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Applying options strategy 'the wheel' to TSLA

adiggs

Active Member
Sep 25, 2012
4,810
14,149
Portland, OR
I don't know what to make of this, but it sounds like it might reduce the ability of short sellers to manufacture shares and manipulate the share price.

This link comes from another thread elsewhere on the forum (New SEC Rules). Following a link inside that article takes me to:

Which sure sounds like this went into effect today, June 23.


Again I don't know what to make of it, but I'm thinking that I want to be extra careful to the upside until I have a better idea on whether trading patterns are going to change.

NOT-ADVICE.
 

Chenkers

Supporting Member
Supporting Member
Apr 28, 2019
503
5,584
Melbourne, AU
This is phenomenally helpful, thank you very much!
In general, when do people sell these weekly CCs? Do you wait for the common Monday morning pop and sell them at that point? Sell the Friday before? Other? Is there any known common pattern to IV going up or down?
Any logic in buying them back once they've gone down in value ~50% or when selling weekly best to simply let them expire?
I used to trade TSLA and enjoyed doing so. Now that I've traded up to hit my [realistic] goal amount I'm holding tightly onto my tiny fortune and half the reason I like selling the covered calls is for the work itself. :)
I tend to split my CC into two lots, one further OTM and one closer to where I think the share price will end. I typically try to sell the more conservative CC's on a pop on the Monday trading to maximise time value. The other basket of CC's I wait a bit later in the week to see where the MM target close for Friday is likely to be. Sometimes this can be on a Wednesday or Thursday. It depends on how settled things are and if it looks like MM have control. It can even be profitable to sell CC early on the Friday. I normally target a BTC at 95% profit, which usually occurs late on Friday. I generally don't let them expire unless far OTM as an after hours move can still see calls exercised. If there has been a big move down during the week you can roll CC's down at less % profit point to capture more premium or close out and sell new CC's on a local rise. If you get caught out with CC's going DITM on a big weekly rise (like this week could be) then they get rolled out and up a week. If they're still ITM then rinse and repeat, sometimes for several weeks on end until you can eventually BTC OTM. Although sometimes it may be better to take a loss and reset.

Typical premiums for an early week CC can be around $5 and later in the week around $2 but it varies up and down. I'm usually doing this with multiple contracts over a couple of accounts and combined with selling IC's and/or Put spreads will net around 0.5% of portfolio value on average per week but can vary 0 to 1.5%.
 
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Buckminster

Active Member
Aug 29, 2018
3,449
17,771
UK
As with others, I've begun selling put and call spreads rather than simply puts (i.e. iron condors). I've got some observations that are from getting started - what it looks like so far and how I'm approaching things.

NOT-ADVICE


My starting point is that I am using is that instead of using cash to back put sales, I am using that cash to back put credit spreads. And then, having sold the put credit spread, I also get a similarly sized and structured call credit spread for "free". It's not actually free of course, but it doesn't carry any incremental margin impact -- it does carry incremental risk (and reward / credit).

The net of the two is that I enter Iron Condors via two trades (put credit spread, call credit spread). I can get there via a single transaction should I choose. But I think of these as 2 positions - if for no other reason than that is how I manage them.

As the margin / backing for a credit spread is dramatically lower than what is needed for a naked put I can sell a LOT more of these. As a for instance - a $25 spread needs $2500 to back it, while a $500 strike put needs $50k as backing. That means I can sell 20 of the first to 1 of the second. This has desirable properties for me. One is that I can use 1/4th or less of my cash to back these spreads and in practice I'm finding that my earnings are somewhere between comparable and much better.

And as a result I've got a lot more unencumbered cash in the brokerage account - cash that I am also using for living expenses and large purchases; such as a downpayment on a house or what have you. That additional flexibility on the spending side would be worthwhile all on its own, even if the rest of this was a wash on risk and income levels.


Some notes about how I'm thinking and managing these positions.
1) I normalize these different trades by choosing a position size and using it consistently. Maybe I use $10k as my position size - that means I'll sell 4 of a $25 credit spread ($2500 * 4) or 5 of a $20 spread (5*2000). By having a consistent position size, then I don't need to watch any position more than another due to amount at risk. It also makes it a lot easier to compare results position to position.

As I gain more experience I can readily imagine increasing the position size. The only difference in setup, management, and teardown of a $10k position size vs. $100k position size is the number of contracts. The effort is the same.

2) I have mostly been using delta to decide on my entry strikes. I think of these in terms of the short put and short call, with the insurance being $20 or $25 further back. I'm not stuck on those two spread sizes - its just what I've been using so far, and I have a bias towards bigger spread sizes over smaller (larger total credits providing a larger window for a break even or slightly better result).

My target delta has so far been .10. I'm finding significantly better credits on the call side and my thinking is shifting towards .15 put delta and .10 call delta. The real point is that I want pretty low risk positions. I find I am getting completely adequate results with these distant deltas.

3) By normalizing my entry points using delta I am finding that the trades behave in remarkably similar fashion. The size of the entry credits are in the same ballpark (my target is 10% of the spread size, with actual credits in the 7-12% range). The spread value changes very slowly until the final day when the bulk of the earnings finally occurs. The real difference between opening earlier in time (5-10 DTE) vs later (1-3 DTE) is not in the credit but in the strikes used for the entry. With fewer DTE the strikes get closer and closer to the share price. A 7 DTE I opened last week for expiration this week started with a $130 difference between the put and call legs. A 3 DTE I opened last week was more like a $60 difference.

4) My exit strategy is for most of these positions to go to expiration worthless, or come close enough for a small cost early close. If the difference between the put and call options is large enough then a reasonably large fraction of these will indeed go to expiration worthless.

5) For management I hope to be able to roll a winning leg closer for an incremental credit. So far this seems to happen about 1 or 2 days to expiration. So far this is mostly what I'm seeing. For the losing leg I will have a bias towards an early close for a small loss over rolling the leg out a week, though both are available. I know that there is a max loss from the insurance but I want to take small losses more frequently over allowing a larger loss to develop.

Rolling a winning leg for incremental credit - I tend to use max pain / put call / call wall / BB type of information to find a strike that I consider safe. The delta tends to not be important to me. In fairness these have also been positions that were 1 or 2 DTE - I have a lot more info at that point about what will happen in 2 days.

6) I haven't figured out the 'right' DTE to open. I don't really think that there is one, but I'm getting a feel for how these evolve and expect to find the balance that works for me. I've done both 3 and 7 DTE ICs so far and liked how both of them have worked.


That's about what I've got so far. I'm interested in learning about what others have been learning in their put and call credit spread efforts.
Can you please clarify on your use of 10% delta.
Tesla, Inc. Common Stock (TSLA) Option Chain Greeks
720 7/2 CC at delta of 0.15. Would you go to an even higher strike? Most here seem to be much more aggressive.
 

tradenewbie

Member
May 17, 2021
48
54
--
For those having <660cc this week, what's your strategy? Are you going to roll now, or wait till tomorrow? Is it better to roll to next week or the week after?

I have 650cc and 660cc, would it make lots of difference to roll either today/tomorrow (assuming it's the same SP today/tomorrow) since it's already ITM?

This is good to see SP finally rise, but not when our cc is below the SP
 
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juanmedina

Active Member
Mar 31, 2016
2,289
5,981
SC
I tend to split my CC into two lots, one further OTM and one closer to where I think the share price will end. I typically try to sell the more conservative CC's on a pop on the Monday trading to maximise time value. The other basket of CC's I wait a bit later in the week to see where the MM target close for Friday is likely to be. Sometimes this can be on a Wednesday or Thursday. It depends on how settled things are and if it looks like MM have control. It can even be profitable to sell CC early on the Friday. I normally target a BTC at 95% profit, which usually occurs late on Friday. I generally don't let them expire unless far OTM as an after hours move can still see calls exercised. If there has been a big move down during the week you can roll CC's down at less % profit point to capture more premium or close out and sell new CC's on a local rise. If you get caught out with CC's going DITM on a big weekly rise (like this week could be) then they get rolled out and up a week. If they're still ITM then rinse and repeat, sometimes for several weeks on end until you can eventually BTC OTM. Although sometimes it may be better to take a loss and reset.

Typical premiums for an early week CC can be around $5 and later in the week around $2 but it varies up and down. I'm usually doing this with multiple contracts over a couple of accounts and combined with selling IC's and/or Put spreads will net around 0.5% of portfolio value on average per week but can vary 0 to 1.5%.

Where do you think the SP will end up this Friday? I assume some traders will start taking some profit soon. I think I am going to try to sell some call credit spreads at open for Tomorrow. Other than that I think I am going to be off line for the day so I don't make any irrational decisions 😅 .
 
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jeewee3000

Active Member
Sep 1, 2015
1,167
6,349
Belgium
How aggressive would be aggressive? Sell it on this Friday?
Well that would be extremely agressive since your shares will not yet have been called away so you would need a large cash position to do so.

The point of this whole thread is "the wheel", i.e.:
1) sell CC's;
2a) if CC's expire worthless, repeat;
2b) if CC's don't expire worthless, let shares get called/option gets exercised;
3) your shares get called away and you receive the price of the sold shares;
4) sell puts against the cash received in step 3.
5a) put expires worthless, repeat;
5b) put doesn't expire worhtless, let option exercise/shares be assigned to you;
6) you receive shares and lose the cash equivalent at the strike price;
7) sell CC's ........


What strikes you pick for the puts depends on:
- your cash position;
- your read of the market (CC's are best sold at SP peaks, puts are best sold at dips)
- your risk aversion.

In theory you could set the put strike the same as your CC strike to make sure you'll end up with the same amount of shares after The Wheel turns fully, BUT if SP never goes down again to that level (in your case 660?) then you have less shares to profit from if TLSA were to go 2daMoon. You can of course keep selling puts against the freed up cash and use the put-premiums to pick a higher strike each time, edging closer and closer to the (rising?) SP.

Build a strategy, learn, adapt.
 

Chenkers

Supporting Member
Supporting Member
Apr 28, 2019
503
5,584
Melbourne, AU
Where do you think the SP will end up this Friday? I assume some traders will start taking some profit soon. I think I am going to try to sell some call credit spreads at open for Tomorrow. Other than that I think I am going to be off line for the day so I don't make any irrational decisions 😅 .
Open Interest has updated and there's still a lot of 650, 660, 670 calls, although the 650's have reduced a bit. I've tried looking at rolls for some IC's and CC's and they don't look great. I'll wait a bit and see if it can move down before making a decision as I'm reluctant to realise a loss early while realising it can soon ballon out.
 

vwman111

Member
Oct 28, 2014
226
484
Not of this world
Covered Call Advice

I have some covered calls that are ATM and some that are ITM that expire this week. I would prefer not to have my shares called away. I'm not sure what all the fancy options are, however i see 2 alternatives. Do i roll when they are ATM? Or do i hold on until closer to expiry tomorrow hoping we get a pull back to Max Pain, and if we don't roll tomorrow when they may be much more ITM.

All non advice is welcomed.
 

jeewee3000

Active Member
Sep 1, 2015
1,167
6,349
Belgium
Covered Call Advice

I have some covered calls that are ATM and some that are ITM that expire this week. I would prefer not to have my shares called away. I'm not sure what all the fancy options are, however i see 2 alternatives. Do i roll when they are ATM? Or do i hold on until closer to expiry tomorrow hoping we get a pull back to Max Pain, and if we don't roll tomorrow when they may be much more ITM.

All non advice is welcomed.
The time value drops faster for calls expiring tomorrow than calls expiring next week or after that, so in theory holding until at least tomorrow afternoon is the better option, except if you're sure the stock price will surely keep rising today and tomorrow.
 
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MikeC

Supporting Member
Supporting Member
Jul 9, 2012
2,912
5,608
Los Angeles
Covered Call Advice

I have some covered calls that are ATM and some that are ITM that expire this week. I would prefer not to have my shares called away. I'm not sure what all the fancy options are, however i see 2 alternatives. Do i roll when they are ATM? Or do i hold on until closer to expiry tomorrow hoping we get a pull back to Max Pain, and if we don't roll tomorrow when they may be much more ITM.

All non advice is welcomed.

If you don't want to lose your shares, I would roll aggressively. You don't want the SP to run away from you and cause your ITM calls to go DITM, because at that point it will be tough to move the strike up much by rolling.
 

adiggs

Active Member
Sep 25, 2012
4,810
14,149
Portland, OR
Can you please clarify on your use of 10% delta.
Tesla, Inc. Common Stock (TSLA) Option Chain Greeks
720 7/2 CC at delta of 0.15. Would you go to an even higher strike? Most here seem to be much more aggressive.
I'm going the other way - increasingly less aggressive. So yes - I'd go even further OTM than the 720 strike you've got there. I don't know where the calls land at .10, but that'd be what I mean. REALLY far OTM.

Note that as of last night I'm changing even that - I'll be sitting out covered calls for I don't know how long. I think that there is too strong of a likelihood that trading patterns changed yesterday, and that nobody will know what the new normal will be for awhile. I don't know if awhile is a week, a month, or a quarter. And I don't see my sitting out for a quarter.
For those having <660cc this week, what's your strategy? Are you going to roll now, or wait till tomorrow? Is it better to roll to next week or the week after?

I have 650cc and 660cc, would it make lots of difference to roll either today/tomorrow (assuming it's the same SP today/tomorrow) since it's already ITM?

This is good to see SP finally rise, but not when our cc is below the SP

Covered Call Advice

I have some covered calls that are ATM and some that are ITM that expire this week. I would prefer not to have my shares called away. I'm not sure what all the fancy options are, however i see 2 alternatives. Do i roll when they are ATM? Or do i hold on until closer to expiry tomorrow hoping we get a pull back to Max Pain, and if we don't roll tomorrow when they may be much more ITM.

All non advice is welcomed.

The time value drops faster for calls expiring tomorrow than calls expiring next week or after that, so in theory holding until at least tomorrow afternoon is the better option, except if you're sure the stock price will surely keep rising today and tomorrow.

If you don't want to lose your shares, I would roll aggressively. You don't want the SP to run away from you and cause your ITM calls to go DITM, because at that point it will be tough to move the strike up much by rolling.

I am closest to @MikeC on this one, and for precisely the reasons he listed. I've gotten DITM and this is how I avoid, or at least mitigate that (and get a better strike price when I do get assigned). My personal rule is that I roll when the option is ATM. I probably don't roll at $5 OTM and I definitely want to roll by $5 ITM.

For these rolls I add 1 week to the expiration and improve the strike by as much as possible while still receiving a net credit. I've been in a situation recently where I did 2 of these rolls on the same day. Today I'll do the second one of these rolls in 2 days as the 675's I rolled into yesterday are already ITM today.

It's moves like yesterday and today for this personal rule. When I did this before I got $25 on the first roll (strike improvement) and then rolling from 2 weeks to 3 weeks I got more like a $15 strike improvement. I'll keep doing this until the option is 4-5 weeks out and then its time to consider assignment and option sales on the other side (i.e. the wheel).
 

tradenewbie

Member
May 17, 2021
48
54
--
I am closest to @MikeC on this one, and for precisely the reasons he listed. I've gotten DITM and this is how I avoid, or at least mitigate that (and get a better strike price when I do get assigned). My personal rule is that I roll when the option is ATM. I probably don't roll at $5 OTM and I definitely want to roll by $5 ITM.

For these rolls I add 1 week to the expiration and improve the strike by as much as possible while still receiving a net credit. I've been in a situation recently where I did 2 of these rolls on the same day. Today I'll do the second one of these rolls in 2 days as the 675's I rolled into yesterday are already ITM today.

It's moves like yesterday and today for this personal rule. When I did this before I got $25 on the first roll (strike improvement) and then rolling from 2 weeks to 3 weeks I got more like a $15 strike improvement. I'll keep doing this until the option is 4-5 weeks out and then its time to consider assignment and option sales on the other side (i.e. the wheel).
I got a chance yesterday to roll my 650cc and 660cc to next week but thought today SP would drop because yesterday rise like crazy.

Do you mean you roll to next week, or 2-3 weeks after?
 

adiggs

Active Member
Sep 25, 2012
4,810
14,149
Portland, OR
For these rolls I add 1 week to the expiration and improve the strike by as much as possible while still receiving a net credit. I've been in a situation recently where I did 2 of these rolls on the same day. Today I'll do the second one of these rolls in 2 days as the 675's I rolled into yesterday are already ITM today.

Actually an addendum - I would also look at 2 week rolls when rolling for time and better strike. I've seen situations where the 2 week roll is significantly better than 2x the currently available 1 week roll.

It has the downside of losing weekly strike adjustment, but it may have the benefit of a significantly better strike improvement. And the strike improvement (governed by the net credit 'rule') is the real point. The incremental time is the necessary cost of the strike improvement. We're buying time for the shares to reverse or at least pause.

And if it just keeps going, then we improved the strike and will get to capture that improvement, $ for $, when we take assignment to work the other side of the wheel. (Be sure you are actually ready to run the other side of the wheel).
 

adiggs

Active Member
Sep 25, 2012
4,810
14,149
Portland, OR
I got a chance yesterday to roll my 650cc and 660cc to next week but thought today SP would drop because yesterday rise like crazy.

Do you mean you roll to next week, or 2-3 weeks after?

Mostly I roll out 1 week. But I also want to look at the 2 or even 3-4 week rolls. At $650 or 660 you are probably already enough ITM that you're looking at a $5 or maybe $10 strike improvement. And you might need to add 2 weeks to get those. Lower IV narrows the window where you can get a strike improvement, while higher IV expands that window.

I have previously (back in Feb) been able to add 1 week and gain a strike improvement while $80 ITM. That doesn't work right now.
 

adiggs

Active Member
Sep 25, 2012
4,810
14,149
Portland, OR
I don't know what to make of this, but it sounds like it might reduce the ability of short sellers to manufacture shares and manipulate the share price.

This link comes from another thread elsewhere on the forum (New SEC Rules). Following a link inside that article takes me to:

Which sure sounds like this went into effect today, June 23.


Again I don't know what to make of it, but I'm thinking that I want to be extra careful to the upside until I have a better idea on whether trading patterns are going to change.

NOT-ADVICE.

MORE NOT-ADVICE.

I wanted to follow up on this. I still don't know what to make of this and more importantly form an opinion about what this will do to trading patterns in TSLA. This may well be a nothing-burger.

The point is that I don't know and from the point of view of selling covered calls, the possibility that this is a 'hidden' version of the 5 for 1 share split last summer that roughly doubled the share price (that's what I remember anyway) then I really don't want to be in the way of that.


My understanding of TSLA trading patterns has arisen from most of a decade following the company closely. More the strategy and execution side as a long term investor but I couldn't help but pick up some information about the short term movements as well. There are patterns that people talk about here and have some success trading - Monday morning pops. Early morning dips. Market makers pinning the shares to a share price that we can pick out sometimes a day or 2 in advance (some of us much better than others).

An important / integral component of that many year history of short term share movements has been the subset of market makers that have been pushing bad news and manipulating the share price downwards. It's been a constant pressure keeping the lid on. The pressure builds too high now and then and explodes but the pressure is steadily there.

This -might- change all of that. And it might mean nothing.


If it does change the functional ability of short sellers to manufacture shares and manipulate the share price downwards, then that change will have the effect of taking manufactured shares out of circulation. Worse for those short sellers, they have to buy those manufactured shares back at a constantly increasing share price right now. Net fewer shares in circulation (pushes share price upwards) that requires the manufacturers of those shares to take them out of circulation (buying pressure that also drives the share price upwards).

I've mentioned off and on my view that we needed something that would draw significant new buyers into TSLA in order for the share price to experience a large and sustained increase in the shares. IF this dynamic I just described is happening, then this is the source of significant new buyers I haven't seen showing up this year.


Again the point is that I don't know.

What I AM doing about this is acting on this. I've rolled all of my near term / near ATM calls out a week. I probably should have just eaten the losses on these but I'm sticking with my roll aggressively pattern for these and we'll see where they go.

I have closed all of my call spreads, mostly for 40-70% losses on the positions. I was seriously expecting a pull back to the 650ish range yesterday during trading. I think that if I'd have seen that note about changes then I'd have closed these yesterday during trading just in case. But I didn't, so I didn't, and I closed today. (Ouch). The put spreads that expire tomorrow I've left alone. They've got a spread value of maybe $0.30 left and I feel have little chance of going ITM. Little enough that I'll take the risk and leave them to expire worthless (hey - I've got to start earning back those losses somewhere!)


On the plus side those hell puts I've been pushing along are looking a lot better the last couple of days. And if what I'm concerned about and repositioning for comes to pass, then they'll be resolving in my favor soon!
 

adiggs

Active Member
Sep 25, 2012
4,810
14,149
Portland, OR
I'm going the other way - increasingly less aggressive. So yes - I'd go even further OTM than the 720 strike you've got there. I don't know where the calls land at .10, but that'd be what I mean. REALLY far OTM.

Note that as of last night I'm changing even that - I'll be sitting out covered calls for I don't know how long. I think that there is too strong of a likelihood that trading patterns changed yesterday, and that nobody will know what the new normal will be for awhile. I don't know if awhile is a week, a month, or a quarter. And I don't see my sitting out for a quarter.

I do have an addendum about this far OTM idea. It's a great way to skim a few bucks here and there ... until it isn't. As are most all of these different strategies.

The problem if you're not ready to take assignment is that if the shares DO move a long ways and that far OTM option goes ITM, then you collected very little premium along the way to offset that. In effect you go from OTM to ITM to net losses VERY quickly. If you are nicking $1 per week with these far OTM options and you do so for an entire quarter (13 weeks) and then you get a move that goes $20 ITM, then you've got a net -$7 to show for the quarter.

Every position has risks and rewards, costs and benefits, and if you can't identify those and their relative magnitude, then you need to keep looking.
 

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