Applying options strategy 'the wheel' to TSLA

[bxr140]

Can someone please explain this for newbies to learn? Thanks

It basically means someone bought 258 $700 calls for this week for $500k. While this is heavy speculation on the buyer's motivation, IMHO the likely scenario is a short/day trade. The buyer simply thinks there's going to be a short term spike in TSLA and wants to capital size on max ∆/$ by buying a close expiration. A spike will also likely raise IV on the contract, which would further add to the buyer's profit.

The downside of course is high theta, but over the course of a few hours the extrinsic value will only erode by a few percent and even overnight its only going to be maybe 20%. That's the price the buyer is wiling to pay, knowing a small [favorable] movement in underlying will easily cover whatever time value burns off...then the rest is upside. As a bit of a WAG, if TSLA opens at something like $720-725 the buyer would ~double their money.

Given that the price paid was conveniently almost exactly half a million dollars it is unlikely the buyer is making a short term play to grab shares at a discount, but that's the other probable scenario. If TSLA is above ~probably $710-715 at expiration, the buyer breaks even (vs just buying ~$18M of shares this morning). Maybe even lower than that, because I'm using current CVs and don't actually know when that order was placed and at what underlying price. Anyway, $725-730 could doubles the $500k and $750 might nets $1M or more. From a risk management perspective this strategy of entering shares also limits portfolio downside to $500k, which is actually a pretty reasonable tradeoff given the much MUCH larger downside potential had the buyer bought $18M worth of shares this morning and then TSLA went to *sugar* this week. For round numbers, ~$20 movement in TSLA represents ~$500k on 25.8k shares...so if the buyer bought 25.8k at, say, $680 (this morning) they'd be worse off if price was below ~$660 at the end of the week then had they just bought the 258 calls.

 

[st_lopes]

Updates on my positions - I now find myself with tied up capital on both legs. Was flirting with a margin call as I had converted lots of shares to LEAPs, so my maintenance excess was thinner than I should have left it. So, I currently have the following two legs:

• 850p 04/16
• 900c 06/18

The 850p are nothing new, they've been my rolled out leg for the last few weeks, looking for a couple of the catalysts in ARK's price target, an FSD roll-out, and P&D to unwind that leg of the strangle.

The 900c came about after having rolled my 770c 03/19 at 96% gains, to 700 03/19c for a net $5 credit / contract. I then rolled those, for a $7 credit / contract once they were also at 90% gains, to 715c 03/26. Actually a fairly productive week of covered call selling netting over $36k last week.

However, then came the weak price action on Friday afternoon. I was getting close to a margin call, so I decided to roll the 715c 03/26 for a 30% gain on premium to 900c 06/18 for a $21 credit per contract. That cash gave me the buffer I wanted going in to the weekend and avoided the margin call.

I will look to roll that closer and down on strikes in the coming weeks, subject to price action. At least the strangle is no longer inverted... for now!

Other thing I need to keep in mind is that my tax bill comes due April 30. So, I may be selling covered calls against my LEAPs to fund that. We'll see what the price action is doing over the next month. Before anyone asks, I'm in Canada, so don't have long term capital gain considerations.

 

[juanmedina]

I sold some 9x 765cc for Friday this morning between $4-2.9 they are down 64%. I might close them tomorrow morning incase we get another rally later during so I can sell some more contracts for better premiums.

 

[gabeincal]

Sold 15 x 722.5cc for 8.43 each then repurchased them a little later for 5.15. That was a decent ride for about an hour.

 

[JustMe]

I stuck my finger in the wind this morning and picked the right time to sell 5x 4/1 $750c for $9.90. They are down to $4.75 by the end of the day. Thought about closing them out but I’ll let them ride a bit longer.

 

[juanmedina]

FYI here is Gary Black on how he sells covered calls

 

[stealthyc]

Sold 15 x 722.5cc for 8.43 each then repurchased them a little later for 5.15. That was a decent ride for about an hour.

I remember you had ~$900p sold puts, and have been rolling them forward, how has that been going with the IV having dropped recently and obviously the share price being quite a bit lower? I've got some $730p I've been rolling but as they are near the current price the premiums have been relatively high, so I'm curious how it has been with the DITM puts.

 

[Discoducky]

While I wish the stock would go up this week, we look very capped at $700 and $670 due to options walls. I've been playing this with calls. Sold 10X yesterday and just bought them back. Quick profits. Trying to do this again today.

 

[gabeincal]

I remember you had ~$900p sold puts, and have been rolling them forward, how has that been going with the IV having dropped recently and obviously the share price being quite a bit lower? I've got some $730p I've been rolling but as they are near the current price the premiums have been relatively high, so I'm curious how it has been with the DITM puts.

Good memory!! I still have them currently at apr 19 900. Hoping for a bump in SP and then roll ‘em. Got -8 currently.......

 

[sub]

Indeed - a weekly $5 premium from 3152 shares, with the money reinvested immediately buying more $TSLA, within change in the share price, yields ~$1M over 56 weeks

If you can squeeze $10 per week out of it, then you get $2.6M, $7.5 leads to $3.6M

If you increase the SP 1% per week, with $10 strike, $5.7M gains

Edit: just realised that if the SP rises, of course the premiums will rise as well, so starting from $5 and adding 1% per week, $3.3M
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I'm doing the exact same thing as you on the call side, except I'm selling calls farther OTM for less risk of losing shares. Are you doing this accepting that risk and willing to lose your shares? Sounds like it since you mention selling aggressive PUTS to get them back. I like your math, but not sure it will work out quite as good as you think due to stock movement. Wondering how losing shares will affect your overall profit/loss over time if you have to sell puts and hope to get them back at same price or lower. I'll be following.

I'm happy selling farther out for now, less risk and stress and I barely have to pay attention to the stock price. I can also make rolls being that far out that should pretty much remove all risk of getting shares called away. Once share price gets back up to $900-$1000 I'm strongly considering going to a synthetic stock position (buy ATM call/sell ATM put and buy a put 300-400 below). This doesn't cost much and can be paid for with a few weeks of selling CC's. This would reduce risk significantly of TSLA having a big drop. I will most likely use the cash to sell puts that I can then adjust down if needed.

 

[sub]

Volatility is a very complex concept that has a bunch of layers, and so such a statement requires a bunch of supporting logic and has a number of permeations based on that logic. (I assume OA has that logic somewhere?) I'd strongly encourage anyone who's trading options and especially selling options to actually take the time to understand what's going on with volatility, as volatility is the specific thing that makes up [almost] all of the extrinsic value of a contract. The CV uncertainty due to implied volatility is literally the thing that's the seller is selling, so why wouldn't someone want to understand it, right? FTR Rho (interest rates) is the other thing that feeds the extrinsic value, but its way less of an impact and generally not all that important to consider over the life of a short term contract.

If selling options was house hunting for 4 bedrooms, 3 baths, a two car garage, and a bit of land to spread out, selling options without at least a basic understanding of volatility is kinda like like setting the Zillow filter to studio apartment in high density housing and hoping for a result. Seriously, its THAT important of a concept.



It would be a good idea figure out how your broker computes margin requirements. It shouldn't be hard; they all have some kind of page that explains margin for different position types.

Typically for an Iron Condor margin requirement is equivalent to the downside/risk of the larger of the two spreads. That make sense, because you can explicitly only get into trouble on one spread or the other, but not both...so they just make you set aside enough money to cover the worst case scenario. In your case it margin typically be calculated at [40 spreads * $5 spread * 100 shares = $20k]. Maybe there's some unique equation with your broker that adds the margin requirements from both spreads of the IC? That's not like a terrible thing, but after all its your money, why wouldn't you want to know?



Not the way you've built it.

Don't get me wrong, I'm a big fan of credit spreads and ICs...but there's a pretty steep downslide slope to them, and their time and a place isn't 'every week'.

Your 650/645 strike on the put side with underlying [then] at ~$650 is pretty ambitious, especially with just a $5 spread. That means if price lands under $645, you're ~$13k in the hole. So with your very ambitious target of $6k/week that requires at least two more weeks just to claw back to net zero. Given that agressive of a strike will likely land the spread ITM at least 30% of the time (and probably more), if you have to burn ~three weeks to return your balance to net zero 30% of the time (so, every ~3 weeks), your "best case of $300k/year" turns into a much more probable "closer to a goose egg on the year".

FWIW If you're looking to maximize return on margin, do some quick excel math on the width of the spreads. Intuitively $5 is a little too close. Last time I checked (this was probably a year or so ago) the sweet spot was more like $15-20 spread...but either way, excelifying a current options chain will give an exact answer.

If I were building short term ICs (and I'm not right now) I'd probably be looking at 550 and 800 as decent bookends and maybe a bit closer if literally just weeklies (so, selling on Thursday for next Friday). Spreads probably on the oder of $20.

by definition, if you do the same spread trade repeatedly without guessing direction right more often than not, you always end up with a goose egg due to probabilities. Actually, do to slippage and fees, you end up losing money. Agree?

 

[bxr140]

by definition, if you do the same spread trade repeatedly without guessing direction right more often than not, you always end up with a goose egg due to probabilities. Actually, do to slippage and fees, you end up losing money. Agree?

Yes, absolutely! That's one of my main story arcs in this thread: Selling options on a fixed/static strategy without taking into consideration volatility and [some kind of] price analysis is very much playing casino odds. And like a lucky player at the blackjack table, some streaks beat the odds.

Anyone selling puts or CCs in 2020 found it 'easy money' (which is great), but that was also the short game taking bullish positions (OTM -P's and OTM covered calls are both bullish) that beat the odds in a once-in-a-decade rally. Anyone who's seen a drawdown in their account balance with those same bullish positions over the past few weeks is dealing with the long game of statistical inevitability.

Keeping the analogy going, selling options on a strategy that considers things like volatility and price analysis is like counting cards.

 

[Lycanthrope]

I'm doing the exact same thing as you on the call side, except I'm selling calls farther OTM for less risk of losing shares. Are you doing this accepting that risk and willing to lose your shares? Sounds like it since you mention selling aggressive PUTS to get them back. I like your math, but not sure it will work out quite as good as you think due to stock movement. Wondering how losing shares will affect your overall profit/loss over time if you have to sell puts and hope to get them back at same price or lower. I'll be following.

I'm happy selling farther out for now, less risk and stress and I barely have to pay attention to the stock price. I can also make rolls being that far out that should pretty much remove all risk of getting shares called away. Once share price gets back up to $900-$1000 I'm strongly considering going to a synthetic stock position (buy ATM call/sell ATM put and buy a put 300-400 below). This doesn't cost much and can be paid for with a few weeks of selling CC's. This would reduce risk significantly of TSLA having a big drop. I will most likely use the cash to sell puts that I can then adjust down if needed.

Sure, that's a great strategy, but I need ~$1m cash for my house in the next 12 months, so I need to be fairly aggressive with this. If my shares get sold, so be it, I know what I'm doing. But given the massive SP rise over the previous year, I'm not convinced we're in for consistently huge jumps, yes, will happen from time to time, but at least sticking to weeklies you limit the possibility, likewise waiting for later on Monday or Tuesday to see the general direction of the stock, sentiment, FUD level, up-coming events and Max Pain chart.

After discussions with another investor, I've adapted strategy to look for a 1% of SP as the premium, so the week in the $6.50-$7 range, which I then buy more common shares. In fact I missed the highs of yesterday by being too greedy with a sell order at $755 and had to go far more aggressive today, for much lower strike and sold 31x cc707.5 for $5 per contract. I have a buy order for 23x $TSLA set at $665

Is this risky? Yes, is it very risky, not for me, $670 seems to be the target for the week and a 6% rise above that seems unlikely...

What is super interesting, is that if I can get a 1% premium per week against all my shares, reinvest in more shares from the premium, then by June 2022, I will have almost double my position - the stock price is irrelevant, up, down, doesn't matter. I adapted my spreadsheet to put in a random weekly gain/loss on the SP, and however I adapt it, the result is almost the same. Here's an example below. Note this doesn't factor in trading fees and the small stamp-duty we pay on trades in Belgium. Note also I don't pay taxes in this account, that drastically biases it in my favour:

 

[ZeApelido]

Sure, that's a great strategy, but I need ~$1m cash for my house in the next 12 months, so I need to be fairly aggressive with this. If my shares get sold, so be it, I know what I'm doing. But given the massive SP rise over the previous year, I'm not convinced we're in for consistently huge jumps, yes, will happen from time to time, but at least sticking to weeklies you limit the possibility, likewise waiting for later on Monday or Tuesday to see the general direction of the stock, sentiment, FUD level, up-coming events and Max Pain chart.

After discussions with another investor, I've adapted strategy to look for a 1% of SP as the premium, so the week in the $6.50-$7 range, which I then buy more common shares. In fact I missed the highs of yesterday by being too greedy with a sell order at $755 and had to go far more aggressive today, for much lower strike and sold 31x cc707.5 for $5 per contract. I have a buy order for 23x $TSLA set at $665

Is this risky? Yes, is it very risky, not for me, $670 seems to be the target for the week and a 6% rise above that seems unlikely...

What is super interesting, is that if I can get a 1% premium per week against all my shares, reinvest in more shares from the premium, then by June 2022, I will have almost double my position - the stock price is irrelevant, up, down, doesn't matter. I adapted my spreadsheet to put in a random weekly gain/loss on the SP, and however I adapt it, the result is almost the same. Here's an example below. Note this doesn't factor in trading fees and the small stamp-duty we pay on trades in Belgium. Note also I don't pay taxes in this account, that drastically biases it in my favour:

View attachment 647274

What strike price % away from position initiation do you pick for each week? Whatever would get you a 1% premium?

Did these simulations encounter cases you would end up ITM unless you rolled?

From the big picture, covered-calls are a great strategy when you are neutral-bullish but not super bullish. That plays out in your simulation because the weekly gains never go up more than 11%.

But what happens if there are several weeks of 15% gains and one of 20%?

 

[sub]

What strike price % away from position initiation do you pick for each week? Whatever would get you a 1% premium?

Did these simulations encounter cases you would end up ITM unless you rolled?

From the big picture, covered-calls are a great strategy when you are neutral-bullish but not super bullish. That plays out in your simulation because the weekly gains never go up more than 11%.

But what happens if there are several weeks of 15% gains and one of 20%?

past performance doesn't equal future performance, but I try to stay 15% OTM and I adjust early, meaning I don't wait until I'm right ATM and try to adjust because you can't adjust as far out the closer to the money you are. I try not to ever be closer than 5-8% above stock price. Why 15%? I looked at TSLA historical weekly movements and that is the number that TSLA has only moved equal to or more than in a week 15-20x since IPO. I don't want to lose any shares, so using this number while also knowing I can adjust out and up limits my risk to near zero. The only risk I see is TSLA moving up fast and consistently enough that I run out of option chains to adjust to. If that were to happen, I would have enough money that It wouldn't really matter and trimming my TSLA position would be ok. I also know I can establish synthetic stock positions that would take a fraction of the money that I currently have committed to TSLA shares, with basically the same return.

 

[sub]

Yes, absolutely! That's one of my main story arcs in this thread: Selling options on a fixed/static strategy without taking into consideration volatility and [some kind of] price analysis is very much playing casino odds. And like a lucky player at the blackjack table, some streaks beat the odds.

Anyone selling puts or CCs in 2020 found it 'easy money' (which is great), but that was also the short game taking bullish positions (OTM -P's and OTM covered calls are both bullish) that beat the odds in a once-in-a-decade rally. Anyone who's seen a drawdown in their account balance with those same bullish positions over the past few weeks is dealing with the long game of statistical inevitability.

Keeping the analogy going, selling options on a strategy that considers things like volatility and price analysis is like counting cards.

are you including the underlying stock gains/losses in this calculation? Selling CC's like I am, and being super bullish long term on TSLA, I couldn't care less what the stock does on a short term basis. I don't consider the stock going down as "losses" since I would be holding the shares anyways. The CC premium is just icing on the cake and allows me to increase my position. I'd like to double what I currently have (2580) before I start pulling funds for living expenses/life style doing the same thing. With my current strategy, which could change, I think I can double my position in 3-4 years. With other investments this would easily allow my wife and I to retire at that point (we are both 47).

 

[ZeApelido]

past performance doesn't equal future performance, but I try to stay 15% OTM and I adjust early, meaning I don't wait until I'm right ATM and try to adjust because you can't adjust as far out the closer to the money you are. I try not to ever be closer than 5-8% above stock price. Why 15%? I looked at TSLA historical weekly movements and that is the number that TSLA has only moved equal to or more than in a week 15-20x since IPO. I don't want to lose any shares, so using this number while also knowing I can adjust out and up limits my risk to near zero. The only risk I see is TSLA moving up fast and consistently enough that I run out of option chains to adjust to. If that were to happen, I would have enough money that It wouldn't really matter and trimming my TSLA position would be ok. I also know I can establish synthetic stock positions that would take a fraction of the money that I currently have committed to TSLA shares, with basically the same return.

So if the stock gets to 5-8%, you will roll. Do you roll out to the next week? Do you pick strike price to zero out the call-buy back or still try to net a premium?

In aggregate, what sort of average % return on premiums are you getting with this method?

BTW heading up 108 for a few days with the family next week, any good food options in Sonora?

 

[sub]

So if the stock gets to 5-8%, you will roll. Do you roll out to the next week? Do you pick strike price to zero out the call-buy back or still try to net a premium?

In aggregate, what sort of average % return on premiums are you getting with this method?

BTW heading up 108 for a few days with the family next week, any good food options in Sonora?

I take into account what news/events are happening that is causing the stock to move, what day/time of day it is etc to determine If/when I'm going to roll. I found I like selling options 3 weeks out and holding them a week, then rolling a week out again. I haven't done the math on this but it seems to keep the Theta burn higher more consistently. Looks like some here are doing weeklies then adjusting down towards the money as they get closer to expiring, I'll have to look at that idea to see if I want to do it, would allow for more premium.

I don't know what I'm getting on a % basis, I'm typically selling them for around $4 each give or take. If I'm rolling by choice, and not because I have to, 15% OTM gets me about $4 per week. When TSLA had that big $100 day last week I was forced to roll twice, but each time I took a small premium and bought more shares. I'm now waiting that out, I'm at 805 April 16's right now. I'll most likely adjust next week and take in 10-15k in premium. TSLA never hit my 750's I was holding when the stock bottomed out, but like I said I don't let the stock get anywhere close to my strikes, allows me to sleep well at night not worrying about news/events when market is closed and makes for easier adjustments.

Everyone has to go by their own risk/reward and financial goals. I do not want to lose potential millions in future TSLA gains by trying to make a couple extra grand today, so holding my shares is most important.

As far as food up here in Sonora, options are limited for sure. There is the "Service Station" in Jamestown, "Diamondback" in downtown Sonora, "The Peppery" and "The Standard Pour" just east of Sonora. Lots of Mexican places, all are pretty similar. Not much culture up here in redneckville. If you like burgers, the best burgers in the county can be found in Mi Wuk at Andy's Mountain Grill. I highly recommend, arguably the best burger I've ever had. They are only open 11-5pm 5-6 days a week however.

 

[chicagotrader]

Just checking in, it's been a while.

I'm setting up my trading account for regular trading of 2 positions (selling calls and puts).

I've set it up this morning and have plans to keep rolling the losing leg. Positions in the account:

800 x TSLA
-8 x Apr 16 900c
-8 x Apr 16 900p
+9 x Jan '21 1300c
$150k cash
(Margin maintenance excess is at $104k)

My plan is to keep selling equal number of calls and puts with the same expiry date (a short strangle?) and roll the leg(s) that's at risk. Have been holding about -6 puts so far through this major TSLA dip and had no effect on my account, so I think so far it proved to be somewhat safe. Rolling these will likely generate 5 digit $ income every month for my family.

Looking for any feedback or warnings about this.

What platform are you trading on?

I'm in the setup phase of a new and roughly half sized account. For me this is a rollover IRA as I bring former work retirement accounts under my direct control.

The initial entry is 400 shares at $676 and
-4 x Mar 19 705 calls
-5 x Mar 19 650 puts

The 650 puts reached ~75% profit today and have been rolled to
-5 x Mar 19 700 puts

I chose to keep the expiration the same, mostly because I'd like to roll the calls and puts together and the calls aren't ready. But this situation is closer to a coin flip (the Mar 19 vs. the Apr 2 expiration) for me - 1 full week to expiration could also get rolled out by 2 weeks. If I were rolling that position tomorrow then it would almost certainly be the 2 week roll. As it is I picked up a $14 net credit and turned $6 worth of premium left to earn this week into $20 worth of premium to earn over the balance of the week.

This also leaves me in a 700/705 strangle expiring this week.


I don't have the margin available (IRA) but this is otherwise what I'm doing - I hope it works as well for me

I think that the primary observation I have for others is that in an IRA that doesn't have withdrawals going (my situation) then this 50/50 cash/shares balance is almost certainly a lower return choice than just holding shares. I've got 8 years to go until I have full access to this money and managing it as if its an income source today, and given my own investment thesis, just owning shares will almost certainly outperform. I am primarily managing this resource in this fashion as I think this will do well enough and mostly I want to be generating feedback today with the balanced puts and calls; the other accounts are share heavy and the feedback isn't as good because of that.


My target is slightly more cash value to share value, and to be selling slightly more puts than calls. When there are enough more puts than calls then I'll be looking for assignment on 1 or more put contracts to get back close to even numbers.

As this is new money going to work I have started the account out with my target ratios and get direct and immediate feedback from an account with a balance between shares and cash.

@adiggs- who is the custodian for your IRA accts?

 

[Lycanthrope]

Sure, that's a great strategy, but I need ~$1m cash for my house in the next 12 months, so I need to be fairly aggressive with this. If my shares get sold, so be it, I know what I'm doing. But given the massive SP rise over the previous year, I'm not convinced we're in for consistently huge jumps, yes, will happen from time to time, but at least sticking to weeklies you limit the possibility, likewise waiting for later on Monday or Tuesday to see the general direction of the stock, sentiment, FUD level, up-coming events and Max Pain chart.

After discussions with another investor, I've adapted strategy to look for a 1% of SP as the premium, so the week in the $6.50-$7 range, which I then buy more common shares. In fact I missed the highs of yesterday by being too greedy with a sell order at $755 and had to go far more aggressive today, for much lower strike and sold 31x cc707.5 for $5 per contract. I have a buy order for 23x $TSLA set at $665

Is this risky? Yes, is it very risky, not for me, $670 seems to be the target for the week and a 6% rise above that seems unlikely...

What is super interesting, is that if I can get a 1% premium per week against all my shares, reinvest in more shares from the premium, then by June 2022, I will have almost double my position - the stock price is irrelevant, up, down, doesn't matter. I adapted my spreadsheet to put in a random weekly gain/loss on the SP, and however I adapt it, the result is almost the same. Here's an example below. Note this doesn't factor in trading fees and the small stamp-duty we pay on trades in Belgium. Note also I don't pay taxes in this account, that drastically biases it in my favour:

View attachment 647274

The 1% idea is fresh today's of this morning so I haven't had much time to try it out. Today it was mostly around $702.50, which I think is safe for the week, but I was more comfortable pushing the strike a bit higher and settling for around 0.8%, there will be some weeks where I feel I can take a higher %age, they will balance out.

So I'm fishing in the 1% range, but taking into account all the arcane things we $TSLA folks think about: P&D, ER, FUD, Max P, Macro's, 10Y yeild... then I look at how it's hanging and go with my gut feeling

I don't have a roll feature, so if I really wanted to get out of a position then I'd need to rebuy then resell. TBH, for the moment, I'd let them exercise as I don't see the SP going anywhere in the short term and I'd be happy selling puts too

Again, I could miss out on a big pop, but these don't happen that often, not on a weekly basis, and I think less so since we had the huge run in 2020

Again, remember, weeklies and looking to sell on the back of an SP rise on Monday/Tuesday, so would need to rise even more and even then, is it going to shoot 20% past the strike price? Maybe, but probably not. And then you sell puts for the same strike for several weeks until you get a dip and it sticks

And I also reserve the right to rebuy on Friday for pennies and sell some yolo cc's into the close, but need a few beers to enable the courage for that...