Advanced TSLA Options Trading

[kenliles]

This isn't exactly advanced or newbie but specifically for those interested in LEAPS-stock-replacement strategy. I didn't think a new thread was warranted so- putting it here.
I’ve recently had several requests regarding LEAPS (stock replacement) strategy for TSLA. So for what it’s worth, thought I’d post a little experience based tutorial for the method I use. There are many numerous alternatives, so please don’t view this as definitive in any way- but this is what works for my investment profile. I started this kind of thing back in the Apple growth days many years ago taking my lumps with trying different stock only- margin plays and finally moving to a LEAPS based method that seems to work for me. Always refining of course… but here ya’ go:
1) The Warning Label:
Only use LEAPS (over stock) for high growth - capital intensive(=well orchestrated growth pattern) companies
(certainly like Tesla and Solar, Apple for example is more marginal growth now and deserves less use of this method)
2) Set the Stage:
Use LEAPS to lower your risk by aligning the stock level you want rather than a simple dollar level because you are leveraging dollars to achieve a stock risk level- not the other way around- as follows:
Decide given your portfolio and risk tolerance, how much TSLA stock you would like to carry and how long. My current range is 2000-2500(3000 tops) shares for the next 5 years (through Mod E market at least). That aligns with my goals vs capital risk. Use LEAPS to reduce the capital required to carry this investment (not to trade on events etc.)- meaning you must tolerate the swings in the value of your LEAPS as if you own the stock at that level. This seems obvious, but too many people use LEAPS to trade on the swings (that should be relegated to short term options or other methods).
3) Oh My, What to Do:
Now with the net Delta you want to carry decided- you need to select the LEAPS (strike, expiration, # of contracts). I recommend simple spreads both in time and strike. Use 2 spreads for each as follows:
Time spread- about 1 year and more than 1 year- So currently J15 and J16. Think about how the company is expected to grow in proportion to expected development and skew to that arrangement initially starting with a mental 50/50. For example I expect 2014 to be a high growth year for Tesla compared to 2015 due to ModX, SC network, GigaF, J15 intro of GenIII) Next year will be more measured against ModX sales
producing a 60/40 split for me going in (maybe even more skewed).
For each of J15 and J16 use 2 strikes (KISS) as follows:
Take the anticipated TSLA$ value 3-6 months prior to expiration and use that strike(or lower) for lower strike leg;
Take the anticipated TSLA$ at expiration and use that(or higher) for the upper leg strike.
For example my initial setup for TSLA was J15 $250 and $300 (total of 60% by dollar investment) and J16 $300 and $350 (totaling 40% by dollar investment)
Remember with this method you will never carry to expiration (you may choose to accent your investment by keeping something through expiration, but if so that should be considered a conversion to a simply short term option play)
4) Oh My, Why Did I Do That:
The time spreads allow for unexpected timing of anticipated events, capturing value of unanticipated events, capturing value of future roll (explained more below), and capturing long term value before those J16s get too expensive later
The strike spreads allow for capturing value of earlier than expected moves in the stock while provided significant cushion for later than expected moves. For example, the lower leg strike is 3-6 months before expiration, so if not reached you still have plenty of time to let those run or roll them up depending on the events taking shape. The higher leg strike will capture time value if the stock price runs up much quicker than anticipated as follows (and this is the basic tenant behind the strike selection):
5) Oh My, What Do I Do Next or The Roll-Up and Out:
With a high growth company the best LEAPS return will be produced when you RECEIVE the time value in your LEAP. When you first purchase the option you are paying(renting) that time. To illustrate the point I'll use an extreme case. Given TSLA currently at $250, the Time Value of the LEAP is a bell(ish) curve from $150 to $400 always peaking ATM ($250). The goal with the LEAP to is to capture as much of that curve in your strike as possible, meaning let that bell peak at your strike well before the rent is due (bring it to me faster than the rent I'm paying). This is why we chose the lower strike 3-6 months out, when the rent begins to accelerate more (although still low by short term Option standards maintaining our tenant of stock replacement investment). When the peak reaches your strike (ATM), roll up in strike and out in time, by considering the new situation and how much of this year's value you have captured (likely early). For example I'm now rolling all J15 $250 to add some J15 $300 (because my Delta track is now top of range affording cash generation) and to more J16 $350+ (because I believe I have captured significant 2014 value early so adjusting 60%/40% ratio to 40%/60% favoring J16 now)
6) Am I Mental or The Mental Picture:
'swim to where the wave peak WILL BE - wait for the inevitable wave to carry you to it's peak, then move to where the next wave will be'.
Don't fight the ocean of event driven peaks 'n troughs, instead let the big waves come to you.
This produces a flow of investment that allows a mental calculation mirroring a stock position
- less emotive-panic allowing a larger hold position;
- intermediate events are tolerated not played, allowing for a bigger mental picture of the ocean.

After all this is your core belief in the company and what those in the company believe to their core;
And THEY are the ones working to create YOUR value- so aligning your investment mission with those wonderful people is the best possible alignment of your decisions as well.
7) Is That All You Got Bro' or Around the Edges:
Around the edges of this for those times the waves seems to get so deep you can't see sky or so tall your nose is bleeding do the following:
Carry a bit of stock position for those troughs:
The stock won't move nearly as much as those LEAPS of course, so when you get those inevitable lows (like Fire induced), you can convert the stock to add LEAP (or any other option for that matter) position providing a rare occasion additional leverage for the inevitable rise again- remember when it does to convert back to your stock hold position (+ cash earned).
Leverage the LEAPS safely for those crests:
On the other side, when at an unexpected scary crest (I can see the whole world from here) and you know damn well you'll have to suffer some sort of sickly air drop, use the LEAPS position for no margin required sell-write of some OTM Calls to cushion-hedge the ride down. This is also why we have a lower leg in our strike spread. You can sell at or above your lower strike (recommend about 10%-20% higher) and at a shorter expiration (recommend no more than month out) covered by your existing LEAPS- safely hedging or adding some cash generation to your portfolio.


(One More Thing):
Enjoy your Life more than your Money

 

[AlMc]

Excellent ken. Thanks Al

 

[pz1975]

Thanks for that - nicely explained. I am doing this sort of strategy too but not as refined as you. I have a question about hedging by selling 1 month out calls above the strike price of your lower LEAP. What if the stock continues to climb and those sold calls become way in the money? I realize the net gain by the LEAPS will offset the loss, but would you roll them out further as expiration nears or just buy them back to take the loss? If the latter, would you sell a small portion of your LEAP position to offset the loss?

 

[kenliles]

Thanks for that - nicely explained. I am doing this sort of strategy too but not as refined as you. I have a question about hedging by selling 1 month out calls above the strike price of your lower LEAP. What if the stock continues to climb and those sold calls become way in the money? I realize the net gain by the LEAPS will offset the loss, but would you roll them out further as expiration nears or just buy them back to take the loss? If the latter, would you sell a small portion of your LEAP position to offset the loss?

yes- likely scenario is that you blew the call and the stock never dipped so take the loss. In other words if in a months time it hasn't pulled back, it isn't gonna for the reasons you thought it might. But remember you're only doing this after a big run up that's pushed your Delta tracking now near (or over) it's top of range, so even a loss requiring LEAP covering (assuming no cash added) will only move you down in your range. With this method don't bet on a downturn more than you can cover and still maintain your tracking range (that defeats the purpose)- Use it as an augmentation to your position and an alternative to reducing your LEAPS positions when they seemingly get too high for your risk tolerance. I reached this point recently when TSLA hit $250-$260- my Delta-tracking was too high for my tolerance even after rolling up and out, so I sold small # of calls to help cushion the likely fall, but no more than a covered-loss would result in staying in my tracking-range. I guessed correctly and so this will just go to cash (for when I guess incorrectly next time )
Also keep in mind, given the bid-ask spreads, there's an inefficiency of trading, so you might want to maintain position vs rolling up and out at a given moment, so selling the covered calls can provide a temporary solution while holding for ER (for example).
And always trade the LEAP (during rollup-out) against the bid-ask spread- never Market order, put your Limit buy below midpoint and move up, Limit sell above and move down until filled; always nice slow calm trade- I often roll over several days to average the benefit- although nothing wrong with just getting it done and observing- one of the perks of the long view

 

[pz1975]

yes- likely scenario is that you blew the call and the stock never dipped so take the loss. In other words if in a months time it hasn't pulled back, it isn't gonna for the reasons you thought it might. But remember you're only doing this after a big run up that's pushed your Delta tracking now near (or over) it's top of range, so even a loss requiring LEAP covering (assuming no cash added) will only move you down in your range. With this method don't bet on a downturn more than you can cover and still maintain your tracking range (that defeats the purpose)- Use it as an augmentation to your position and an alternative to reducing your LEAPS positions when they seemingly get too high for your risk tolerance. I reached this point recently when TSLA hit $250-$260- my Delta-tracking was too high for my tolerance even after rolling up and out, so I sold small # of calls to help cushion the likely fall, but no more than a covered-loss would result in staying in my tracking-range. I guessed correctly and so this will just go to cash (for when I guess incorrectly next time )
Also keep in mind, given the bid-ask spreads, there's an inefficiency of trading, so you might want to maintain position vs rolling up and out at a given moment, so selling the covered calls can provide a temporary solution while holding for ER (for example).
And always trade the LEAP (during rollup-out) against the bid-ask spread- never Market order, put your Limit buy below midpoint and move up, Limit sell above and move down until filled; always nice slow calm trade- I often roll over several days to average the benefit- although nothing wrong with just getting it done and observing- one of the perks of the long view

Thanks - great advice. The other components I have been doing is adding medium-term calls (ie. 3-6 months out) on dips where there was no reason for the dip (ie. general market issue, short-attack, profit taking) expecting a correction back upwards where more profit is gained using these shorter-term calls. Also adding short-term calls (1-4 weeks out) in anticipation of major surges upwards (Detroit auto show, ER/gigafactory (turned out to be MS upgrade), etc.). I did this when it dipped to 191 before ER and it paid off well, although I sold most of the calls too soon between 213-245 not expecting the huge jump to 265!, and lost out when I bought more calls at 250-255 expecting another big spike after the gigafactory announcement (got greedy).

 

[kenliles]

Thanks - great advice. The other components I have been doing is adding medium-term calls (ie. 3-6 months out) on dips where there was no reason for the dip (ie. general market issue, short-attack, profit taking) expecting a correction back upwards where more profit is gained using these shorter-term calls. Also adding short-term calls (1-4 weeks out) in anticipation of major surges upwards (Detroit auto show, ER/gigafactory (turned out to be MS upgrade), etc.). I did this when it dipped to 191 before ER and it paid off well, although I sold most of the calls too soon between 213-245 not expecting the huge jump to 265!, and lost out when I bought more calls at 250-255 expecting another big spike after the gigafactory announcement (got greedy).

yep- the secured long term position allows some speculative plays like that- kept separate can be a great way to advantage event driven moves. I do a little of that on the side as well

 

[macman]

Thank you for sharing your experience. I'm also in search of best option strategy. I have a question. Why do you use spread instead of straight option buying in your strategy? Since you never wait till option expire or even close to option expiration date, I don’t see the advantage of using spread here. For example, on 12/9, the stock closed at $141.9. Let’s say your total investment is $8,900. You can get 10 contract of J15 250 for $8.9 each or 23 contact of J15 250/300 spread for $3.87 each. On 2/15, the stock closed at $248. Straight option buying could have made $35,000. Spread only made $30,700. Maybe I’ve missed something here?

This isn't exactly advanced or newbie but specifically for those interested in LEAPS-stock-replacement strategy. I didn't think a new thread was warranted so- putting it here.
I’ve recently had several requests regarding LEAPS (stock replacement) strategy for TSLA. So for what it’s worth, thought I’d post a little experience based tutorial for the method I use. There are many numerous alternatives, so please don’t view this as definitive in any way- but this is what works for my investment profile. I started this kind of thing back in the Apple growth days many years ago taking my lumps with trying different stock only- margin plays and finally moving to a LEAPS based method that seems to work for me. Always refining of course… but here ya’ go:
1) The Warning Label:
Only use LEAPS (over stock) for high growth - capital intensive(=well orchestrated growth pattern) companies
(certainly like Tesla and Solar, Apple for example is more marginal growth now and deserves less use of this method)
2) Set the Stage:
Use LEAPS to lower your risk by aligning the stock level you want rather than a simple dollar level because you are leveraging dollars to achieve a stock risk level- not the other way around- as follows:
Decide given your portfolio and risk tolerance, how much TSLA stock you would like to carry and how long. My current range is 2000-2500(3000 tops) shares for the next 5 years (through Mod E market at least). That aligns with my goals vs capital risk. Use LEAPS to reduce the capital required to carry this investment (not to trade on events etc.)- meaning you must tolerate the swings in the value of your LEAPS as if you own the stock at that level. This seems obvious, but too many people use LEAPS to trade on the swings (that should be relegated to short term options or other methods).
3) Oh My, What to Do:
Now with the net Delta you want to carry decided- you need to select the LEAPS (strike, expiration, # of contracts). I recommend simple spreads both in time and strike. Use 2 spreads for each as follows:
Time spread- about 1 year and more than 1 year- So currently J15 and J16. Think about how the company is expected to grow in proportion to expected development and skew to that arrangement initially starting with a mental 50/50. For example I expect 2014 to be a high growth year for Tesla compared to 2015 due to ModX, SC network, GigaF, J15 intro of GenIII) Next year will be more measured against ModX sales
producing a 60/40 split for me going in (maybe even more skewed).
For each of J15 and J16 use 2 strikes (KISS) as follows:
Take the anticipated TSLA$ value 3-6 months prior to expiration and use that strike(or lower) for lower strike leg;
Take the anticipated TSLA$ at expiration and use that(or higher) for the upper leg strike.
For example my initial setup for TSLA was J15 $250 and $300 (total of 60% by dollar investment) and J16 $300 and $350 (totaling 40% by dollar investment)
Remember with this method you will never carry to expiration (you may choose to accent your investment by keeping something through expiration, but if so that should be considered a conversion to a simply short term option play)
4) Oh My, Why Did I Do That:
The time spreads allow for unexpected timing of anticipated events, capturing value of unanticipated events, capturing value of future roll (explained more below), and capturing long term value before those J16s get too expensive later
The strike spreads allow for capturing value of earlier than expected moves in the stock while provided significant cushion for later than expected moves. For example, the lower leg strike is 3-6 months before expiration, so if not reached you still have plenty of time to let those run or roll them up depending on the events taking shape. The higher leg strike will capture time value if the stock price runs up much quicker than anticipated as follows (and this is the basic tenant behind the strike selection):
5) Oh My, What Do I Do Next or The Roll-Up and Out:
With a high growth company the best LEAPS return will be produced when you RECEIVE the time value in your LEAP. When you first purchase the option you are paying(renting) that time. To illustrate the point I'll use an extreme case. Given TSLA currently at $250, the Time Value of the LEAP is a bell(ish) curve from $150 to $400 always peaking ATM ($250). The goal with the LEAP to is to capture as much of that curve in your strike as possible, meaning let that bell peak at your strike well before the rent is due (bring it to me faster than the rent I'm paying). This is why we chose the lower strike 3-6 months out, when the rent begins to accelerate more (although still low by short term Option standards maintaining our tenant of stock replacement investment). When the peak reaches your strike (ATM), roll up in strike and out in time, by considering the new situation and how much of this year's value you have captured (likely early). For example I'm now rolling all J15 $250 to add some J15 $300 (because my Delta track is now top of range affording cash generation) and to more J16 $350+ (because I believe I have captured significant 2014 value early so adjusting 60%/40% ratio to 40%/60% favoring J16 now)
6) Am I Mental or The Mental Picture:
'swim to where the wave peak WILL BE - wait for the inevitable wave to carry you to it's peak, then move to where the next wave will be'.
Don't fight the ocean of event driven peaks 'n troughs, instead let the big waves come to you.
This produces a flow of investment that allows a mental calculation mirroring a stock position
- less emotive-panic allowing a larger hold position;
- intermediate events are tolerated not played, allowing for a bigger mental picture of the ocean.

After all this is your core belief in the company and what those in the company believe to their core;
And THEY are the ones working to create YOUR value- so aligning your investment mission with those wonderful people is the best possible alignment of your decisions as well.
7) Is That All You Got Bro' or Around the Edges:
Around the edges of this for those times the waves seems to get so deep you can't see sky or so tall your nose is bleeding do the following:
Carry a bit of stock position for those troughs:
The stock won't move nearly as much as those LEAPS of course, so when you get those inevitable lows (like Fire induced), you can convert the stock to add LEAP (or any other option for that matter) position providing a rare occasion additional leverage for the inevitable rise again- remember when it does to convert back to your stock hold position (+ cash earned).
Leverage the LEAPS safely for those crests:
On the other side, when at an unexpected scary crest (I can see the whole world from here) and you know damn well you'll have to suffer some sort of sickly air drop, use the LEAPS position for no margin required sell-write of some OTM Calls to cushion-hedge the ride down. This is also why we have a lower leg in our strike spread. You can sell at or above your lower strike (recommend about 10%-20% higher) and at a shorter expiration (recommend no more than month out) covered by your existing LEAPS- safely hedging or adding some cash generation to your portfolio.


(One More Thing):
Enjoy your Life more than your Money

 

[Chickenlittle]

Thank you for sharing your experience. I'm also in search of best option strategy. I have a question. Why do you use spread instead of straight option buying in your strategy? Since you never wait till option expire or even close to option expiration date, I don’t see the advantage of using spread here. For example, on 12/9, the stock closed at $141.9. Let’s say your total investment is $8,900. You can get 10 contract of J15 250 for $8.9 each or 23 contact of J15 250/300 spread for $3.87 each. On 2/15, the stock closed at $248. Straight option buying could have made $35,000. Spread only made $30,700. Maybe I’ve missed something here?

I doubt there is a "best option strategy". You have to flexible enough to adjust or change your strategy depending on circumstances at the time.

 

[macman]

I doubt there is a "best option strategy". You have to flexible enough to adjust or change your strategy depending on circumstances at the time.

I agree if you are referring to short term and frequent trader. For long term stock replacement buy and hold play, there got to be some good strategy proven to work over time like Ken's.

 

[DaveT]

Here’s a quick update on the weekly positions that I had going into the MS upgrade (Note: these were small positions for experimental/learning purposes and I’m posting so others can benefit from the learning. My main holdings are stock & LEAPs.). Here’s a post I posted:
Social Chat - Short Term TSLA Movements - Page 174

I had expected TSLA to trade in a range of 200-225 or 200-230 this week, so I had set up an iron condor (200/197.5 bull put spread and 225/257.5 bear call spread) and a 230/232.5 bear call spread, and a 230/235 bear call spread.

After hearing about Morgan Stanley’s price target raise at night (thanks mulder123), I posted that I was planning to exit the short calls from these spreads.

The problem was that I knew TSLA was going to gap up and if it gapped up too much I was worried that my trades would approach max loss. I’m still quite new with selling weekly premium, so this was going to be a good experiment of how much I would get slammed for a huge gap up when I’m leaning short on my weekly trades.

So, I woke up quite stressed. I think it was fluxcap who mentioned something like iron condors can give you an ulcer when the stock moves in either direction. I thought 200-230 was a large range, so I thought my risk was minimal. And even if I lost my max loss it would be minimal since my risk is defined up front when making the trade. So here’s the specifics of the trade and how they turned out. This is more to share my learning experience on selling weekly premium and what happens during a huge gap up and how much you can lose, and if it’s worth selling premium or not.

Trade #1: Feb28 Bull put spread 197.5/200 (sold Friday 2/21 when stock was at $210).
Credit $0.60 (sold Feb28 200 puts for $2.81 and bought Feb28 197.5 puts for $2.21). Max pain $1.90.
Puts expired worthless
Total profit: $0.60

Trade #2: Feb28 Bear call spread 225/257.5 (sold Monday 2/24 when stock was at $216)
Credit $0.55 (sold Feb28 225 calls for $2.35 and bought Feb28 227.5 calls for $1.80). Max pain $1.95
Closed trade at market open on Tuesday 2/25 (day of MS upgrade) for $1.42 debit (bought Feb28 225 calls for $7.80 and sold Feb28 227.5 calls for $6.38)
Total loss: -$0.87 ($0.55 credit, $1.42 debit)

Trade #3: Feb28 Bear call spread 230/232.5 (sold Monday 2/24 when stock was at $217). Double position.
Credit $0.37 (sold Feb28 230 calls for $1.45 and bought Feb28 232.5 calls for $1.08). Max pain $2.13.
Closed trade at market open on Tuesday 2/25 (day of MS upgrade for $1.10 debit (bought Feb28 230 calls for $5.20 and sold Feb28 232.5 calls for $4.10)
Total loss: - $0.73

Trade #4: Feb28 Bear call spread 230/235 (sold Monday 2/24 when stock was at $216)
Credit $0.70 (sold Feb28 230 calls for $1.59 and bought Feb28 235 calls for $0.89). Max pain $4.30.
Bought back Feb28 230 calls a few minutes into market open on Tuesday 2/25 for $6.32.
Then rode the stock up to $143 with the existing 235 calls.
Sold/closed 235 calls for $11.61
Total profit: $5.99 ($0.70 credit - $6.32 + $11.61)

Overall, some quick reflections:

1. I was pleasantly surprised that I was able to exit Trades #2 and #3 with rather minimal loss compared to the max pain of the trades. This was because these are spreads and while the sold calls went up tremendously on the gap up, so did the bought calls as well.

2. This was much better than going into MS upgrade with covered calls (or naked) because I probably would have been forced to buy them back or miss out on a huge run up.

3. The credit spreads all had defined risk going into the trade.

 

[kenliles]

Thank you for sharing your experience. I'm also in search of best option strategy. I have a question. Why do you use spread instead of straight option buying in your strategy? Since you never wait till option expire or even close to option expiration date, I don’t see the advantage of using spread here. For example, on 12/9, the stock closed at $141.9. Let’s say your total investment is $8,900. You can get 10 contract of J15 250 for $8.9 each or 23 contact of J15 250/300 spread for $3.87 each. On 2/15, the stock closed at $248. Straight option buying could have made $35,000. Spread only made $30,700. Maybe I’ve missed something here?

@macman
Sorry I missed your question, been tied up today. Yes I'm using using 'spread' term in a broader sense here than the 'bull call spread'. These are ALL straight LEAPS Call buys but at different strikes to accommodate future roll up and allow 2 sets of time value capture (and the lower strike provides a cover for possible write-sell hedge). Some refer to these as strike 'spreads' and time 'spreads' ; sorry for the liberal use of terminology, but exactly to your point these are all bull call buys. It's only hedge manifests from the long expiration (the reason for never carry to expiration) and an available cover to write-sell from time to time.
Thanks for your comment , good clarification to make

 

[DaveT]

@kenliles

For your LEAPs strategy, are you doing it from a tax-deferred account?

 

[macman]

@macman
Sorry I missed your question, been tied up today. Yes I'm using using 'spread' term in a broader sense here than the 'bull call spread'. These are ALL straight LEAPS Call buys but at different strikes to accommodate future roll up and allow 2 sets of time value capture (and the lower strike provides a cover for possible write-sell hedge). Some refer to these as strike 'spreads' and time 'spreads' ; sorry for the liberal use of terminology, but exactly to your point these are all bull call buys. It's only hedge manifests from the long expiration (the reason for never carry to expiration) and an available cover to write-sell from time to time.
Thanks for your comment , good clarification to make

Thanks for clarification. It makes much more sense now. Very good strategy. Inline with pro's advice that always take option positions with various strike prices and expiration dates.

 

[kenliles]

@kenliles

For your LEAPs strategy, are you doing it from a tax-deferred account?

The short answer is yes. But if tax considerations are predominant, the same strategy with different strikes in an attempt to hold 12 months would be in order. It takes a different plan, for TSLA as example would have J17 available later this year so you would today be in J16s then add J17s, once there you wait 12 months for roll so use higher strikes. I've played with that (using Apple years ago), although it still works better than simple stock hold, It's less effective because it's hard to get the strike to carry the time value to you more than once a year in which case other methods may prove better.

 

[3mp_kwh]

@macman
Sorry I missed your question, been tied up today. Yes I'm using using 'spread' term in a broader sense here than the 'bull call spread'. These are ALL straight LEAPS Call buys but at different strikes to accommodate future roll up and allow 2 sets of time value capture (and the lower strike provides a cover for possible write-sell hedge). Some refer to these as strike 'spreads' and time 'spreads' ; sorry for the liberal use of terminology, but exactly to your point these are all bull call buys. It's only hedge manifests from the long expiration (the reason for never carry to expiration) and an available cover to write-sell from time to time.
Thanks for your comment , good clarification to make

Unless you are writing calls, which is not bullish, time value is something you lose and not something you "capture"?

I'm out of p200, march22's this morning, for a net loss of ~9%. The $237 open completed a limit order, for the last third of a wild 9 trading hour ride, in puts. I usually go out of the money, hoping to fetch leverage on any price delta going my way. That I was in puts, from $249, down to $237 and lost money really sucks. I sold in equal thirds, next to prices of $249, $243 and $237. All limit orders. I'm left thinking market-making when you're deep in/out, against the strike, can simply work against you. Supply/Demand, or someone else hitting a stupid bid, you are left to chase, can ruin your day.

My bad was to realize fundamentals don't auger on the down side as much as I first thought. The capital costs of the latest issue turned out to be borderline free money, with little prospective dilution. Lots of analysts from the utility sector, and folks here, are starting to do other fundamentals, that could bring non-automotive earnings to TSLA's income statement (on a GAAP basis ).

 

[kenliles]

Unless you are writing calls, which is not bullish, time value is something you lose and not something you "capture"?

The premise is belief TSLA(in this example) will grow faster than the cost of the time (the strategy only applies to high growth scenarios).
This bet is more in line with the time risk of owning the stock. In my head (right or wrong), the risk of TSLA not growing into my strike over 1 year is extremely low- they will either grow due to the missions they must accomplish or die, another year reprieve isn't a likely scenario- so this a essentially akin to owning the stock in mind set risk of investment level against the chances of it growing over the time horizon of a normal stock investment.

with that in mind:
The LEAP time loss is not a foregone conclusion, rather an integral part of the option value. You paid up front for a (relatively) linear time 'loss' (especially true for a LEAP which are first available 2 years out)-
Like any option, the bet is the decay is significantly slower than TSLA growth of course. This strategy aligns that bet with the time-risk level associated with owning the stock, but (potentially) increases the return by 'capturing' the market maker's 'miscalculation' of the linear loss vs the risk associated with TSLA meeting/exceeding it's goals in that time.
The 'capture' occurs when TSLA reaches your strike (peak time value component) well before the expiration so now as owner of the LEAP, YOU hold the value of the time remaining (and the increased Delta tracking of the underlying to boot). Advantage has now moved to you (and peaked in your favor when ATM) because your not holding the stock for sale, but an option for sale. Time to roll with that 'captured' accomplished (assuming you are still growth bullish on the underlying over the next 2 years). Rinse and repeat.

Depending on the underlying performance of course, I've found the return to be greater than 2:1 vs owning the entire Tracking investment in the stock- but carrying much less risk. The risk reduction is based on the fact that my capital outlay for the position is nearly an order of magnitude less and yet the scenario of gain or loss plays out the same given the small decay in time value against the REQUIREMENT that TSLA (over a one year period) makes very significant growth objectives. If they don't the stock portfolio will drop as much as the LEAP position, while the LEAP has been forced (from the beginning) to be in a prescribed time value decay that has nearly no bearing against the ability of the company to meet it's growth objectives. I use this prescribed (market maker)disadvantage to my own advantage. I've found this method provides double returns, with less risk, and angst over unforeseen events that I know the company will adjust to if required.

Regardless that's where the 'capture' term comes from because it flips the time advantage to the long term investor (despite the time decay) by him/her bringing the peak time-value of the LEAP (which is always part of it's value). Perhaps think of it as having inside knowledge (relative to the market) that absent a catastrophic event (that will destroy the stock in same proportion as the LEAP), the time value component on this position is going to massively outstrip the prescribed rent-decay (unchangeable by the market after the purchase)

 

[AlMc]

The premise is belief TSLA(in this example) will grow faster than the cost of the time (the strategy only applies to high growth scenarios).
This bet is more in line with the time risk of owning the stock. In my head (right or wrong), the risk of TSLA not growing into my strike over 1 year is extremely low- they will either grow due to the missions they must accomplish or die, another year reprieve isn't a likely scenario- so this a essentially akin to owning the stock in mind set risk of investment level against the chances of it growing over the time horizon of a normal stock investment.

with that in mind:
The LEAP time loss is not a foregone conclusion, rather an integral part of the option value. You paid up front for a (relatively) linear time 'loss' (especially true for a LEAP which are first available 2 years out)-
Like any option, the bet is the decay is significantly slower than TSLA growth of course. This strategy aligns that bet with the time-risk level associated with owning the stock, but (potentially) increases the return by 'capturing' the market maker's 'miscalculation' of the linear loss vs the risk associated with TSLA meeting/exceeding it's goals in that time.
The 'capture' occurs when TSLA reaches your strike (peak time value component) well before the expiration so now as owner of the LEAP, YOU hold the value of the time remaining (and the increased Delta tracking of the underlying to boot). Advantage has now moved to you (and peaked in your favor when ATM) because your not holding the stock for sale, but an option for sale. Time to roll with that 'captured' accomplished (assuming you are still growth bullish on the underlying over the next 2 years). Rinse and repeat.

Depending on the underlying performance of course, I've found the return to be greater than 2:1 vs owning the entire Tracking investment in the stock- but carrying much less risk. The risk reduction is based on the fact that my capital outlay for the position is nearly an order of magnitude less and yet the scenario of gain or loss plays out the same given the small decay in time value against the REQUIREMENT that TSLA (over a one year period) makes very significant growth objectives. If they don't the stock portfolio will drop as much as the LEAP position, while the LEAP has been forced (from the beginning) to be in a prescribed time value decay that has nearly no bearing against the ability of the company to meet it's growth objectives. I use this prescribed (market maker)disadvantage to my own advantage. I've found this method provides double returns, with less risk, and angst over unforeseen events that I know the company will adjust to if required.

Regardless that's where the 'capture' term comes from because it flips the time advantage to the long term investor (despite the time decay) by him/her bringing the peak time-value of the LEAP (which is always part of it's value). Perhaps think of it as having inside knowledge (relative to the market) that absent a catastrophic event (that will destroy the stock in same proportion as the LEAP), the time value component on this position is going to massively outstrip the prescribed rent-decay (unchangeable by the market after the purchase)

Well, I am giving this a go. I already had in place the lower strike option for Jan 2015. I added the higher strike for 2015 and the two strike prices in 2016. I still hold a sizeable stake in TSLA stock but used proceeds for the sale of some to fund this strategy. Going in with no expectations.

 

[kenliles]

Well, I am giving this a go. I already had in place the lower strike option for Jan 2015. I added the higher strike for 2015 and the two strike prices in 2016. I still hold a sizeable stake in TSLA stock but used proceeds for the sale of some to fund this strategy. Going in with no expectations.

having the underlying stock is a good idea and starting slow to make the comparison also good. You can use the underlying stock from time to time to augment the rolls.
what strikes do you have now for J15, J16?

 

[AlMc]

having the underlying stock is a good idea and starting slow to make the comparison also good. You can use the underlying stock from time to time to augment the rolls.
what strikes do you have now for J15, J16?

I already had some that I picked up when we dipped in November: Jan 15 140s and 170s (I will use them as my low strikes, but may sell them for the next 'ratchet up')

I bought Jan15 350s and Jan 16 350s and 500s I know the 350s may be a little pricer than you may have suggested but I did have some nice proceeds from some other short options in Jan and Feb this year. As I get more comfortable with the strategy I may buy deeper OTM LEAPS.

Ken, Thanks for your interest and expertise. Al

 

[kenliles]

I already had some that I picked up when we dipped in November: Jan 15 140s and 170s (I will use them as my low strikes, but may sell them for the next 'ratchet up')

I bought Jan15 350s and Jan 16 350s and 500s I know the 350s may be a little pricer than you may have suggested but I did have some nice proceeds from some other short options in Jan and Feb this year. As I get more comfortable with the strategy I may buy deeper OTM LEAPS.

Ken, Thanks for your interest and expertise. Al

sounds good...
yeah when they issued J15s, those $170s were the highest offered at the time- I did the same at the time, moved them up later at roll-time..
all the best!