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Applying options strategy 'the wheel' to TSLA

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

  1. MXWing

    MXWing Well-Known Member

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    My opinion is completely different than the other responses, so with high probability I am proposing an idiot trade. :)

    I like March 2022 at 1200. ~615 premium when I last checked
    -Only pays 50 less premium for 1 year less time value.
    -If held to expiration is taxed at capital gains rate (if this applies)
    -High premium gives you awesome breakeven levels, hard to imagine losing here.
    -You will WISH you get assigned early. Pocket all that premium, sell the shares and re-sell the same thing.

    TSLA also being relatively low, gives you great upside potential.

    If price spikes up in a year, that means the short put has gained in value. There is the option to let it ride out to expiration, buy back the put at a profit or roll it to higher strikes if tsla has really gone gangbusters.

    The only real risk I see when it comes to giving up premium is selling when IV is low.

    As a rule however, you want to sell puts when prices are low, not when prices are high. That 1200 put would be paying much less if we were at 900 vs 725.

    Being a long dated short put, it doesn't really matter much if the trade is instantly negative or goes negative for awhile. It still has until March 22 to work itself out. Early assignment means free premium to redeploy the short put.
     
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  2. ZeApelido

    ZeApelido Active Member

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    Have you done that before and know it to be true? I've read conflicting statements on this on the interwebs (and here).
     
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  3. MXWing

    MXWing Well-Known Member

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    Yes. There’s zero ambiguity here. When an options position is exercised, rolled, sell to close, buy to close, or expired you immediately lock in the loss or profit.

    Let’s say you sold a 900 put this Feb 2021, and are down 20,000.

    If you roll the feb 900 by buying it back sell the March 1000 2022 for 40,000 the follow happens:

    You lock in 20,000 short term losses for the 2021 tax year.

    Your March 2022 position has a basis of 40,000. If you let it expire and you don’t get assigned in March 2020, you are taxed on 40,000 at long term rates.

    If you close in Feb, the gains will offset against your 20,000 loss when you did the roll originally.

    Hope this helps and makes sense.
     
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  4. ZeApelido

    ZeApelido Active Member

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    I have a toddler crawling all over me so too many numbers o_O

    If I sell to open a covered call in Feb 2021 for a March 2022 expiration and I let it expire or buy to close it > 1 year from when it was initially sold, is that a long term or short term capital gain?

    I think it's clear when you buy then sell over one year later, that can be taxed long term. But the selling then buying isn't clear from what I've read, because you never really held a position for a year.
     
  5. bxr140

    bxr140 Active Member

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    To make sure folks don't misinterpret this:

    1) There is 0% chance of early assignment on the timelines we're talking about. Early assignment is exclusively a near-expiration thing, where kooks who don't know any better think its a great idea to exercise a long option, or market makers are choosing to close out DITM contracts that have zero time value (and so, exactly the same P/L profile as shares).
    2) Obviously, nobody would ever exercise an OTM put, as is generally the example we're talking about here.
    3) Save for secondary factors like the B/A spread, the financial upside/downside to someone executing your short contract is the same as if you closed the contract. So, "all that premium" as quoted above is explicitly not the 100% of the premium for which you sold the contract.

    Sure and, explicitly, a fraction of the value for which you sold the contract. The issue is that (more or less) time value actually works against a long dated short contract, acting as a sort of pressure opposing the upside to you. As time moves on that pressure starts to release, opening up more upside. That's one of the reasons long dated short contracts are pretty foolish--selling a shorter dated contract starts off with less time value 'pressure'.

    And that's not even considering the negative impact volatility will have on the contract value in that spike...

    Another reason long dated short contacts are pretty foolish is that if value goes negative, one's strategy becomes hope real hard for a recovery. I can appreciate that some folks might be okay with the HRH trading strategy; personally if I wanted to hope real hard on earning money I'd go buy a powerball ticket.
     
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  6. Oil4AsphaultOnly

    Oil4AsphaultOnly Supporting Member

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    I think this is the part that zeApelido was trying to point out. You're claiming that selling puts (aka shorting the put option) can be treated as long-term capital gains, but documentation about selling covered-calls (aka shorting the call option) does NOT get that treatment.

    According to Tax Implications of Covered Calls - Fidelity:
    "If a covered call is closed with a closing purchase transaction, the net capital gain or loss is considered short term regardless of the length of time that the short call position was open."

    I've been unable to find a definitive declaration about the tax treatment of selling puts.
     
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  7. st_lopes

    st_lopes Member

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    Update on my positions... with my 850p 03/05 effectively having 0 time value, I pulled the trigger and rolled these to 850p 04/16 (after P&D and potentially earnings) for a $15.5 credit per contract.

    750c 03/05 are decaying away. Absent some major rebound, I am likely to roll those on Thursday to a 0.30 delta 03/12 position.

    Also sold a couple 670p 03/05 on the pull-back today. We'll see how those play out rest of this week.
     
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  8. MXWing

    MXWing Well-Known Member

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    Was specifically talking selling puts and rolling puts. :)

    This link is pretty comprehensive here.

    Tax Treatment for Call & Put Options
     
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  9. Oil4AsphaultOnly

    Oil4AsphaultOnly Supporting Member

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    I already read that link, it doesn't cover the tax treatment for shorting puts. "Protective puts" are being long the option, which is the opposite trade.
     
  10. MXWing

    MXWing Well-Known Member

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  11. ReddyLeaf

    ReddyLeaf Active Member

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    ok, time to fess up. Yesterday, I sold 12Mar 800c for $5.00 on ALL of my TSLA shares.:eek: Delta was around 0.10 at the time, so not a high risk play, but still nerve racking for this newbie. I didn’t time the Monday peak perfectly, but apparently good enough based on today’s nearly $40 drop, since the options are down 55%.

    As part of my continued learning, I finally realized that using the premium to buy additional shares of TSLA, especially if I could buy at a lower SP, would act as an additional hedge against a rising SP. Before the trade, I had enough free cash in the accounts to cover rebuying the calls back up to $850 SP, which seemed relatively safe for 3/12 exp. Then, I realized that in an emergency, I could sell those odd lot shares (06, 16, 30 in each account) if the SP rose above $850, thereby raising additional cash to buyback the ITM options. Again, my goal is to generate some cash by selling covered calls, but definitely NOT lose my shares.

    Hmmmm, so better yet, why leave the emergency cash static, if my biggest concern is losing shares on a 800c that goes DITM against me? It would be better to have the “emergency cash” rising in value along with the SP. This is probably eminently obvious to all you experts, but not to this newbie.

    So, knowing that the SP goes up and down, this morning I put in 5shr buys at $5-$10 increments all the way down to $620. I managed to snag 25 shares down to $690 without even worrying about whether I would catch the best price drop. If the price stays below $800, which seems highly likely, the calls expire worthless and all of those premiums go into TSLA at a lower cost basis than the strike. A big win for my trading experience and a relief to not risk losing my shares.

    If the SP somehow manages a massive rally and goes over $800 (say $900), I have 900x25=$22,500 additional available to buyback the DITM options. This combined with the $25,000 actual cash in the accounts, means that I could buyback nearly five contracts, even in the “worst” case $900 SP scenario. In reality, I would certainly be able to roll four contracts at a time up & out another two weeks and collect some additional premium, following @adiggs methods.

    So, even being constrained in an IRA without margin, I’m able to sell low risk (0.10 delta) covered calls and slowly increase the number of shares purchased. At this time I’m not comfortable going above 0.15 delta to access those higher premiums, just too risky from a long term perspective. If I can continue this method the rest of this month, I should have built up another 100 shares before the next earnings announcement.
     
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  12. adiggs

    adiggs Active Member

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    From the tracking section of a previous post of mine - I did some research and tried to figure out a way to get this cash flow tracking implemented in Excel. I couldn't figure it out on my own and went to my font of all knowledge - DuckDuckGo.

    Where I discovered that yes, I can do something like this. But my data is formatted wrong. The data needs to be in a 1 row per transaction (so 1 row for the open, and a different row for the close, along with a flag indicating whether the $ are coming in or going out). My data is 1 row per trade with open and close dates, open and close $s. I found this by looking for implementing a business cash flow statement and other financial reports. Because that's what is being tracked - the equivalent of a business reporting both an income statement and a cash flow statement (there is also a balance sheet in business reporting - I've got a different method I use for tracking my balance sheet changes over time -- I record the cash and shares in each account, each month).

    Implementing the cash flow statement being a big enough pain in the rear I've decided to stick with my income statement / trade profit-loss that I have implemented right now. I know that the cash flow will be different from profits and that if I stick to net credits then the cash flow will at least be positive, even if it'll be a pain to know what it is exactly.


    Interesting side effect of the pivot table I use to summarize all of my trades - I position them in time via the close date. Because the open positions don't have a trade date, the pivot table puts these into a "<March 25, 2020" bucket (any guess when I started this? :D).

    That bucket represents the currently open and unrealized / paper gains, along with the cash in that account that I have received but haven't yet earned. So I can watch that number going up and down to do my own approximation of what the future realized results will be anytime I want. A roll for a deep ITM option will show up in my summary pivot table as a loss in the realized results for the time period and a larger increase in the bucket of stuff that doesn't have a close date.

    So I think I've got enough info to handle the cash flow even if I don't have a monthly or quarterly cash flow statement like I really want. The net income / realized results are easy to track and report on - I've already got that.
     
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  13. sub

    sub Active Member

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    why worry about buying the calls back? Just roll them out and up. If you roll early enough, you can get $30-$50 farther OTM strike with a one week adjustment for break even or if you want a slight credit. I do the same thing, I buy shares with the premium immediately, I don't worry about the SP.
     
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  14. strago13

    strago13 Member

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    This gave and @adiggs gave me the courage to finally pull the trigger and start selling covered calls, so thanks. I am just playing around now, but I just sold a single12MAR 800 for $2.30 to get a feel for how this works. I likely will sell again this month, but not over earnings calls / other large predictable events. Ultimately, I would like to leverage all of my shares...but that will take some time.

    Thanks for all the insight provided in this thread.
     
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  15. corduroy

    corduroy Member

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    #2255 corduroy, Mar 3, 2021 at 1:03 PM
    Last edited: Mar 3, 2021 at 1:12 PM
    I sold some calls and a put today (short strangle) with March 12 expirations. I don't have enough confidence in these conditions to go out any farther. The calls are doing great but of course the put is underwater.
     
  16. juanmedina

    juanmedina Active Member

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    I been selling puts today for Friday $610 strike and under. I haven't sold any calls the premiums seem so low that is not even worth it to me. I usually try to collect at least $2 for 25% OTM CCs.
     
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  17. ReddyLeaf

    ReddyLeaf Active Member

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    #2257 ReddyLeaf, Mar 3, 2021 at 8:09 PM
    Last edited: Mar 3, 2021 at 8:22 PM
    Congratulations. Take things slow and one day at a time. I started with just a single CC as well. TSLA can move against you quickly and vigorously, so spend a few months reading this thread, as well as some of the other options and trading threads. Trade cautiously for a few months and you will be comfortable before you know it. I’ve made some impulsive options buys that went completely bust, as well as stock buys that were clearly at too high an entry price. Nowadays, I just wait for the SP to come to me and I pick up 5-10 shares at a local minimum. There’s no hurry.
    I’ve mentioned this before, but probably on the other trading thread: My trades are all in IRAs and my trading platform will not allow multiple-leg trade “rolls.” I must first buy back (with cash, not margin) to close a CC or CSP, and then sell the next option. It’s clunky and slow, but it eventually works as long as I keep enough free cash available in each account. The platform is definitely not built for trading, especially options, but I’m not really interested in moving to another brokerage, so kinda stuck.:(
     
  18. Oil4AsphaultOnly

    Oil4AsphaultOnly Supporting Member

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    Who's your broker? I have an IRA with Schwab, and at first I thought the UI didn't allow for complex option trades (unlike the TDameritrade UI), but it's just that they buried the "legacy options trading" tool link. So your broker might be like Schwab and they've simply buried the interface somewhere to make it harder for "novices" to accidentally get themselves in trouble.
     
  19. Xepa777

    Xepa777 Member

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    Dumb 101 noob question: I sold a put last week but noticed that it didn't move my equity/margin ratio on Schwab (I'm at 89% right now). Does that mean by selling puts I'm not at risk of getting margin called? I'm just at risk of getting annihilated if I sell too many and buy too many shares at Tesla at a super high price. Right?
     
  20. samppa

    samppa Member

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    Getting into the wheel, cash in place.
    Sold a please-assign-me p650 for 3/12 yesterday for 29.50 yesterday.
     
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