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Applying options strategy 'the wheel' to TSLA

Discussion in 'TSLA Investor Discussions' started by adiggs, Apr 16, 2020.

  1. adiggs

    adiggs Active Member

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    Generally speaking - if I were in this situation I would be moving on to my new position. But I'm running at higher deltas right now, so that $0.92 is a lower premium than I would normally allow a position to go down to (I'd rather be back to a higher delta much earlier).

    The way I think about the benefit of closing the current position and opening a new position is the increase in premium that will be decaying of this upcoming week.


    An example of how I would be thinking about this situation:
    My option chain is showing that 820 call with a .03 delta and .33 theta. Thus nearly no impact on the option price from share price movement AND very low time decay. Without knowing how aggressive / conservative you like to position yourself, some choices I see:
    - the 760c is a roughly $3 premium, a .10 delta, and .79 theta. Or as I think of it, now I would have $3 I can earn over this week instead of $1.
    - the 725c is ~$7 premium, a .21 delta and $1.34 theta. Or again, the way I think of it, now I have $7 premium to earn over this last week instead of $1.
    - the 705c is .31 delta etc..

    In all of these choices I'm taking on more risk in exchange for better earning potential.

    With my own every other week approach these days, I would be also be considering Mar 19 strikes as well (so a 3 week trade instead of a 1 week trade). Something like:
    - 770c, Mar 19 expire; a $12 premium from .21 delta, and $0.75 theta.


    In all of these choices, part of my thinking about the starting point ($.92 premium remaining on a .03 delta position) is whether there is a new position I would rather be in. That can include closing the position and staying in cash / shares with no open option position. If there is no other position I would rather be in, then I'd stay put and earn that last $0.92 (because why not - low risk money is low risk money).

    And of course if there is a new position I would rather be in, then out with the old and in with the new!

    I would usually have a new position I would rather be in by this point in a position's life.
     
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  2. adiggs

    adiggs Active Member

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    The particular observation here - I agree with @ReddyLeaf 's observation completely. If I were ordinarily only selling CC, then I'd either be sitting out or looking for a different type of trade to benefit from what's currently going on. I've found that no matter how far OTM I go, there have been moves that eat up all of that OTM space and put me on pace for an ITM finish, on calls that I really don't want assigned. My specific worry right now is that a sudden reversal would put CC ITM at a much lower strike than I like.
     
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  3. adiggs

    adiggs Active Member

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    The next few posts are to update, after a year of me doing this, the trading strategy I've evolved to. It's long enough I'll break it into different posts.


    My own trading strategy has been evolving for the year I've been doing this (and I keep learning - so the approach is also still changing), and has arisen out of my own particular priorities (income, delta neutrality, low effort, low risk).

    The important inputs that are motivating my end result:
    1. I like the relatively high premiums available at high deltas.
      1. This is mostly an important risk management / mitigation component (but heck more is also better as well)
    2. The share price range in which a losing leg can be rolled to buy time is surprisingly (to me) large
      1. Worst case - a roll out in time with no strike change should always be available for a small net credit. There is pretty much always a bit of premium available in a roll that is 2 weeks longer.
    3. My objectives, not necessarily prioritized, are:
      1. low(er) risk,
      2. risk mitigation strategies available (part of lower risk)
      3. income
      4. low(er) effort
      5. delta neutrality (also a component of risk reduction
    4. I view capital intensiveness as a feature not a bug. I know that isn't true for most people, but heck - buy and hold is also capital intensive.
    5. My personal investing dynamics have proven (to me) to be good for buy and hold (or maybe - buy and forget :D) and BAD for buying options or anything with a <3 month trading time horizon. Mostly because I'm really bad at deciding when to sell these short duration positions and making that decision is critical to success (I can't ignore the timing). So sticking with trades where "do nothing" is a reasonable to good choice most of the time is a good idea for me.
    6. I only trade TSLA and TSLA options. This is a function of my long term research and view of Tesla's strategy and execution and is critical to my risk mitigation view of things.
    7. My current investment hypothesis for Tesla is 10+ years, and has been updated from the 10+ years it was back in 2012. There is a reasonably good chance that my wife and I will own our TSLA shares until we're dead (multiple decades). So if I get assigned on puts, even when I don't want them, my fallback here is "oh noes - I own more shares" (or running the wheel against the new shares).


    My strategy summary:
    Sell both puts and calls, targeting roughly equal deltas, with an effective result of living in a perma-strangle. I would very much like the number of puts and calls to be reasonably balanced. My best account is currently about 2 calls to 1 put, so I'm not militant about being exactly equal puts and calls. That perma-strangle has spent a reasonably large fraction of it's time so far as an inverted strangle (put strike higher than call strike) and has also proven fine.

    I'm using higher deltas, though also still figuring out what target I'll work at. For now I've been targeting the .30 to .40 range - I'm still wrestling with what I prefer. I'm pretty sure I won't target <.20 and I'm not emotionally ready to sell ATM straddles (or ~.50 delta). I view these higher delta positions as lower risk by making the position more dynamic and resilient to moves up or down (more on this later).

    I use every other week expirations.


    (more details following)
     
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  4. adiggs

    adiggs Active Member

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    For the objectives, this strategy satisfies them in these ways.

    Low(er) effort:
    I've worked the 3-8 trading day range previously. I liked the results and how fast I gained learning and experience but didn't like how closely I needed to monitor daily gyrations in the shares. I've moved to aligning all of my trades on an every other week strike. Example - all of my current positions are Mar 5 expirations. These were all rolled from the Feb 19 expirations, and will be rolling into the Mar 19 expiration. This mostly has meant I can ignore the shares for 1 week and then watch them for 1 week.

    Summary - every other week expirations for less effort while maintaining frequent adjustments in strikes to dynamically change with the share price.


    Delta neutrality.
    This is really more of a decision making simplifier and emotional improvement for me, but I realize there are important technical dynamics here. The desired steady state is for the call and put delta to match - this is where the equal number of puts and calls comes from (matching contract deltas turns into an overall neutral delta exposure).

    It simplifies my decision making because whatever is good for 1 leg is bad for the other. Ergo - I don't need to figure out a good time to sell a covered call - if it's a bad time for the call, then it's almost certainly a good time for selling the put (the exception I can see is when it's a bad time on both sides). I suck at direction, magnitude, and timing for share changes, so taking these factors out of my decision making = good.

    With frequent rolls I can keep adjusting dynamically to changes in option delta, helping me maintain neutrality and thus indifference to what the shares do next. Dynamism over static is a theme.

    Summary - remove directionality from my decision making by angling for delta neutrality.


    Income.
    If I can sell an option for $20 then that's $2000/contract (actual contracts on winning legs have been more like $20-$40 for me). So if I'm selling 10 contracts at a time, then I've got $20k in cash flow (I won't earn all of this as I'll roll before expiration). Selling both puts and calls, now I'm looking at $40k in cash flow in 2 weeks and $80k cash flow in a month. At a $700 share price this is a $1.4M account (50/50 account value in shares and cash) so its capital intensive for sure.

    So far, in practice, it looks like the better way to think about the income is that 1 leg is treading water (~no profit, but some small amount of cash flow; say $1, $100/contract, or $1000 in 2 weeks extending the example above) while the other leg is earning 100% of this. Thus $40k/month instead of $80k/month.

    And even that is evolving into something closer to 50-80% of one leg is generating the income / profit, and the remainder of that profitable leg is buying a better position on the badly performing leg. That brings me down to a $20k/month income on $1.4M - my math says that is 1.5% on capital per month, and that sounds awfully good for an income source; assuming a taxable account, then simplistically that is a $240k/year pre-tax salary.

    Its also my observation that more like 3%/month is a more typical month for months that don't involve 20%+ moves in a single direction. Being TSLA these are reasonably common, so I am not assuming that - just noting that it also isn't that uncommon to achieve. To get closer to 3% we just need 1 leg to roll without help for a small net credit.

    Summary (at least for me): I can achieve desirable income characteristics from a relatively small portfolio.
     
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  5. adiggs

    adiggs Active Member

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    Most importantly - risk management / mitigation.

    This one has become REALLY important to me. I could return to the workforce today if I had to pretty easily - I've only been out of the workforce for a month, so my skills haven't gotten rusty yet :). Give me 5 years though and I'll be useless in the trade I've been practice - my previous annual pay won't be available any longer.

    I really don't want to need to get another job, so I'll give up income for resilience / safety against big changes in the share price.


    First
    - if I can get to 50/50 account value in shares and cash, then the cash damps out account swings - roughly 50% in fact :) So I miss out on upside moves by having cash that could have been shares. This isn't a problem or risk for me - I have enough shares for exposure to upside moves.

    And don't get hit so badly on down moves as the cash is worth as much at $800/share as $400/share.

    I think of this as being somewhat like shifting a portion of the portfolio to bonds in retirement with the same rationale. The big difference is a bond that generate 1.5%(+) per month vs. 1.5%/year.


    Next - I manage risk dynamically by making adjustments (via roll) within the winning leg when available. The idea here is to be rolling the 'winning' leg and leaving the 'losing' leg alone. Right now, with shares going down, I've been rolling the calls down and leaving the puts in place. Three weeks ago with shares going up, it was the calls that were unchanging over the window and the put leg that was rolling up.

    These rolls improve risk dynamics in two ways - rolling the winning leg gets its relatively low delta back up to something much closer to the losing leg delta (delta neutrality).
    It also generates an additional premium that can be income or can be used on the winning leg for a better ending strike, thus using the additional cash flow from the winning leg to offset the unrealized losses on the losing leg. ​

    NOTE: Its important to realize that these rolls on the winning side are necessary to the overall risk dynamics. Sort of like when you're playing blackjack you have to recognize double and split opportunities as they represent necessary choices in order to minimize the house edge and mazimize your results (reduce risk, improve overall returns).​

    Next - managing risk dynamically makes me far more responsive to whatever actually happens and almost indifferent to even pretty large moves (over a 2 week window). The farther the shares go in a 2 week window, the better the winning leg will perform, offsetting the fact at the same time the other leg is doing badly.

    A current example - for the Mar 5 expiration I started with an 830/875 strangle. The shares went down like crazy and I've had two early close opportunities for the call leg - once in the upper 700s and again in the upper 600s. That latter roll was to 680 for a $35 premium.

    After that last roll I was (am) in an 830/680 inverted strangle for Mar 5 expiration. The third call position in the Mar 5 window generated enough income by itself to be 4 months of income. Or for risk mitigation I can use some of that income on the put leg to improve my roll choices, including taking a net debit to move the strike by a lot more than a net credit can make available.

    On this particular put, even being $150 ITM, I've had a roll to the 825 strike for Mar 19 and a $1 net credit available throughout the week just ending. Because of (only) that most recent call though, and assuming it finishes OTM (or close ITM) then I can spend as much as a $40 net debit on the put and improve it to a 775 strike instead. Being so far ITM any net debits improve the strike by close to $ per $ (relatively bad). In this case, $40 of debit buys a $50 improvement in the strike and in the context of only that most recent call would still leave me with "only" 1 month of income for a 2 week position. That is a whole lot of risk mitigation / management available.​

    Next - more of an attitude and conceptual thing. For purposes of position management my strategy on the winning leg is to rolling aggressively to improve income and bring delta closer to the losing leg. This has historically been a good choice in the 2/3rds to 4/5ths profit level, at least on these <4 week options.
    Most importantly on the losing leg I shift to "buying time" as my mental model. My intent isn't minimizing losses - that will come from when the shares (finally!) reverse and/or using some of those winning leg profits to get the losing leg to a closer ITM strike. That naturally leads to waiting for close to expiration before rolling.
    The buying time mental model can be tough when I'm $150 ITM (that put leg) and is proving trivial when I know that even this far ITM I can improve the strike by $50 or more with call side proceeds.​
     
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  6. adiggs

    adiggs Active Member

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    Some misc stuff.

    Tracking
    I have historically tracked each of my individual trades. That up around 150 trades in the year I've been doing this where my primary tracking goal today are the realized results.

    I believe that I need to augment realized results tracking with cash flow tracking. These two can prove to be very different.

    It looks like the cash flow runs ahead of realized results with these two matching up over longer periods of time. I.e. - realized results and cash flow will be nearly identical over a year, but can be dramatically different over 1 week. One being positive while the other is negative is easy to have happen in any particular week.

    I think the cash flow is important to track as its the most immediate measure of whether I'm getting ahead or not. The way I think of these rolls - there are two kinds of rolls in this approach. What I think of as convenience rolls, where I'm really BTC a winning position to realize that gain and then a STO a new position. It's convenient to think about it as a roll, but I can get the same overall dynamic for this trade as two individual trades.

    The other roll though is a necessary roll. The obvious way these arise is that the position goes so badly against you that you no longer have the cash available to BTC. One of these works by using the credit from the open leg to pay off the debit from the closing leg. By insisting on a net credit the accumulating rolled position will represent a larger and larger unrealized gain (while creating larger and larger realized losses - these can take time to turn into a realized profit).

    But if one closes one of these multiple-roll positions too early (say a 67% profit) then the overall sequence of rolls can represent a realized loss. I want income from cash flow that turns into realized gains - not cash flow that turns into realized losses.

    I haven't yet added cash flow to my tracking spreadsheet, but I think the equation will be reasonably straightforward. I'll track it at a monthly level and use the net open income for the month minus the net close outgo for the month. This is different from realized results to the degree that a position is opened in 1 month (+cash in open month, -cash in close month).


    Longer term downtrend dynamics.

    I haven't experienced this myself yet but I have some thoughts about how I expect positions to evolve over time. When we're in a longer term downtrend, then I'll see lower and lower value in the shares that I own. But the share count won't change and with my long term buy and hold view of things, I am indifferent to a $400, $800, $1600, etc.. share price.

    While the share value is decreasing the cash value is unchanged, thus increasing the fraction of the account in cash (backing puts).

    The beautiful thing - when the cash value gets enough above share value, then I can allow any number of those ITM puts I'm rolling along to go to assignment. In which case I am buying new shares at a relatively low share price (over time - I think of this as akin to dollar cost averaging).

    And at the extreme, I can make a decision to go heavily overloaded on shares. As a thought experiment - if I roll that 830 put I have today all the way down to $100 and it is still ITM, I probably decide to let approximately all of those puts go to assignment - buying shares at $100 sounds like the bestest thing ever.


    Uptrend dynamics.

    There's a similar dynamic though not the same. As shares go up, share value will go up while cash value will be unchanged, thus decreasing the fraction of the account in cash. I'll be generating cash from option sales and that might be enough to maintain the 50/50 ratio.

    But whenever it falls behind, then I have the option to allow some of those covered calls go to expiration (probably after many rolls), turning some of the shares into cash and moving the account back towards that 50/50 balance. This sure sounds like a sell high result :)


    Both of these longer term dynamics are truly longer term. Rather than something I would think about monthly, I expect this to be more like 1x/year and maybe multiple years between either outcome occurring. I need a pretty low share price to take assignment on a put, and I need a pretty high share price to take assignment on a call.

    At today's $680 share price, I probably am not interested in taking assignment on any puts until I've rolled my put leg down to $400. On the call side I'm probably interested in taking assignment on some shares around $800 due to how far away from 50/50 cash I am. Heck - I should probably be interested here at $680, which makes it a lot easier to sell really high delta calls.


    Or maybe to tie back to the original thread name - "the wheel" is something that gets turned when a long term trend takes us enough above or below my expected value at that point in time, rather than something I'm doing trading window to trading window.
     
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  7. adiggs

    adiggs Active Member

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    #2207 adiggs, Feb 27, 2021
    Last edited: Feb 27, 2021
    And because I just can't stop this morning :)


    A NOT ADVICE idea.

    I started experimenting with this general idea at the beginning of the year. I haven't needed to refine it very much from the initial test, but there has been critical experience that I had to get from that test position.

    And thus the idea - you might find it valuable to duplicate something I did starting at the beginning of this year.

    Namely - in order to create the desired balance of puts and calls, and create a micro position where I could test this out, I bought 100 shares and had enough cash to have bought another 100 shares. At our current ~$700 share price, this is $140k. I didn't actually care what the share price was at that time and I ended up starting one of these positions in two different accounts (two tests!) - one at $735 share price and the other at $850 share price.

    So - buy the 100 shares. And then immediately sell the strangle - 1 call and 1 put. I'm using delta as my first pass guide to choose strikes and its pretty high. So you might go with a .30 delta call and put. My option chain says that is a 620 put and a 740 call using March 19 as the expiration date, as I'm writing this shares are at $680, so the strangle is +/- $60, but I got there via delta. Or you could go weekly (Mar 12) which will tighten up the range. You might go with something seemingly more conservative - say the .20 delta on each side (expands the strangle) etc...

    I find myself biasing towards .35 or .40 delta these days, but that comes from a more dynamic view of risk management that has been acquired by doing .20 to .30 delta strangles.


    And then you just manage that strangle, week to week (or more accurately, trading window to trading window). You can use a larger window, but I would bias towards weekly or every other week if you have the time and energy. The purpose of this position is education and experience, and it'd be pretty sweet to be earning $1400 (1%) per week, or whatever it turns into, while you're gaining that experience.

    Within that 'manage strangle week to week', I would play around with different elements. I might roll the winning leg (which can go to any delta) to a variety of different deltas. .20, .25, .30, .35, .40 - these are the ones I've been trying out. The losing leg gets whatever it gets (which as you'll quickly discover, can find you looking at $150 share premiums that you would never open as a starting point, but that's what the roll gets you to).

    A big component of what I was wanting to learn - how far ITM could I go and still have a desirable roll available. The first call I sold went deep ITM and taught me I could get $100 ITM (10-15%) and still 'save' the position. The current put is $150 ITM (close to 20%) and I still have a good roll available (good roll for me = net credit plus at least a 1 strike improvement).

    You'll find that in an inverted strangle, both legs can finish ITM, which means that both legs are just taking the best roll that they have available and may be yielding roughly 0 cash flow for that trading window (which is also ok - I find that some trade windows can generate 2-5x of my target, so windows with no income are just fine).

    As an example using my current specific position - I have rolled my way into a 830/680 strangle, if the shares land at $750 at the end of next week, then I consider that to be a great outcome. Both are reasonably deep ITM ($70 on one side, $60 on the other), but both will have good roll choices available. And the effect of those rolls will be to tighten up the strangle while generating small net credits.

    I also prefer this strangle (830/680) over what I started with (830/875). If the shares go down from here, then the call leg has generated just about as much premium as it could to offset this big down move. All of that additional premium can, if I choose, be used to move that 830 put.

    The purpose of this test position is to see different elements of how one of these positions evolves and to see how well it does or doesn't work for your own trading mentality. Such as this 830/680, though this is a sizable position for me, not a test position.


    Lastly of course - you shouldn't try out this test position until you feel ready for all of the elements. Besides selling both puts and calls, a roll transaction / ticket, that will also include compatibility between my list of inputs that led me to this and your own view of the world.


    I needed 2 months to build on the 8 or 10 months of experience of selling options I had already accumulated. It'll be what it'll be, but if you've been selling options already, then you'll probably find this a reasonably minor tweak to stuff you're already doing.
     
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  8. st_lopes

    st_lopes Member

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    @adiggs truly appreciate your insights and the sharing of your observations

    We have very similar approaches to picking positions and managing the risk of those positions; most significant difference is that you’re selling cash covered where as I have been using portfolio margin (and, as I’ve learned, too much of it).

    Other difference is that I’m not yet retired, or retiring. Still have a few decades of work, though lately I’ve been toying with ideas of taking on more passion project / different risk profile roles rather than the same grind. My approach to options has been an exercise in assessing how consistent an income stream this can be. The more consistent, the more comfortable I’d be with taking on a higher risk project professionally.

    These last couple weeks have been a lesson in how much of that available margin I should deploy when entering a weekly or biweekly trade. I have had some margin calls, but fortunately have not come out of things with any less share exposure, but I have given back some of my premium gains YTD, and find myself more leveraged than I was a couple weeks ago.

    03/05 will be a big reset of position week for me as I have several strikes on both sides of my strangles expiring this week; I equally find myself in an inverted strangle and whereas I used to be 2:1 puts to calls I’m closer to 1:1 right now (sign of margin buyer power having reduced with the recent pull backs)

    Current sold positions: 830c 787.5c 850p all 03/05 expirations

    I had also sold some 875p 04/16 as we were dropping, but had to close those due to margin calls for a small loss (netted my small gain on closing some covered calls).

    I also shifted some shares to Mar 2023 1500c this week. Bi-product of a margin call forcing to close some shares, but was able to achieve same share exposure through a 1.9 leverage on these leaps.
     
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  9. adiggs

    adiggs Active Member

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    That's good stuff and I hope to hear more details from you on how this all evolves. There are two main reasons I started this thread and continue posting regularly. The first is that I suspect there are other people that can learn from what I've done, mistakes I've made, and victories I've had that they can make use of themselves. Or as is frequently the case for me - something I can learn from while running my own experiment to see for myself (so I have an idea of what will happen).

    The other reason is for myself. I find that thinking things through well enough to make them conscious for myself as well as write them down in a sufficiently organized fashion for others to know what I was thinking requires me to think these things through. Doing so, and then writing it down, makes these lessons more memorable for myself. So whether anybody reads my posts or not I am somewhat indifferent - I am locking in my own education at a minimum.


    Anyway, given the current share price and the open call positions you mention, those calls look like good opportunities for increasing exposure (and therefore reward / premium) to me. One of my key learnings - something I've sort of known for more than 6 months, but have only crystallized recently enough to be able to say out loud - rolling the calls closer will in some meaningful ways lower risk on the overall position.


    Here is an idea I'm creating on the spot to illustrate the idea (for you to consider - not advice).
    Using the 830c as the starting point, my option chain shows that as having a $0.80 premium at 0.03 delta and 0.30 theta (yes - I round to nearby numbers to be easier to read and still directionally accurate). My interpretation - there is very little incremental realizable earnings available to you in the coming week.

    Let's see what the 700c would look like (maybe think of this as an extreme to better illustrate the idea). The 700c is about $15, .34 delta, and $1.77 theta. That is still the March 5 expiration.

    The obvious risk here is the shares come back up above 700 next week, and now the calls are ITM. It wouldn't even need to be all that big of a run up for the call position to be a net loser.

    The pros, or the reason I'm suggesting this idea for you to consider.
    - A whole bunch more immediate cash flow. You'll probably hang onto the cash rather than use it (I would :D), but its there for whatever you want to do.
    - A big improvement is that if the shares keep going down, then you'll be realizing $15 in gains in the coming week rather than $0.80.
    - And that will be a big help when you're figuring out the big reset for next week.

    The way I look at it, the 700c is going to be a pure win in the context of your overall situation (all assuming roughly equal numbers of contracts). The shares could end up somewhere around where they're at. The 700c becomes worthless (which I take to really mean something like $1 or $2 - that exposes my bias towards small premium options :D) and you've got an extra $15 ($13-14 really) as extra income, or money you can use for improving the roll from the 850p, or whatever combination that makes sense to you.

    Or if the shares go back up, then yes - the calls can end up ITM. Which means you'll be rolling both sides. Presumably the absolute worst situation would be to end up at 775 - exactly in the middle of the 2 positions (of the 850/700 inverted strangle). That will mean that both are $75 ITM. That'll still be a reasonably good roll on both sides that will also have the effect of shrinking the strangle window, making the next position even better, etc.. Actually I think that is the single best outcome, but anything between the strikes in the inverted strangle look good to me (at least within my 830/680 strangle)

    From what I've seen I would much rather face two legs that are each $75 ITM than a single leg that is $150 ITM.

    And I think that is the key to the larger strategy I described in my previous opus -- don't focus on any one single position. Look at the overall position and how it works together. I claim that the 850/700 inverted strangle for next week is safer than the 850/830 inverted strangle you're in right now. And yes - I know that I've simplified multiple call/put positions down to this single position - it's the idea I'm going for. The specifics are up to you either way.


    I had a similar situation for this March 5 expiration starting with an 875 call. On the last roll when I landed at 680 the shares were around 680 as well. I intentionally went to such an aggressive strike specifically for the safety. My biggest concern at that moment is that we'd be drifting down to 600 over the next week (and still is). Therefore the 680 call provides me with the most immediate cash flow AND the best downside protection that I have quickly available to me (roll existing covered calls down closer to the share price). Managing a move up over next week would be delightful :)

    If the shares go back to mid 700s then I might have a 2 week window where all I'm really accomplishing is to roll both my put and call to being closer ATM, but I can do so in a cash flow positive way and the outcome is inevitable - one leg or the other will get back to being OTM and back to generating income. And I don't give up any shares if I don't want to, and I don't turn any cash into shares unless I want to. All I lose from this big move down is a few income generating opportunities (I think of each leg, in each expiration window, as 1-2 income generating opportunities; I don't even need 1/2 of them to generate income to come out ahead).

    Generalizing from my situation to yours, if you are primarily dreading or forecasting a further drop during next week, then you might go even MORE aggressive on the call. Something like the 680 I'm at, or even going a bit ITM - say 670. The 670 call is about $27.50, a .52 delta, and $2.03 theta. If the shares trade upwards then that option will finish ITM and you'll be rolling - maybe on Thursday with a good roll available on each side. It also means that the 850p won't be so badly ITM.

    If the shares trade downwards then that call is providing just about the most coverage as you plan for as that 850p goes even further ITM.


    But we'll need the flexibility to keep rolling, potentially for months, for this to work. So having a time constraint on when the cash needs to be free for a home purchase or a college education or .. - that is an additional constraint you will also need to consider. I have something like that coming up and the amount is sufficient that I've begun planning for it now. The obvious impact being that I can't write as many puts, and if all of my cash is tied up backing puts, then that is bad cash management on my part.

    Best of good fortune to you!
     
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  10. adiggs

    adiggs Active Member

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    A good topic for one of the retirement threads. But keeping this brief - though I've personally stopped working for a paycheck, to me the point of "retiring" isn't stopping work for a paycheck. It's really about financial independence.

    The freedom, as you mention, to be more selected and aggressive about the projects you take on. Maybe also the freedom, if you're doing contract work in the high tech industry (where I'm at), to take a few weeks or a few months off between projects, combined with the ability to be more choosy regarding the projects you take on and the companies you work with.

    Or in my case - the freedom to take a really big break, and then do some volunteer work. Work that won't get back to full time for a full year, I expect ever again.
     
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  11. st_lopes

    st_lopes Member

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    Excellent food for thought. Thank you!
     
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  12. generalenthu

    generalenthu Supporting Member

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    Good update @adiggs in the context of how you're managing thru this down turn. like your approach of aggressively rolling calls down. And even then you're net long deltas.

    If anything the biggest risk to this strategy is a sharp rise > 900 or 1000 in the very near term, where digging out of the $150 put call overlap becomes pain.

    Meanwhile, the elevated implied vols make tightening that overlap that much easier.
     
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  13. dkemme

    dkemme Supporting Member

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    Thank you soooo much adiggs. Your insight to the wheel has given me a path to financing life after a paycheck and look forward to your wisdom in finding life after a career. I am about 6 years (16 years if my SO so chooses) behind you in this major life change.

    Guide me wisely my master.
     
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  14. ZeApelido

    ZeApelido Active Member

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    Thoughts on a similar question, but with respect to longer expiration dates? I sold CC's on a bunch of shares with a Jan 22 expiration at a variety of OTM strike prices (about 50% of them above $1500 strike) for a nice total premium.

    Currently, the premiums have been essentially halved since I sold them, so I could close them out and keep 50% of the premium.

    #1 benefit of doing this is removing any risk of those ending up ITM and having them assigned (though I would totally okay if it happened).

    #2 is if the stock price rises again significantly in say the next few months, I could sell CC's against them against them again to generate even more cash. Though I'm not sure if I would end up with more or less cash than just staying where I'm at now. If I make the expiration still almost a year out, I should end up with more cash this way...

    Thoughts?
     
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  15. SN_8

    SN_8 Member

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    My not advice is that you've been given a gift to be able to close them out with a significant profit now. Close them out, wait, and write new calls as IV and price both rise. You have more flexibility this way.

    This is what I've done with shorter dated June calls. The only reason to leave the position open IMO is if you think the stock will continue to drop.
     
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  16. bkp_duke

    bkp_duke Active Member

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    My not-advice opinion: I think this is a good strategy. The pull-back in share price, and subsequently call premium price, has given you a nice opportunity to lock in some gains during what is historically Tesla's weakest quarter.

    I believe we all here expect the stock and options prices to go back up after say Q2 deliveries (I'm not sold that Q1 deliveries will be that good), or FSD is released, etc. Sharp up-trends are always the best time to sell those covered calls to maximize your premium.

    Again, my not-advice, but how I am approaching things.



    On the flip side, buying some of those long dated calls (i.e. LEAPS) is something to be done now, or when you think there is a big drop in the premium price. Example, I loaded up on 200 calls of AMD at an absurdly high strike price ($185) that expire Jan 2022. I viewed the downside as limited, and the upside as VERY high. Might be a strategy to consider with TSLA (one I am eying).
     
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  17. adiggs

    adiggs Active Member

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    It's true that a big and fast rise in share price will be a challenge. More generally a big and fast move in either direction is something of a problem.

    But "problem" in this context means, worst case, that the put leg will be performing really well and then I make the choice to turn all of the cash flow from the puts into net debits on the call side in order to keep the call strike rising as quickly as I can. I can readily imagine this turning into a few months of effectively 0 income.

    But that sharp move up also means that the current deep ITM put will be offsetting some of that loss as its very large premium gets crushed by such a move. If I rolled today for the $5 strike improvement and small net credit, then the new position will have a premium of ~$150. That's a lot of premium to earn as the shares go up sharply, and will be earned quickly in the scenario we're considering.

    That sharp move up will also be mitigated by aggressive rolls on the put leg as the shares move quickly over $1000. In fact the aggressive rolls are a requirement for mitigating the risks in the strategy (those net credits are critical to the dynamic management of losing legs).

    It's the opposite problem of what I'm handling right now with the fairly sharp move downwards - the put strike has fallen well behind of the share price.


    As best I can tell there are three patterns for share price moves that look particularly bad for this approach.
    1) The obvious one - the shares head off in some direction, quickly, and don't stop.
    - While this can, in theory happen, there is also some limit. We've had a couple of recent stretches where we first went through 2 weeks of constant increases in the share price, and then a couple of weeks with constant decreases in the share price. In both cases the shares did take off in one direction and keep going, but it wasn't too long before they stopped. Or at least take a short breather.

    2) Shares go a long ways in one direction, and then plateau and trade around that new price level with no meaningful retracement. On the current down move this might manifest as a move down to 500 tomorrow morning and then further trading around 500-550 for a few months.
    - Because i don't get the pull back, the deeply ITM puts take a long time to drag themselves back to the share price.
    - AND because the shares are reasonably flat for an extended period the calls aren't performing all that outstandingly (a single premium per 2 week window).
    - AND IV is likely to drop during that extended plateau further reducing the value generated from the calls.

    3) We see an extended period of trading something like what we're seeing right now, but extended into the future. Shares move down aggressively into the 600s - maybe even down to 600. And then the shares turn around and move sharply back up to say 900. And back down, and back up, spending just long enough at the outer bounds to draw the OTM leg up and then push it quickly deep ITM when the shares go sharply back down.

    I think of this as the whipsaw pattern - it's not just trading sideways (ideal for this strategy); it's trading sideways, but up and down fast enough, and far and fast enough, that the legs alternate being deeply ITM and drawing the income off of the winning leg to keep both close for the breakout (up or down) where the sharp move just keeps going.


    In all 3 cases I think that the overall result is approximately the same.
    1) Income probably drops to ~0 as all of the net credits on the winning leg get turned into net debits on the losing leg and help it catch back up as quickly as possible. This may turn into multiple months of rolling legs with no income. This is a bad use of capital but my optimal use of capital is different from most - this circumstance is just fine and one of the risks I take.

    2) I still have my backup to the backup available in all 3 cases - take assignment and restart this process around the new strike price. I probably take the restart option over running the wheel, as running the wheel would mean that instead of 50/50 puts/calls, I'd be more like 100% on one side and 0% on the other, and somewhat balanced on each side is a requirement of this larger trading approach.

    The consequences I can see from any of these 3 scenarios:
    - Taking assignment will likely mean taking a permanent loss of capital.
    - It might "only" mean losing out on a big chunk of a significant gain (or buying fewer shares during a really good buying opportunity). These are risks I'm willing and happy to take as both are acceptable outcomes for me. I come out ahead in both of these, even if I don't come out as far; to me that's the cost side of the benefit side of what looks like a reasonably stable and large income source.


    The permanent loss of capital scenario is the single biggest worry that I have and that I make choices around. It's why I'm more likely (current situation) to roll the 830 put to 775 for a $40 net debit over rolling the 830 put to 825 for a small net credit. If I push the income down to 0 using only the most recent call, I actually have a $70 net debit available to use, so I am currently still generating income in this $40 net debit choice at or above my target, while pulling the put a long ways towards the share price.

    This is that dynamic position vs. static position idea I mentioned here and there, and am still figuring out how to articulate well.

    Doing this well requires balancing the ongoing income with the permanent loss of capital risk. I can push the ongoing income to ~0 for multiple months without issue (a single good 2 week window can generate as much as 4 months of income I've discovered. Which I interpret to mean that we'll need a truly extraordinary move in the shares, and I think one that is significantly more extraordinary than I've witnessed in 8 years following TSLA to trigger one of the scenarios that might put me into the permanent loss of capital situation. That doesn't mean it can't happen, but there are always tail risks that can't fully be accounted for.


    A reminder - if anything looks like free money -- it isn't.
    If something looks too good to be true -- it isn't, and something about the situation isn't understood. Keep looking (or asking for help to understand what you're missing).
     
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  18. adiggs

    adiggs Active Member

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    #2218 adiggs, Feb 28, 2021
    Last edited: Feb 28, 2021
    The guidance and master part - be careful :)

    But the larger idea is why I started this thread. Not to see anybody duplicate or attempt to mimic my trades or exactly what I'm doing. But to help myself figure this stuff out - where I've landed this year is different from where I started a year ago, and to offer up my own experiences to help others with their feedback and learning loop (as well as learn from others experience, so I can accelerate my own feedback loop). The education and experience from a year of selling both puts and calls were a requirement for me to get here.

    I hope that anybody that wants, and has similar requirements / objectives, will find my experiences helpful in guiding their own acquisition of experience.


    Two simple YES-ADVICE that I would definitely make:
    1) Don't jump all the way into the pool. Do the basics education (the OA videos, other sources you find helpful - TastyTrade also does a bunch of videos I found helpful). And then do some small trades to start getting your toes into the water. Make sure you know the mechanics of entering and exiting both a put and a call by doing them. Also do some roll transaction tickets, and make sure you know the mechanics of a roll in your interface.

    Really basic stuff, but you don't want to be in the middle of a large and badly losing position and need (not want) to figure out how to do a roll. (Ask me how I know)

    2) If/when this strategy for generating income makes sense and you've got experience with the pieces, then start with a 1 contract position (100 shares, 1 covered call, 1 cash secured put). There's no rush nor would you want to rush into doing this at larger scale.


    In your case, with ~6 years to retirement, starting up the single contract position and running it for a year or more looks like a completely reasonable thing to do. You'll increase the opportunity to see some more extreme share moves, which will expose you to both the mechanics of doing this. And most importantly (my opinion) it'll expose you to the emotions of (for instance) associated with handling the more extreme situations. The emotional reactions to what's going on are what have gotten me into trouble. And besides, hollow feeling in my stomach doesn't sound like a fun retirement. I've got to be comfortable with a put leg that is $150 ITM and a call leg that is ATM - not just out loud, but explaining the situation to my wife, and when I go to sleep at night (yes to all 3 in my current strangle).

    In retirement the extreme tail risks that is consuming the bulk of the comments - that's also the bulk of what I'm thinking about every time I move the strangle (or inverted strangle). The income is a desirable by-product - it's not my micro-focus though (and I think the broader focus on the tail risks / how this goes wrong, is exactly the right focus).
     
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  19. Stretch2727

    Stretch2727 Engineer and Car Nut

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    Trying to take the emotion out of my strategy. Close to retirement, recently change to a less stressful but lower paying job, but no need for income right now. Trying to figure out the best strategy for retirement.

    I have diversified some of my gains out of TSLA but would still like to hold a large position and diversify further if it makes more large gains and buy back in if it declines.

    My general strategy for some income against the TSLA holdings. I just started a few weeks ago.

    Hold a targeted fixed $$ amount in TSLA. It's a fairly large position.
    I sell 2 layers of weekly puts and calls that put me at approximately at the same $$ amount for TSLA if they assign. The price goes up the calls sell the shares, the price goes down the puts buy the shares.

    For instance for March 5th I have sold 1 contract of the following:

    Layer 1 Strangle
    715C
    650P
    Layer 2 Strangle
    750C
    625P

    If the options go ITM, I let them assign.
    If both sides are OTM I will usually roll everything. Actually pretty rare. My position will not change as the the selling and buy points are based on my target $$ amount and the number of shares I hold.
    I will usually try to adjust the trade every Friday for the following week. If one side is ITM I will assume it will assign and will open a new position for the following week.
    Have plenty of shares for the covered calls. As well I make sure I have plenty of cash to secure the puts. I have other diversified index ETF's in the same account I can sell if I need cash. Had to do this with the recent stock decline.

    I usually get $3-4K per week, but also benefit by buying low and selling high. It will keep me in a fixed $$ amount of TSLA which I comfortable with in my overall portfolio. As well does not take too much of my time so I can actually retire at some point.
     
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  20. juanmedina

    juanmedina Active Member

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    @adiggs have you look historically out the 52 weeks with weekly Strangles set at .3 delta how many times would the strangle expire worthless?
     
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