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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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    As a brief update - these numbers from earlier today were when the shares were down about $7. At this point, they are down about $80, and it occurred to me that I left money on the table by closing as early as I did. I thought I would provide some updates on actual numbers, to help people inform their intuition of how option premiums can change (in this case, day after earnings, with expiration tomorrow - a pretty rare and extreme circumstance).


    I closed the 1700 calls at about $7. They are now trading at about $1.50, so the next $83 drop in share price would have gotten me another $5.50 in premium reduction (high %, small actual).

    The 1850s calls were closed at $1.50. Another $83 drop in the share price has lowered that premium to $0.40.


    On balance, I did leave money on the table, but I also eliminated the risk at that point that the share price would suddenly reverse and go up $100 :). And it wasn't much money that was left on the table.
     
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  2. juanmedina

    juanmedina Active Member

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    I really thought you were going to loose your shares. Good for you.

    I sold a July 24th $2500 for $3.4 and closed out for $1.4 a few days ago... way too early. I thought about selling another one on Tuesday or yesterday but I chickened out another learning experience...IV crush is amazing. I bought also a $2500 July 24th on monday for $2.35 and sold it the same day for $7 and I got a spread for tomorrow for $4 it was ITM this morning and now is destroyed :(. I am holding to that one and see if it comes alive tomorrow.
     
  3. adiggs

    adiggs Active Member

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    As did I. I finally achieved peace with that (MHO probable outcome) earlier this week, partly because I'd come up with a plan for how to recover those shares. I'll be posting about how I started thinking about that over the weekend (along with how to run the wheel more aggressively for extra premium; see if anybody can think of holes :)


    In other news - the sharp drop has caused (possibly too strong of a term :D -- the market made me do it!) me to proceed with that put ladder I mentioned earlier. For next week, I've opened positions of: 1450 put @ $40 (.33 delta), 1400 put @ $25 (.23 delta), and 1300 put @ $10 (.12 delta).

    The idea here - I think that a bounce back up is more likely than not, so selling some puts here will go worthless next week. But if the shares come down, then I'm ready and willing to buy shares at effectively 1410, 1375, and 1290. Isn't that generous of me? If I do get assigned, then I'll be selling calls on these new shares at very high deltas - close ATM and ITM sort of deltas. These will be high premium options to sell, and my goal will be to rotate the shares back to cash pretty quickly (I'm more interested in cash in this account than shares).


    Sorry about the incomplete quote. I'm a big believer in starting as slow as you need to, to be comfortable with what you're doing. And taking as long as you need to get comfortable.

    Another learning experience or two, and you were paid to have the experience. That's gotta be one of the best deals around.


    This was my first earnings where I had a position in place over earnings. Having seen the results, I'm likely to figure something out around future planned news events. I've heard about IV crush, but this was the first time I had $ on the table to .. enhance the experience :)
     
  4. smorgasbord

    smorgasbord Active Member

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    I'm just spitballing some option strategies here, and I'm not the best at this, despite having traded options for a few years.

    After reading S3 Partner's report on the still high TSLA short positions, TSLA Short Squeeze Getting Tighter – Shortsight.com , which says in part:

    "fourth consecutive quarter of profitable GAAP profits which was the final hurdle for being considered for inclusion into the S&P 500. By beating consensus expectations its 2020 rally will probably continue and its short squeeze will not only endure but get even tighter...Upward price pressure on Tesla’s stock price will continue to be reinforced by the short side of the market as the feedback loop of higher stock prices forcing even more short covering helps drive prices higher. "

    1) S&P Inclusion will drive TSLA up
    2) Rising TSLA will squeeze shorts, forcing them to cover, driving TSLA up
    3) Go to #1

    Rinse and repeat until TSLA is in the index and/or shorts have all covered. I'm expecting a $2,000 price by the day of official inclusion, but obviously could peak even higher. And, unfortunately, I do expect TSLA to return to earth sometime after inclusion (day after or week after, I don't know).

    So, how do I play this? Timing for inclusion could be as early as 3rd week in August, or as late as Feb 2021. I could just buy some $2500 or so Calls for Feb, but I suspect there are better plays, maybe some kind of ladder....
     
  5. adiggs

    adiggs Active Member

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    The potentially million dollar question. When you get it figured out, please share! :)
     
  6. vikings123

    vikings123 Supporting Member

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    I think we close around 1450 today. Sold a 1450 put expiring today for 24$. Fine with getting assigned.
     
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  7. dakh

    dakh Supporting Member

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    I'm surprised how cheap calls are for next week. 1500 strike is $33. Very different from earlier in the week. I was going to sell some at much higher strikes, now thinking it's a good buy actually. Definitely hard to navigate what's going on without some good amount of experience.
     
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  8. vikings123

    vikings123 Supporting Member

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    Looks like I'm getting shares assigned :). Does the brokerage assign shares on Monday morning?
     
  9. Right_Said_Fred

    Right_Said_Fred Moderator

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    I rolled my 10 p1640 7/31 to 10 p1640 8/21. Another 41k of premium in the bank for a total of 432k since starting on June 10th. Return of 46% so far (goal is 40+% for the whole year).
     
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  10. hershey101

    hershey101 Member

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    Wait, you sold 10 contracts at $1650?! So you are willing to take delivery of $1.65m of $TSLA at an effective 16% yield on a $1T valuation in 2028....

    What's the exit strategy on this trade if we are in the start of a downtrend?
     
  11. adiggs

    adiggs Active Member

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    I can't speak for @Right_Said_Fred but what generally makes the wheel go, is being ready and willing (even eager) to take delivery of the shares (in this case), or to sell the shares at the strike for sold calls.


    With the wheel strategy, the idea is that when assigned on the puts, you take the shares (10 positions in his case), and start selling covered calls - probably pretty aggressive ones - until assigned again. Or of course, you can just keep the shares and stop selling as well.

    Cash to shares, back to cash, and around and around the wheel goes.

    As long as the strike to strike (cash to shares, shares to cash) is even, then the premiums are all yours. To the degree that the strike to strike is against you, then the premiums offset that; gotta keep a close eye on that, as being sufficiently negative on the strike to strike transitions can wipe out your premium gains and cause you to start falling off the wheel (term that somebody else used up-thread - I like that and plan to reuse it :)).
     
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  12. Right_Said_Fred

    Right_Said_Fred Moderator

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    Yes, in principle I’m willing to take delivery of 1000 shares for $1,64 million. And then start selling covered calls against them.

    This can also be done in a downtrend, although the premiums will then ofcourse be less. But with a growth stock like TSLA, which has so much going for it over the next years, I do not consider a downtrend very likely, so I’m willing to take that risk.

    In this case I’ve decided to postpone delivery of the possible assignment by a few weeks by rolling the position, as I think an S&P announcement may lift the share price above the strike.

    I’m definitely trying to follow the rules of the wheel and go from cash to shares, shares to cash and so on. But I’m not following them rigidly if I believe another action is opportune. I’m also trying to learn what works best for me. I have a lot of experience daytrading index options 15 years ago (writing strangles and straddles, covered with futures), stock options are a new area.
     
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  13. adiggs

    adiggs Active Member

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    A few semi-random thoughts from my thinking and preparation for assignment on covered calls at 1700 this past week.

    In the wheel, we make transitions from shares to cash (covered call assignment - sell shares), and cash to shares (CSP assignment - buy shares).


    The observation in this post is that cash and shares each have their own dynamic, and it matters for 'staying on the wheel'.

    The think about shares is that no matter what the share price is, you have that many positions in shares. So if you have 500 shares, then you have 5 positions you can write covered calls against. That is equally true at a share price of $200, $1200, $2200, etc.. In any situation where maintaining shares is your priority, then having the share price go up after covered call assignment creates risk that in the strike to strike change, you'll lose more than you gain. And in the worst case, you'll lose enough that you can't get back into the same # of shares that you started with (falling off the wheel).

    Share count will never increase or decrease.


    Cash has a different dynamic. If you're never assigned, then with cash, you can turn cash into more shares at a low share price than you can at a high share price. If the share price goes down to $200, then you can get 6x the shares with your cash than if the share price were $1200. If the premiums collected along the way are adequately large, and the strike to strike is neutral or close, then the lower share price (buy price) makes it easier to buy more shares.

    But the downside is that if the share price keeps going up, if you aren't generating premium at least as fast as the shares are going up, then you're falling off the wheel (at least as measured in the # shares your cash can be turned into).


    (This might all be obvious :D)
     
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  14. adiggs

    adiggs Active Member

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    Given this shares and cash dynamic, I've realized that in my two accounts, I have opposite priorities.

    In one account, that holds shares and almost 0 cash (>99% share value, <1% cash), my priority is to keep the shares. With so little cash though, I have very little leeway if I get assigned for the puts to get back to shares - I can only accept a very small loss and still get back to the same # of shares.

    In the other account that mostly holds cash, my priority is to stay in cash. The motivation is more complex, but I'm more likely to be spending the cash in this account for living expenses or big purchases, and I'd prefer that I not tie up this money in shares for very long. Therefore, even though I've been steadily selling fewer puts in this account as the share price goes up (slipping off the wheel in terms of positions), it turns out that the account is generating more and more cash despite selling fewer and fewer positions, and I'm quite happy anyway.


    Overall, this leads in the first account to selling far OTM calls and if assigned (rarely), selling close OTM and ITM puts.

    In the second account, selling far OTM puts and if assigned (more likely due to writing higher delta puts), I would be selling close OTM and ITM calls.


    The final observation from this week is that very high premium options create their own form of protection. I ended up in 3 positions with option premiums of $233, $175, and $119. Those very high premiums is what enabled me to get back to even and a little bit better this week, despite other positions losing a lot of money.


    AND THUS my learning - instead of writing all of my positions as far OTM, I am going to start writing at least one of my positions in each account that is much closer ITM. Maybe these more aggressive positions are more like .30 or .40 delta, but either way, the idea is to court assignment on that 1 position, while generating the relatively large premiums in that one position from each side of the wheel. The big premiums are nice - the incremental protection from those big premiums look equally valuable (easier to close positions that go against me due to having more cash available to do exactly that).

    The form that this took on Friday was to sell a put ladder in that cash centric account. I sold the ladder prior to the $100 drop on Friday (ah well), but setup there is (all for 7/31 expiration):
    $1450 strike put, $40 premium, .33 delta at sale (and already ITM - I hope this doesn't go a lot more ITM :D)
    $1400 strike put, $25 premium, .23 delta at sale (still OTM, but not by much.
    These are the two that I'm actively courting assignment

    Then a 1300 strike put at .12 delta for $10 premium
    and a 1000 strike put for $1 premium (.01 delta). This last position is really using the last bit of cash to write what I can with it, rather than a serious position.


    If the share price finishes below 1400 but not by a lot, then I'll easily be able to write similar strike calls for large premiums to convert shares back into cash on those 2 big premium positions.

    And if the share price goes back above 1450 by Friday, then all of these positions will expire worthless and the higher premiums on those 2 contracts will enable me to push up that 1000 strike put to something closer (a 1075 or so).

    Actually, I'll keep the premiums on the 2 large positions either way - unless very, very close ATM at expiration, I'll take assignment on those two. Worst that will happen is I'll sit on an extra 200 shares for months while we're waiting on the shares to come back up to this 1400 and 1450 strike range (oh the horror :)).


    The intention is to do a similar call ladder in the other account, though I'm a lot more conservative there. I'll wait for awhile, maybe days for the share price to bounce back, and maybe months. The idea will be similar though - write a pretty high delta (and OTM) call, a medium delta call, and then the rest far OTM. I'll be courting assignment on those one or two, with the intent that I'll be writing ATM and ITM puts to return to shares and collect some large premiums along the way.


    So my thinking is that having 1 (or 2) position I'm actively moving back and forth will generate some large premiums, and those large premiums will keep the cash account closer on the wheel (# positions is constant or increasing) and provide some buffer / flex on the share account to keep all the shares intact (and maybe someday, have enough extra cash to write an incremental put position, and then acquire an additional share position.
     
  15. adiggs

    adiggs Active Member

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    I figured all of this out when facing assignment on the 1700 calls. I was expecting the shares to be more like 1900. I might not have had any puts available to sell with a high enough strike plus premium to get the break even down to 1700. If that were true, then I would probably have sacrificed one of my share positions so that the rest of the put positions could be returned to shares at very high premiums, and then look to be more aggressive to collect more premiums, and eventually get back that lost position (but of course more risk).

    Lets work an example using the actual closing share price (1417) and this weekend's option chain, along with made up call assignment strikes.


    A similar position as I was facing would have been assigned on calls at 1200 that are now trading at 1417. If I just write the 1400 strike puts for 53, then I'm looking at sell 1200, buy 1400, and lose 200 on the strike to strike change but make back 53 on the premium. I'll end up selling puts on 1 fewer position and if assigned (reasonably likely from selling ATM put), then I'm lined up to lose $147 per position. Ouch.

    I have cash in the account of 1200 per position.

    As my priority is to return to shares, while maintaining the shares, it looks kind of grim :)

    I can sell the 1200 put for $10. If it's assigned, then I buy for 1200 what I sold for 1200, so I'm happy. But the delta is .10, so likelihood of assignment is low.

    That premium from the first put, enables me to sell a second put at 1210. That also generates a $10 premium, now at a .105 delta.

    Which enables me to sell another 1210, and so forth. I can sell as many positions worth of shares as I started with, but I need a pretty big drop in the share price to finish ITM and get assigned, and this is my priority.

    So low premium generation, and low probability of being assigned - I need a pretty big drop in share price to help me get back on the wheel.


    Similar setup, except that instead of being assigned on 1200 calls, I am assigned on 1400 calls. I have cash on hand for 1400/share for as many positions I sold.

    An easy approach is to sell as many 1400 puts to match up with the positions that were called away. These sell for $53 and the .44 delta. Good premium plus reasonably high likelihood of assignment. I collect $53 / contract and wait for a week. If I finish OTM, then I have an incremental $53 / contract, so my break even goes up from 1400 to $1453, and I repeat next week (and I have the cash to write all of those 1450 options to maintain my share count).

    Alternatively, I can sell the 1400 put for $53 (.44 delta). This is reasonably likely to be assigned, and if it is, then I keep the $53 premium.

    That $53 premium enables me to sell a 2nd position at 1450 for an $80 premium (.57 delta). If assigned, I'll buy at 1450 what was sold at 1400. So I'll lose $50 on the strike to strike change, but net $30 premium (I'm pretty happy with this, and the high delta makes it pretty likely this will work).

    I can now establish a 3rd put at say the 1475 strike for a $90 premium and .66 delta. For best chance of assignment, I probably write all of the remaining positions at this strike.

    The net position I've established is a ladder where I have very little ability to close positions early, and which is designed for the highest likelihood of assignment. And if somehow nothing is assigned (share price ends above 1475), then I collected 53 + 80 + 90 (3 positions; +90 for each additional position after the 3rd) worth of premium that moves my break even from 1400 to about 1470 (+~70 average over the 3 positions).

    If these all finish ITM, then I get back to my original share position, and I net out 53 + 30 + 15.

    If the 1475 is ITM and the others OTM, then I net the $15 net profit from the 1475 option, plus the 53 and 80 for the other 2 positions that finished OTM - bigger premiums that increase the likelihood that in the next week I can write options that are likely to get back to the share positions at a profit.
     
  16. adiggs

    adiggs Active Member

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    Big walls of text, and I apologize for that. I hope these thoughts about turning the wheel, and handling the risks of falling off the wheel are helpful.

    And I hope others can point out where I'm missing things or can do better.


    An obvious source of premium to widen the break even or profit level, is to go out more than 1 week as I'm doing. Whether 2 weeks or 4, you get that extra time premium that widens the share prices you can sell your options at and still hit a neutral or profitable strike to strike difference.

    For instance, going out 1 more week.. That 1400 put @53 premium (.44 delta), goes up to $75 premium with the extra week. Staying with ladder design above, sell the 1450 put for $100 premium (.53 delta), and then the 1500 strike at $130 (.62 delta) probably sets up the ladder. Higher strikes on the ladder increases the likelihood of assignment and the higher premiums enable higher and higher strikes if needed to chase the share price higher.
     
  17. pz1975

    pz1975 Supporting Member

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    One thing you could do if a position gets away from you (like your 1700 call if the SP had been 1900) is close it as a loss and try to recoup it by selling an OTM put and an OTM call expiring 1-3 months out. Make the premium on each equal half (or just more than half) of the loss you just took (in this case $100-105 each). That way you gain lots of time value relative to selling one expiring in the next 1-2 weeks (so the strike prices are much further OTM), and by selling both a put and a call, you know at least half of the trade will expire worthless. You may have to chase the other half later if the SP moves a lot in either direction, but it buys you time and by being much more OTM makes the deltas much lower (and thus much less likely to end up ITM). I would then just forget about those 2 positions until 1-2 weeks ahead of their expiry date, at which point they join back in the wheel and maybe you close the more risky one when it gets to 90-95% profit.
     
  18. juanmedina

    juanmedina Active Member

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    I have the same problem in my IRA I don't have much cash to rebuy a covered call that I sold if it gets away from me so that's why I sell way OTM calls. I am trying to build a larger cash position by collecting the small premium from the OTM calls and sometimes I buy a Yolo here and there If feel it will work out. On my brokerage account I can be more aggressive because I can fund the account if I need to close it out call.
     
  19. Mokuzai

    Mokuzai Member

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    In my IRA (Fidelity) there is a roll function with options where you can buy back and sell another call in the same operation. If you don't want your shares being called away you can use this to increase the strike with a farther out call and even net gain premium.
     
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  20. Lycanthrope

    Lycanthrope Not a cat

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    Hi gang. Sorry, haven't visited for a few days and haven't been in weeklies for some, erm, weeks :D

    However, in Friday trading, I came to the conclusion that $TSLA had been hopelessly over-sold, so I sold 10 trading shares (that I'd bought Monday for $1514), sold those at a $900 loss and bought a couple of 14/8 c1545

    Which went ITM yesterday and are now 53% up :D:D

    Rest of my October calls went don the shitter last week, but have recovered now. I also got June 2022 $3500's a few weeks back, which got hammered, but time, time, time...
     
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