Advanced TSLA Options Trading

[vikings123]

Even if covered call expiring in Jan-2022 is sold (against your existing long call) in 2020, the value of that short call sold should be treated as income in 2020?

Yes, you have the money now in 2020.

I don’t believe this is right. I believe the premium is not treated as income until you either let the call expire worthless or get it exercised or decide to buy it back. I also recall reading that the only way this can be treated as long term gain if your calls get exercised(assuming your shares have been held for more than one year).

Edit: Found an article to support my point.

Here are some important concepts related to taxes and covered call trading:

• Option premium is not considered income until the option contract has ended by expiration, assignment or purchased to close.

https://seekingalpha.com/article/310719-the-perpetual-covered-call-as-a-tax-advantaged-trade

 

[kengchang]

You are correct. I got confused about the part that it is always consider short term gain

 

[Criscmt]

I don’t believe this is right. I believe the premium is not treated as income until you either let the call expire worthless or get it exercised or decide to buy it back. I also recall reading that the only way this can be treated as long term gain if your calls get exercised(assuming your shares have been held for more than one year).

Edit: Found an article to support my point.



https://seekingalpha.com/article/310719-the-perpetual-covered-call-as-a-tax-advantaged-trade

Thanks @vikings123

@kengchang Got it. The transaction would go into 2022 taxes (assuming it's closed, or expired worthless in that year) but if the option expires worthless, it's always STCG.

 

[Knightshade]

Speaking of options and tax stuff- Quick question this might be a good place to ask since so many folks use different brokers...

Merrill lets you assign a specific tax lot online if you want to sell something you hold- as I imagine everyone does.

But if you get a sold call assigned, you CAN NOT specify which tax lot to fill the assignment with online- you have to call on the phone, and a broker has to manually submit a request to another team, and then maybe in the next 2 weeks the change will go through.


Which is pretty garbage, and a PITA if selling CCs.

Anybody have a good recommendation for someone who lets you do this entirely online/yourself/instantly?

 

[kengchang]

Speaking of options and tax stuff- Quick question this might be a good place to ask since so many folks use different brokers...

Merrill lets you assign a specific tax lot online if you want to sell something you hold- as I imagine everyone does.

But if you get a sold call assigned, you CAN NOT specify which tax lot to fill the assignment with online- you have to call on the phone, and a broker has to manually submit a request to another team, and then maybe in the next 2 weeks the change will go through.


Which is pretty garbage, and a PITA if selling CCs.

Anybody have a good recommendation for someone who lets you do this entirely online/yourself/instantly?

IB can let you designated the lot within 2 days

 

[Dig deeper]

Speaking of options and tax stuff- Quick question this might be a good place to ask since so many folks use different brokers...

Merrill lets you assign a specific tax lot online if you want to sell something you hold- as I imagine everyone does.

But if you get a sold call assigned, you CAN NOT specify which tax lot to fill the assignment with online- you have to call on the phone, and a broker has to manually submit a request to another team, and then maybe in the next 2 weeks the change will go through.


Which is pretty garbage, and a PITA if selling CCs.

Anybody have a good recommendation for someone who lets you do this entirely online/yourself/instantly?

Fidelity lets you reassign lots online. The lot reassignment needs to be done before the trade settles (T+2) or it will default to whatever your settlement method is (usually Fifo).

 

[DaveT]

Does anybody have a covered call strategy that you've used to avoid ever getting your shares called away?

 

[Chenkers]

Does anybody have a covered call strategy that you've used to avoid ever getting your shares called away?

Just roll up and out to a later date and higher strike (ideally for a slight credit). The chances of covered calls getting called away before expiry are pretty remote so you should be able to roll out indefinitely.

For example in mid/late December I had a lot of 700 to 780CC's for 1.5 weeks out with TSLA around 650. TSLA shot up to 850 in a bit over a week and I was left with all these calls DITM. But by early February I was able to progressively roll the calls up to Mid-800's strikes using 1-2 week rolls. By this time TSLA had stabilised and come back a bit so I was able to close all of these calls out.

I found that the DITM the calls went the smaller the roll improvement available at zero cost. So I also sold a couple of extra Puts (on unused margin buffer) and a couple of additional calls to add a bit of premium to get a better roll on the lower calls when needed. An advantage with DITM calls is they increase Portfolio Margin buffer making it possible to sell safe Puts to help roll the sold Calls out. This whole process has given me a lot more confidence to keep selling calls (and puts) even with the extreme volatility that TSLA often exhibits.

The other consideration is that you can just sell more CC even further out of the money where they're unlikely to go ITM. I would normally sell calls around 2 weeks out at up to 25% above the share price (the example of a 30% rise above is very extreme). I prefer not going longer dated to limit the price movement and to capture the steepest part of Theta decay. But you can sell weeklies (more work) or go even higher strikes to limit the risk.

 

[ongba]

Does anybody have a covered call strategy that you've used to avoid ever getting your shares called away?

Dave,

one possible strategy is to sell calls initially only against 1/3 or 1/2 your shares and keep the other 1/2-2/3 for price appreciation, or if needed, calls can be sold against them as well, to help roll up and out if the initial calls sold go in the money.

 

[Nocturnal]

Quick question. I have some LEAPs that are ITM, $620 EXP 09/16/22 for example. Does it make sense to roll some/all of them up to higher strikes? Assuming I see the SP continuing to increase from here of course. I believe when you are fairly DITM you just have the intrinsic value rather than time value.

 

[ReddyLeaf]

Quick question. I have some LEAPs that are ITM, $620 EXP 09/16/22 for example. Does it make sense to roll some/all of them up to higher strikes? Assuming I see the SP continuing to increase from here of course. I believe when you are fairly DITM you just have the intrinsic value rather than time value.

Read @Papafox blog and some of the old options trading threads for better advice, but......IIRC, LEAPs still have significant time value unless they are very far ITM, at least until one year or so before expiration. Far ITM, then they begin to trade like the stock. Most advise I’ve seen is to roll out 9-12 months before expiration.

 

[jeewee3000]

Quick question. I have some LEAPs that are ITM, $620 EXP 09/16/22 for example. Does it make sense to roll some/all of them up to higher strikes? Assuming I see the SP continuing to increase from here of course. I believe when you are fairly DITM you just have the intrinsic value rather than time value.

Rolling LEAPS?

I have a bunch of 2018 LEAPS of various strikes. Some of the common wisdom here seems to be that around now is the right time to "roll" them into 2019 LEAPS. They're mostly deep ITM. I've never explicitly rolled them before, usually I have let them expire and convert, then hold for long term...

teslamotorsclub.com

 

[Chenkers]

I am not sure what you mean by “If the share price shoots well above the upper strike by expiry then I will roll the strikes up to give a wider spread at zero cost for additional profit.”

Continueing from the main thread as instructed by Mods:

I'll give you a hypothetical example of what I mean by rolling the strikes up to give a wider spread at zero cost for additional profit. Say you purchase a Jan'23 700/900 vertical call spread for $45 per contract, $4,500 cost. At or near expiry if TSLA is at or above $900 then the spread contract will be worth $200 or $20,000 value. However if at that time if TSLA is well above $900, say $1100, then the spread value will still be $20 because its capped by the sold call leg. To extract more value from the original spread you can roll it up and widen the difference between the spreads to increase its value. To do this you move the upper sold call leg to say $1100 and then increase the lower long call leg strike to a strike where the roll premium is equal to your original spread premium cost. So this could be an 800/1100 vertical spread that costs $45, so the roll cost $0. As a result your original spread purchase for $4,500 now results in a return of $30,000 or 6.7x.

There can also be tax implications to consider around the timing of any rolls, especially where long term capital gains are applicable.

 

[soundart2]

AH! Thanks to you guys, now I'm FINALLY starting to understand CALL spreads! So after the market opens and the prices populate, could you guys please post the June 2023 version of that spread, or if it's better to stick with the March 2023's? Much thanks, @soundart2 and @Dancing Lemur !

Thanks to all that replied to my original post with advice/thoughts/perspective re: the 1000/1300 call spread. I know it's been commented on subsequent to here, too.

Again, as with golf, I'm a long-time beginner when it comes to options. Sometimes I hit the fairway, but more often than not, I shank the ball deep into the woods.

Having said that, as others have said, I learned that if you buy the spread, you basically should plan to hold to duration if you want to maximize the gain. I learned that the "hard way" on another spread I did last year, where my thesis was right, but it ran too fast for my long-dated call spread and I didn't realize full appreciation because BOTH legs went up in value. Though, a wise person once advised that if you can get a quick 50% of your max profit pretty early, it may be worth selling at that time, rather than waiting it out an extra year or whatever to get the other 50%. Or "roll" I suppose, if functionally I knew what that really meant (unless simply selling your current spread and buying a new one for the same price).

But to complete the exercise, I did wind up going out to June and buying the 1000/1300 call spread. Paid ~$47. Probably longer than I need. But my thesis/experiment was "Can I 6x my money in ~2 years with a measure of comfortable risk". Not trying to maximize it, but pick a trade I had high confidence in, and then hold to duration. And not sweat about for 2 years (assuming price appreciation is same or better than expected). So for a lot of reasons, I may be too bearish/conservative, and June 23 may be less preferable than March 23. But for this particular trade, I thought the extra quarter would give me a little extra comfort and I wouldn't sweat if I didn't make the perfect trade. But I will maybe play with some others, including a more Out of the Money straight Leap.

Thanks for all the wise advice about rolling to expand the spread and squeeze a little extra out of the trade if it starts working in my favor.

 

[UncaNed]

Thanks to all that replied to my original post with advice/thoughts/perspective re: the 1000/1300 call spread. I know it's been commented on subsequent to here, too.

Again, as with golf, I'm a long-time beginner when it comes to options. Sometimes I hit the fairway, but more often than not, I shank the ball deep into the woods.

Having said that, as others have said, I learned that if you buy the spread, you basically should plan to hold to duration if you want to maximize the gain. I learned that the "hard way" on another spread I did last year, where my thesis was right, but it ran too fast for my long-dated call spread and I didn't realize full appreciation because BOTH legs went up in value. Though, a wise person once advised that if you can get a quick 50% of your max profit pretty early, it may be worth selling at that time, rather than waiting it out an extra year or whatever to get the other 50%. Or "roll" I suppose, if functionally I knew what that really meant (unless simply selling your current spread and buying a new one for the same price).

But to complete the exercise, I did wind up going out to June and buying the 1000/1300 call spread. Paid ~$47. Probably longer than I need. But my thesis/experiment was "Can I 6x my money in ~2 years with a measure of comfortable risk". Not trying to maximize it, but pick a trade I had high confidence in, and then hold to duration. And not sweat about for 2 years (assuming price appreciation is same or better than expected). So for a lot of reasons, I may be too bearish/conservative, and June 23 may be less preferable than March 23. But for this particular trade, I thought the extra quarter would give me a little extra comfort and I wouldn't sweat if I didn't make the perfect trade. But I will maybe play with some others, including a more Out of the Money straight Leap.

Thanks for all the wise advice about rolling to expand the spread and squeeze a little extra out of the trade if it starts working in my favor.

If we're going to hold onto the spread until expiration either way and then execute everything, then that negates my usual idea of the benefit of later expiration as a safety valve (extra tine to recover from a macro event) if we're going to hold onto to it till expiration anyway, doesn't it, @soundart2 ?

 

[Brunel]

Thanks to all that replied to my original post with advice/thoughts/perspective re: the 1000/1300 call spread. I know it's been commented on subsequent to here, too.

Again, as with golf, I'm a long-time beginner when it comes to options. Sometimes I hit the fairway, but more often than not, I shank the ball deep into the woods.

Having said that, as others have said, I learned that if you buy the spread, you basically should plan to hold to duration if you want to maximize the gain. I learned that the "hard way" on another spread I did last year, where my thesis was right, but it ran too fast for my long-dated call spread and I didn't realize full appreciation because BOTH legs went up in value. Though, a wise person once advised that if you can get a quick 50% of your max profit pretty early, it may be worth selling at that time, rather than waiting it out an extra year or whatever to get the other 50%. Or "roll" I suppose, if functionally I knew what that really meant (unless simply selling your current spread and buying a new one for the same price).

But to complete the exercise, I did wind up going out to June and buying the 1000/1300 call spread. Paid ~$47. Probably longer than I need. But my thesis/experiment was "Can I 6x my money in ~2 years with a measure of comfortable risk". Not trying to maximize it, but pick a trade I had high confidence in, and then hold to duration. And not sweat about for 2 years (assuming price appreciation is same or better than expected). So for a lot of reasons, I may be too bearish/conservative, and June 23 may be less preferable than March 23. But for this particular trade, I thought the extra quarter would give me a little extra comfort and I wouldn't sweat if I didn't make the perfect trade. But I will maybe play with some others, including a more Out of the Money straight Leap.

Thanks for all the wise advice about rolling to expand the spread and squeeze a little extra out of the trade if it starts working in my favor.

Don't forget that $30k gain (if successful) will have cost you $4,700, so not quite the 6x your money, unless I am reading something wrong.

 

[ReddyLeaf]

Continueing from the main thread as instructed by Mods:

I'll give you a hypothetical example of what I mean by rolling the strikes up to give a wider spread at zero cost for additional profit. Say you purchase a Jan'23 700/900 vertical call spread for $45 per contract, $4,500 cost. At or near expiry if TSLA is at or above $900 then the spread contract will be worth $200 or $20,000 value. However if at that time if TSLA is well above $900, say $1100, then the spread value will still be $20 because its capped by the sold call leg. To extract more value from the original spread you can roll it up and widen the difference between the spreads to increase its value. To do this you move the upper sold call leg to say $1100 and then increase the lower long call leg strike to a strike where the roll premium is equal to your original spread premium cost. So this could be an 800/1100 vertical spread that costs $45, so the roll cost $0. As a result your original spread purchase for $4,500 now results in a return of $30,000 or 6.7x.

There can also be tax implications to consider around the timing of any rolls, especially where long term capital gains are applicable.

I’m assuming that you meant $20K in my highlight. A quick question for the spread experts: Given the price action of the past few months, and the ramped opening of GF4&5 in 21Q4-22Q1, would it make more sense to wait a few months until Jan2024 or Mar2024 options become available to initiate such a spread? My thinking here is that the stock price will languish around $700+/-100 until Fall. Initiating the spread later puts a few more months of higher GF production in the options timeframe. Furthermore, is there an optimal time/price/width/trend to initiate the spread?

 

[Chenkers]

I’m assuming that you meant $20K in my highlight. A quick question for the spread experts: Given the price action of the past few months, and the ramped opening of GF4&5 in 21Q4-22Q1, would it make more sense to wait a few months until Jan2024 or Mar2024 options become available to initiate such a spread? My thinking here is that the stock price will languish around $700+/-100 until Fall. Initiating the spread later puts a few more months of higher GF production in the options timeframe. Furthermore, is there an optimal time/price/width/trend to initiate the spread?

It was correct at $200. The spread value at expiry when fully ITM is the difference between the upper and lower strikes, $900-$700=$200.

2024 is a long time away if you consider all the potential catalysts for tesla in that timeframe. Ultimately you have to decide for yourself what the share price will be at expiry.

Another way to think of the difference between straight calls and spreads is that a straight call is where you are paying for unlimited upside potential. With a spread you are capping that upside to what you think may be possible and only paying for that. Set the -C leg too high and you pay too much premium and don't realise the spreads full value. Set it too low and you cap the value and while you can roll up, you don't capture as much value as a perfect spread range.

 

[adiggs]

Though, a wise person once advised that if you can get a quick 50% of your max profit pretty early, it may be worth selling at that time, rather than waiting it out an extra year or whatever to get the other 50%. Or "roll" I suppose, if functionally I knew what that really meant (unless simply selling your current spread and buying a new one for the same price).

A "roll" is a specific sort of transaction / ticket. The mechanics are to accomplish two things in a single trade (you pay for 2 commissions though, as it'll show up as two transactions in your history).

Given that you started by selling a contract (it's what I primarily have experience with), then the roll is a ticket that executes a buy-to-close on the existing position and simultaneously executes a sell-to-open on a new position.


There is a convenience factor for some. There is potentially a bid-ask spread benefit as you can specify the net result you're looking for and the transaction won't happen until the combination of the two transactions yields your credit or debit price.

The primary benefit for me is that with sold contracts it isn't that hard to get into a position where you don't have enough cash in the account to complete the buy-to-close order separately from the sell-to-open. The easy way to get into this situation is to spend the cash you receive up front when selling a contract (such as by immediately buying some additional TSLA shares; this is a reasonably popular trading strategy around these parts).

You might be able to get it done with a larger number of smaller transactions - close a few to open a few; repeat ad nauseum until everything is in the new position. While also experiencing the gains and losses that will accumulate over the series of transactions due to the shares moving while you're doing all the orders.

 

[ReddyLeaf]

I thought it would be better to move this question to the advanced options trading thread. I just noticed some very high strike options with a lot of interest for May 21st (monthly). Can anybody help me learn what type of trade this might be and why/how it was initiated? It definitely looks like a multi-leg spread, perhaps an iron condor or credit spread? So, 7000+ Puts traded at 1050/1100 strikes and a similar number of calls at 1100/1150. Is that you @bxr140 @setipoo @Lycanthrope ?