
(This is slightly more plausible)



----
I'm still sticking with selling puts and waiting for expiration (and accepting assignment if it happens). If volatility is low at the moment, perhaps this implies that I should wait until earnings when volatility goes up and sell more puts *then*. Gotta remember to look at volatility.

 

[Jonathan Hewitt]

Please remind me exactly what you're doing, because you left out a key piece of information. Is this correct:
Short November Call
Long December Call
?

Or are you doing:
Short November Put
Long December Put
?

Both are typically debit trades, but they have somewhat different behavior.

I am confused by your claim that both options will lose value over time; the short position gains value for you (by losing value for the guy on the other side of the trade).

Obviously if you're doing one of these you're doing something really complicated:
Short November Call
Long December Put
(I can't imagine why anyone would do this)

Short November Put
Long December Call
(This is slightly more plausible)



----
I'm still sticking with selling puts and waiting for expiration (and accepting assignment if it happens). If volatility is low at the moment, perhaps this implies that I should wait until earnings when volatility goes up and sell more puts *then*. Gotta remember to look at volatility.

You want to do Short November Call/Long December Call or Short November Put/Long December Put. If you look at the Profit/Loss curves it's essentially the same for both. This may be kind of confusing but if you play around with some P/L curves you will see that they basically do the same thing. The only main difference I can think of right now is that one scenario will end up with both options ITM while the other one will end up with both options OTM. This matters only if you hold until expiration because options that are out of the money can just expire whereas ITM options must be closed or exercised.

Hopefully the following explanation on the time decay portion makes more sense. We all know that all options experience theta/time decay thanks to having an expiration date. Time decay on an option you are short is beneficial to you. This is just like having a covered call on your stock, you want time to go by and for it to expire worthless because you get to keep the premium. On the other hand, time decay of your long option hurts you. This is like holding a naked call and TSLA not moving. Your options will lose value over time and eventually expire worthless if they are OTM. For the calendar spread, you have both of these dynamics working at once. The way we set it up though is so the overall position's time decay is in your favor as the short option will time decay faster than the long option. As time goes on both options will lose value due to time decay but you are ok with losing money on the long option due to time decay because you will make money faster on the short option assuming all other variables stay the same.

It's weird to think about but the prices of each option in the spread could go wildly up or down thanks to a large share price movement but your P/L could remain unchanged. This is by design of the spread, we only want to capture profit from Volatility change and Time Decay.

Shorting naked puts in low volatility is fine (I do it) but it's something to be aware of. When volatility is higher you will get more premium shorting a put and if volatility drops back down afterwards you will make money faster. Because of this you might want to short more puts at periods of high volatility. If volatility is low when you put it on and then spikes while you're short a put then it will probably look like a loser position until volatility comes back down or enough time passes to counteract volatility's effects. The biggest problem is usually volatility spikes during a large down move, which means you are double hurt if you are short puts. Just remember that share price direction makes a bigger effect on naked put value than volatility and at expiration the share price in relation to the strike is all that matters.

 

[neroden]

Shorting naked puts in low volatility is fine (I do it) but it's something to be aware of. When volatility is higher you will get more premium shorting a put and if volatility drops back down afterwards you will make money faster. Because of this you might want to short more puts at periods of high volatility. If volatility is low when you put it on and then spikes while you're short a put then it will probably look like a loser position until volatility comes back down or enough time passes to counteract volatility's effects. The biggest problem is usually volatility spikes during a large down move, which means you are double hurt if you are short puts. Just remember that share price direction makes a bigger effect on naked put value than volatility and at expiration the share price in relation to the strike is all that matters.

I prefer to short puts out-of-the-money, and I'm always willing to take assignment. (I'm only working in the situation where I have a reason to believe the stock will go up above my target price long term.) In the assignment scenario, higher premium means effectively lower buy-in price... and doing it later in a large down move means I'm getting a lower price, too. So shorting puts at high vol rather than low vol ends up being 100% good for the scenario I'm working with. I *have* to remember this.

 

[neroden]

Regarding your calendar spread, I note that TSLA routinely has higher premiums for puts than for calls, because it's hard-to-borrow. I suspect this will show up in different prices for the put calendar and for the call calendar, which should give you different rates of return.

It's clear that either calendar spread is a trade which has to be closed, correct? If you wait until after the first expiration date, all kinds of things happen and it stops doing what you wanted it to do. I personally avoid trades which *have* to be closed because you never know when I'll be called away on urgent business and unable to trade.

 

[Jonathan Hewitt]

Regarding your calendar spread, I note that TSLA routinely has higher premiums for puts than for calls, because it's hard-to-borrow. I suspect this will show up in different prices for the put calendar and for the call calendar, which should give you different rates of return.

Yes, the puts will cost more, but this will raise the premiums on both the option you buy and the one you short so I don't think you are at either an advantage or a disadvantage in this case. There will be a difference in your starting point depending on choosing puts or calls but I would think you would see similar results percent wise from that point onward. I would have to run some scenarios to explore this further as I don't have any proof of this and it's quite possible I am thinking of this wrong. Thanks for questioning me on this!

It's clear that either calendar spread is a trade which has to be closed, correct? If you wait until after the first expiration date, all kinds of things happen and it stops doing what you wanted it to do. I personally avoid trades which *have* to be closed because you never know when I'll be called away on urgent business and unable to trade.

It all depends on your trading style as far as when you want to close it. You are trying to pick the point in time in which the difference in value between the short option and long option is largest. Because picking this exact point in time is only possible with a time machine traders will generally set target a certain % return for calendar spreads. 30% profit is a popular target from the traders I follow as this is a decent return that makes it worth your time but not too high of a target where you end up waiting too long and lose your profits due to the trade going against you. This spread is different as I aim to capitalize on the volatility increase from delivery numbers and then a volatility increase before earnings so last time I closed it the day before earnings. If you hold all the way until the first option expires (I don't plan to for this trade) then yes, things can get interesting. If you have a profit generally you should close your trade before expiration of the short option. If you don't have a profit you can short the next weeks option. This gives you another short option to time decay against the long option and keeps the calendar alive. It's kind of like selling a covered call against stock over and over. The difference here is unlike stock your long option will expire so eventually you will run out of weeks to short against the long call but hopefully you end up with a profit somewhere along the way.

 

[SuryaDham]

Jonathan, I like your strategy, I think it would have worked on several past occasions and should also work in the future. BUT I would be particularly careful with the Q3 numbers release.
There is the real risk, that Q3 will be a blowout-quarter. We know Elon's Email, we know they are planning for a secondary in Q4. They will do everything to have Q3 look as amazing as possible, in order to bring some serious momentum in the stock. Not sure you wanna be in that trade if that happens...
I'm not saying don't do it, but I want to inspire you to take these points into consideration for this particular quarter.
I'll probably try your strategy at some time in the future, as I like the seemingly good risk/reward ratio.

 

[Jonathan Hewitt]

Jonathan, I like your strategy, I think it would have worked on several past occasions and should also work in the future. BUT I would be particularly careful with the Q3 numbers release.
There is the real risk, that Q3 will be a blowout-quarter. We know Elon's Email, we know they are planning for a secondary in Q4. They will do everything to have Q3 look as amazing as possible, in order to bring some serious momentum in the stock. Not sure you wanna be in that trade if that happens...
I'm not saying don't do it, but I want to inspire you to take these points into consideration for this particular quarter.
I'll probably try your strategy at some time in the future, as I like the seemingly good risk/reward ratio.

Thank you very much for your input, I was hoping I would get a few people contributing their thoughts. I actually have the same concern you do. I'm not sure why, but the predicted breakeven points on my software (assuming no change in volatility) are tighter than last time. Last quarter the stock could have gone +/- ~$35 and I could have still broke even. This time it is saying only +/- ~$25. With the tighter range I am more reluctant to enter the trade. I could choose a higher strike to give me more room to the upside but then if things go bad I won't have as much room to the downside, which is the side I am more vulnerable to right now due to being heavy in TSLA stock, LEAPS, and short puts. One good thing about this trade is that it is defined risk so you can put into it what you are comfortable losing and don't have to worry about losing more than what you put into it.

No matter what, it would only be a couple percent of my portfolio, maximum. My idea is to put on multiple types of trade so that if TSLA doesn't go up a lot or goes down some I can still make some money off of a trade.

 

[Jonathan Hewitt]

After much thought I've decided to put my calendar trade on with half as many contracts as last time and I'm putting it in slightly below the middle of the Bid/Ask. After how well it worked last time I had planned on doing twice as many contracts so doing half as many isn't going to break the bank for me. I'm more than happy to do the research for everyone! We could just put the trade on in a paper money account but by using some real money I will be more engaged with the trade. It's like playing poker for just chips or actually having a real pot.

I put in a bid at $2.40/spread for being short the November 200 put and long the December 200 put. There's a good chance this order doesn't get filled but I don't want to overpay for something I'm not super confident about. Here's what my software shows the P/L curves for a 1 lot. Take it with a grain of salt as it doesn't take into account volatility changes, which is a major component of this trade:

 

[Jonathan Hewitt]

After much thought I've decided to put my calendar trade on with half as many contracts as last time and I'm putting it in slightly below the middle of the Bid/Ask. After how well it worked last time I had planned on doing twice as many contracts so doing half as many isn't going to break the bank for me. I'm more than happy to do the research for everyone! We could just put the trade on in a paper money account but by using some real money I will be more engaged with the trade. It's like playing poker for just chips or actually having a real pot.

I put in a bid at $2.40/spread for being short the November 200 put and long the December 200 put. There's a good chance this order doesn't get filled but I don't want to overpay for something I'm not super confident about. Here's what my software shows the P/L curves for a 1 lot. Take it with a grain of salt as it doesn't take into account volatility changes, which is a major component of this trade:
View attachment 195213

It took all day but it just filled for $2.40! Game on. Wish me luck!

Calendars are a slow grind. Overall theta decay in this case is ~ $3/day per contract in my favor.

 

[Jonathan Hewitt]

Once again volatility spiked after delivery numbers were released. IV is currently at 49%. My November/December $200 put calendar spread I paid $2.40 for is now trading at $3.275 (up 36.5%), assuming I was able to close it out at mid market. It will be interesting to see if we get further volatility increase as we approach earnings and the Solar Roof announcement. 50% IV is pretty much guaranteed based on the past (which we are at right now) but 55-60% is very probable. Even if we don't see any more IV increase I will still enjoy theta decay on the spread as time passes.