Advanced TSLA Options Trading

[tschmidty]

OK, sorry to ask this here, but I can't seem to find a clear answer on this. If I buy a call (making up numbers) October 4th for $250 and it goes in the money to $260. When I exercise that, do I have to have $25,000 free cash to buy those 100 shares and then sell them, or am I selling the actual contract for $1000? Using RobinHood if it matters.

 

[Fact Checking]

OK, sorry to ask this here, but I can't seem to find a clear answer on this. If I buy a call (making up numbers) October 4th for $250 and it goes in the money to $260. When I exercise that, do I have to have $25,000 free cash to buy those 100 shares and then sell them, or am I selling the actual contract for $1000? Using RobinHood if it matters.

No, the default for most retail brokers is "cash settlement delivery" for NASDAQ equity option contracts, I.e. you get any profits credited in your trading account automatically.

If you want physical delivery (to buy the shares at the strike price), you have to tell them explicitly. Very few traders do.

Edit: as @ggr pointed out ETrade will exercise them automatically, so check with your broker!

The clearinghouse default for expiry is to excercise the options:

Delivery, Exercise and Corporate Actions - Futures Options Physical Delivery | Interactive Brokers​

 

[tschmidty]

No, the default for most retail brokers is "cash settlement delivery" for NASDAQ equity option contracts, I.e. you get any profits credited in your trading account automatically.

If you want physical delivery (to buy the shares at the strike price), you have to tell them explicitly. Very few traders do.

Thanks so much. That is what I assumed but makes for a pretty big assumption!

 

[ggr]

No, the default for most retail brokers is "cash settlement delivery" for NASDAQ equity option contracts, I.e. you get any profits credited in your trading account automatically.

If you want physical delivery (to buy the shares at the strike price), you have to tell them explicitly. Very few traders do.

That's exactly the opposite of what ETrade does. If the options are in the money, they will be automatically exercised. I can't speak to other brokers, they're the only one I use for options.

 

[Nocturnal]

I agree. And also, what is the goal? Is it 100,000? Or is it 105,000? Or maybe only 95,000. Seems to me, the leaked email of possibly reaching 100,000 deliveries, and "being short of the goal by a few thousand" may mean absolutely nothing in relation to each other. In fact, both could be true, and Tesla still delivers 103,000 (just making up a number).

With Robinhood at least, if you don't have the cash to buy the stocks then they sell the option for you. I assume that is slightly less profitable but probably a little less risky.

 

[Fact Checking]

That's exactly the opposite of what ETrade does. If the options are in the money, they will be automatically exercised. I can't speak to other brokers, they're the only one I use for options.

Thanks, didn't know that - I have edited my reply to @tschmidty to include your warning. Everyone should check this with their brokers.

 

[Runarbt]

That's exactly the opposite of what ETrade does. If the options are in the money, they will be automatically exercised. I can't speak to other brokers, they're the only one I use for options.

What if you dont have enough cash in your account?

 

[ggr]

What if you dont have enough cash in your account?

Instant margin call. You can sell the stock after hours, somehow find the cash to transfer in, queue a sale for Monday opening, or play the lottery and see what they liquidate on your behalf

Don't ask me how I know.

 

[Fact Checking]

Instant margin call. You can sell the stock after hours, somehow find the cash to transfer in, queue a sale for Monday opening, or play the lottery and see what they liquidate on your behalf

Don't ask me how I know.

So that's another profit center for ETrade?

 

[StealthP3D]

OK, sorry to ask this here, but I can't seem to find a clear answer on this. If I buy a call (making up numbers) October 4th for $250 and it goes in the money to $260. When I exercise that, do I have to have $25,000 free cash to buy those 100 shares and then sell them, or am I selling the actual contract for $1000? Using RobinHood if it matters.

You don't need to exercise it, you can sell it for a profit without ever taking delivery of the underlying stock.

 

[Tslynk67]

Thanks, didn't know that - I have edited my reply to @tschmidty to include your warning. Everyone should check this with their brokers.

Look in your broker's help pages, they'll have the procedure and rules. Here, for instance, is the options manual from my broker= https://www.keytradebank.be/files/documentcenter/manuel_options_en.pdf

 

[ggr]

You don't need to exercise it, you can sell it for a profit without ever taking delivery of the underlying stock.

Yes, but you have to do that before the market close. I've had options that looked to be out of the money, but in the last few minutes of trading pop up and be $0.01 in the money. You can (again speaking only about ETrade) tell them in advance not to exercise. You might do this if the price to sell the option is less than the commission they would charge.

Note that this applies to both calls and puts. The downside of a put getting exercised is that you might lose shares you want to keep, and incur tax consequences you would have preferred to avoid, all for a few cents of profit.

 

[Nocturnal]

Looking at the price of calls over the next year now, they are much more expensive relative to likely SP increases than 6 months ago. Am I looking at this correctly that sentiment is that SP will rise a good deal and therefore calls (for a bull) are less attractive? I was ok spending 100 or so on a lottery ticket knowing that most would close worthless, but if I got lucky (and I did) I'd make huge returns. Now it seems like I'm risking thousands for perhaps a multiple of 2-3 on the upside.

 

[Boomer19]

Yes, but you have to do that before the market close. I've had options that looked to be out of the money, but in the last few minutes of trading pop up and be $0.01 in the money. You can (again speaking only about ETrade) tell them in advance not to exercise. You might do this if the price to sell the option is less than the commission they would charge.

Note that this applies to both calls and puts. The downside of a put getting exercised is that you might lose shares you want to keep, and incur tax consequences you would have preferred to avoid, all for a few cents of profit.

in general, OCC auto-ex’s any ITM calls a broker holds in their participant accounts. it’s called ex-by-ex

how brokers handle it with clients may differ depending on preference, acct type, etc

a contract holder can request exceptional processing to prevent auto-ex, which is rare. called EED

you can also request to exercise prior to expiration, for a fee, or free at some brokers.

quote

Expiring options are subject to the “Exercise by exception” (“Ex-by-ex”) procedure under OCC Rule 805. “Ex-by-ex” is an administrative procedure used by the OCC in which options that are in the money by specified threshold amounts are exercised unless a clearing member submits instructions not to exercise the options. An Expiring Exercise Declaration (“EED”) is a notification of a decision either: (1) to not exercise an option that would be automatically exercised under OCC’s Ex-by-ex procedure, or (2) to exercise an option that would not be automatically exercised under OCC’s Ex-by-ex procedure.

Option holders desiring to exercise or not exercise expiring options must either: (1) take no action and allow exercise determinations to be made in accordance with OCC’s Rule 805;1 or (2) submit an EED to the Exchange by the deadline specified in paragraph (d) below.

An EED is deemed submitted to the Exchange if a member or member organization: (1) submits its instructions through CBOE’s Member site: EED CEA Forms

submits its instructions via email to [email protected];2 (3) uses OCC’s electronic communications system; (4) uses the EED form of any other national securities exchange, of which the firm is a member and where the option is listed, and submits it to that exchange; or (5) uses such other method as the Exchange may prescribe.​

Option holders have until 4:30 p.m. Central Time (“CT”) on the business day immediately prior to the expiration date to make a final decision to exercise or not exercise an expiring option. At any time up to 4:30 p.m., an option holder may resubmit an EED or may cancel an EED by filing an EED cancel with the Exchange. Members and member organizations may not accept exercise instructions after 4:30 p.m.​

 

[MikeC]

Looking at the price of calls over the next year now, they are much more expensive relative to likely SP increases than 6 months ago. Am I looking at this correctly that sentiment is that SP will rise a good deal and therefore calls (for a bull) are less attractive? I was ok spending 100 or so on a lottery ticket knowing that most would close worthless, but if I got lucky (and I did) I'd make huge returns. Now it seems like I'm risking thousands for perhaps a multiple of 2-3 on the upside.

Implied volatility is way up, plus there is a delivery report and earnings report coming next month. One way to think about it is that there is a lot more demand than usual for calls (and puts) right now, which increases the price of the options contracts independent of strike price and time value.

An, yes, this makes calls (and puts) relatively less attractive. May be a good time to deleverage.

 

[MikeC]

Yes, but you have to do that before the market close. I've had options that looked to be out of the money, but in the last few minutes of trading pop up and be $0.01 in the money. You can (again speaking only about ETrade) tell them in advance not to exercise. You might do this if the price to sell the option is less than the commission they would charge.

When this happens to me, I call my broker (Schwab) after market close and put in a "Do not exercise" order and they cancel the contract.

 

[jeewee3000]

Looking at the price of calls over the next year now, they are much more expensive relative to likely SP increases than 6 months ago. Am I looking at this correctly that sentiment is that SP will rise a good deal and therefore calls (for a bull) are less attractive? I was ok spending 100 or so on a lottery ticket knowing that most would close worthless, but if I got lucky (and I did) I'd make huge returns. Now it seems like I'm risking thousands for perhaps a multiple of 2-3 on the upside.

As @MikeC correctly pointed out, the reason the options are priced so high right now is due to IV (Implied Volatility) being way higher than usual.

From Investopedia:

• Implied volatility is the market's forecast of a likely movement in a security's price.
• Implied volatility is often used to price options contracts: High implied volatility results in options with higher premiums and vice versa.
• Supply/demand and time value are major determining factors for calculating implied volatility.
• Implied volatility increases in bearish markets and decreases when the market is bullish.

To add to the first bullet point of the above, the reason the market believes $TSLA's valuation will shift drastically in the coming months/years is because of:
- the very drastic shift in the last six months ($180 -$435);
- the fact that the run up (probably) has not found it's top yet;
- the fact that P&D numbers are about to come out;
- the fact that Q4 ER might do a lot for the stock price;
- ...

Below is the current valuation of the LEAPS expiring JAN2022. When $TSLA was around $330 I bought some JAN22 640calls at a price of $15 per contract. Those are now priced at $45,50 with an IV of 41%. When I bought them the IV was already around 38-39% since we had just run up from $180 very quickly. At the time the 640 calls were the highest strike price available. Now you can buy JAN2022 calls with strike price of $850.

All these calls have high IV right now, so only buy them if you are certain a massive run-up lies ahead.

If you are not so sure, you might want to wait until the stock price has consolidated or dropped a bit.

The best time to buy call options but especially LEAPS is:
- when the stock trades at "low" prices (might happen soon, might never happen again);
- when the stock has traded sideways for a decent amount of time.

Of course if the stock would crash to $200 on FUD you'll see me buying LEAPS like crazy, no matter the IV. But if you think the stock will stay around $400-$450 for some time you should let it trade sideways for some weeks before getting in.

 

[Nocturnal]

As @MikeC correctly pointed out, the reason the options are priced so high right now is due to IV (Implied Volatility) being way higher than usual.

From Investopedia:

Of course if the stock would crash to $200 on FUD you'll see me buying LEAPS like crazy, no matter the IV. But if you think the stock will stay around $400-$450 for some time you should let it trade sideways for some weeks before getting in.

Makes sense thanks. That's pretty much what I'm doing, with the exception of a late 2021 option I picked up that seemed to be priced well. I'll be sticking with equities for a while.

 

[Jovian]

Hi everyone, been reading the investors' round table and the threads before it for some time, rarely post just read. Have a question about options:

Been thinking about buying some LEAPs calls Jan 2022 ~520 Strike. Was thinking about buying before Q1 Earnings release as there is a chance it could skyrocket the stock price very quickly. If that doesn't happen I'd still have ~2 years for stock price to grow. I'm very new to options and only know what I've read briefly on the internet (I do understand the massive risk and possibility it could make my position worth $0). So was wondering if the price were to rocket quickly would the lower strike options grow by a larger % or would all options grow equally? Would I rather have a 520 or 650 Strike price if the price goes flying upwards after earnings?

Also any thoughts on the specific 1/2022 520 Strike call would be appreciated as well. Picked up some literature on options hoping to read more next couple of days (happy to take recommendations for literature), but appreciate your thoughts.

(I've read risk disclaimers time and time again and I am very risk tolerant.)

Thanks in advance.

 

[mongo]

Hi everyone, been reading the investors' round table and the threads before it for some time, rarely post just read. Have a question about options:

Been thinking about buying some LEAPs calls Jan 2022 ~520 Strike. Was thinking about buying before Q1 Earnings release as there is a chance it could skyrocket the stock price very quickly. If that doesn't happen I'd still have ~2 years for stock price to grow. I'm very new to options and only know what I've read briefly on the internet (I do understand the massive risk and possibility it could make my position worth $0). So was wondering if the price were to rocket quickly would the lower strike options grow by a larger % or would all options grow equally? Would I rather have a 520 or 650 Strike price if the price goes flying upwards after earnings?

Also any thoughts on the specific 1/2022 520 Strike call would be appreciated as well. Picked up some literature on options hoping to read more next couple of days (happy to take recommendations for literature), but appreciate your thoughts.

(I've read risk disclaimers time and time again and I am very risk tolerant.)

Thanks in advance.

For short term moves, you want to look at the Delta and Gamma for the options you are interested in. Delta is the amount the option price moves based on a one dollar change in the stock price. Gamma is how much Delta changes based on a one dollar change in the stock price.

The 520 has a Delta of 0.5 and Gamma of 0, so it moves 50 cents for every dollar TSLA moves (ignoring time value and implied volatility)
The 650 has a Delta of 0.34 and Gamma of 0, so it moves 34 cents per dollar of TSLA.

If you were only buying one and hoping for short term movement, the 520 is a better option. If you have some $ budget then you would need to check their prices to see how many of each you could get. 3 650s would have approximately the same movement as 2 520s.