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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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    An update - I'm shifting my strategy lightly; I was writing occasional calls. After the last couple of weeks that has stopped. I'm not stopping completely - I'm just going to be better at sticking to my 'rules', and for that account, staying in shares is important to me. So I'm looking for a combination of strike, days to expiration, and premium that makes the risk/reward tilt my way. The net being that the current share price is too low: to get a premium worth the risk, requires either too low of a strike or too many days to expiration for me to chance it (0.50 premiums aren't worth any level of risk to me, after that very unfriendly big spike a week or 2 back).

    On the put side, I've also shifted. I'm shifting my delta up pretty significantly. In particular:
    I've written a put ladder today for Aug 7 / next Friday (closed the existing puts at 70% gain) that ranges from 1400 to 1485 and a delta from .23 to .42 (premiums from $26 to $51). I like the Aug 7 over July 31 as I like positions in the 3 to 8 day range, which makes today the 1 day in that range where I can go either way. I like the larger premiums for Aug 7 over rolling up for July 31.


    That .42 delta put is comfortably the highest delta put I've ever written. My intent is to get assigned on at least one of these positions (and if it looks like I'm failing to get assigned, I'll just roll up the lowest delta position to a high delta position and try again).

    It's also my belief that we're going up much more than down the next week or two at least. I'm hoping for a relatively modest net upward move in the stock week to week (up, up, and away, but $50/week instead of $200/day spikes). I think that hope is a forlorn one :). That's a second reason for getting so aggressive on the put premiums - if I'm write about direction, then the premiums will melt quickly.
     
  2. adiggs

    adiggs Active Member

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    With the put ladder in place, I'm seeing a dynamic that makes sense, but wasn't as apparent or conscious to me.

    By ladder, I mean that I have a range of strikes on the same expiration day. What I really have is a range of deltas, so I will have times where the delta fit within the range I'm looking for, but the expirations may vary (but typically only by a week due to my preference for option writes in the 3-8 days to expiration range).

    After 1 day of the pieces of the ladder being in place, it's going my way. The largest absolute gains favor the closest ITM puts (shares +$7, while option premiums are minus-$4 to minus $7.

    But the % gains favor the further OTM options (+$7 share price, option premiums today at -18% to -13%.


    These differences in the math dynamics illustrates two interlocked ideas for choosing specific positions. The closer ITM options are going to provide the largest premiums (absolute and %). Those closest ITM options will drop in absolute value faster than further OTM options (they've got more total value to lose).

    But the further OTM options are going to drop in % value faster.


    As a consequence, I anticipate the furthest OTM options to reach my profit target of ~$67% most quickly. This seems to be a good profit level that captures a lot of the premium while also providing a new position within my time and delta considerations that I will prefer (namely 3-8 days to expiration, and delta as high as .30) over what's left of the 67% profit option.

    I have a .42 delta put in my current ladder though (for the first time), and I like the dynamics it's providing so far. I suspect that I have increased the delta I'm willing to write up to that .40-.45 range, though I figure I need to write at least a 2nd to be sure; especially as long as I'm in a mode where I want to be assigned so I can start seeing the full wheel dynamics.

    Even with these more aggressive positions, I think it unlikely I'll write most or all of my position at the .,30 or .40 delta level, but rather stick with this ladder idea where the lower end of the ladder is more like .10-.15. As the bottom of the ladder reaches 67% profit and/or a .05 to .07 delta, I'll roll that up and/or out to capture that gain and simultaneously establish a new position - most likely at or near the top of the ladder.


    Oh - I'm still monitoring for call sale availability, but I suspect I need something closer to an 1800 to 2000 share price before I have call strike prices / premiums / delta levels that I find desirable. Or alternatively, I'll need a put assignment, at which I'll be writing highly aggressive calls against those purchased shares.
     
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  3. Davidzhao365

    Davidzhao365 Member

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    Hey can I get some help to validate this idea about tax?

    Step 1
    Assume today, the SP is $1500, and I sold a
    Deep ITM call, Jan 21 $100 and collected $140k premium. And then I used that money to buy 95 shares.

    Step 2.
    From July to Nov, I sell puts and accumulate $200k gain, realized.

    Step 3.
    In Dec 2020, Assume the SP is $3000, and I close the deep ITM call by buying back the Jan 21 $100 call, and thus I realize $150k loss.

    So for all the steps above, my net realized gain should be $200k - $150k = $50k right?

    So essentially I transferred the short term gain from selling put to the 95 shares that bought in step 1. Is this correct?
     
  4. Davidzhao365

    Davidzhao365 Member

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    Here is another example

    Assuming it is Jan 1 2020 today, start of the year, and we have $100k cash in the broker account.
    Assume Tesla stock is $1000 today.

    Step 1
    On Jan 1 2020, sell a call, say Jun 2022 $100 call, and collect $900 premium (we ignore the time value for now), then we have $900 * 100 shares = 90k proceed. We call this trade A.

    At the same time, use the 90k proceed to buy another call, Jun 2022 $110 call. Assuming this strike is available. We call this trade B.

    so after trade A and B, we should have $100k cash left or slightly more, since B is cheaper than A.

    Step 2.
    Use the $100k buy a few OTM calls, say Sep 2020 $1500 call. This is trade C.

    Step 3.
    wait from Jan to Sep. and now trade C is about to expire, and we assume the stock price is $2000 now and we sell the call for a gain/profit.

    Assume we sold the call for $300k, so we have 300k-100k= 200k gain from trade C.

    Step 4
    In Sep 2020, after we close trade C, we close trade A. Now trade should realize $100k loss.

    So in total we reduce the taxable gain from $200k to $100k now, and we keep trade B open for 2021 or 2022.

    Essentially we transferred shorted term gain from trade C to long term gain in trade B.
     
  5. Mokuzai

    Mokuzai Member

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    Sold a Jul 31 $1,450 put on Monday for $56. Yesterday it went in the money and they assigned it. I'm actually surprised they assigned me...if I were on the other side of that trade I'd want to hold those 100 shares if I already had them. Whatever...time to sell a covered call on those shares on Monday.
     
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  6. graphilwar

    graphilwar Member

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    Are you planning on selling weeklies on that? Or going out 30, 45, 60 DTE? I’ve been avoiding doing covered call sales, got burned a few times.
     
  7. Mokuzai

    Mokuzai Member

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    Well I got assigned at $1,450. Right now the Aug 7th $1,450 calls are going for $42. Will see what it's like when the market opens but $4,200 in a week is more than my day job. If we see another mighty Monday I might pick a higher strike. These are officially trading shares now so I wouldn't mind getting them called away. They're pure premium harvesting shares.
     
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  8. Davidzhao365

    Davidzhao365 Member

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    I finally figured out how to convert short term call gain to long term call and vice versa.
    Does it work for you?

    Long Term to Short Term
    This is easier.

    Say you have Jun 22 $1000 call, and since it is deep ITM, you want to convert it to a higher leveraged position.
    You can sell a Jun 22 $1010 call, and take the premium to buy short term calls or high strike calls. Note that after this trade, you should have 2 trades open:

    Long Jun 22 $1000
    Short Jun 22 $1010

    As long as the 2 trades are open, you wont be taxed for the premium you received for selling $1010 call yet.

    Short Term to Long Term
    This is much harder I think. Here is a way that I am using, but I am open to other ideas.

    Say it is Aug 2020 now, and you have 10 Oct 20 $1800 call as the S&P 500 inclusion play at 5k cost. But you dont want to trigger the short term capital gain tax.

    You can open 10 call spread, say
    10 long Jun 22 $1500 (assuming the cost is 510)
    10 short Jun 22 $1510 (assuming the cost is 500, cheaper than the above)

    Then in Oct 20, assuming TSLA SP is $2000, you make $20k-5k = 15k profit (realize $15k gain) for 1 $1800 call, and you realize 150k gain in total for the 10 calls.

    Now the short Jun 22 $1510 might be worth $800 now, so you accumulated ($800-500)*100 = 30k loss per contract.
    So now if you buy back 5 $1510 contracts, you realize $150k loss here.

    Note that to buy back 5 contracts, you need $400k cash. You have $200k cash from the sale of 10 $1800 call, and you need to find another $200k to cover the entire gain. Or if not, you can only cover a portion of the gain. This part is configurable depending on the call spread you choose.

    Now the net gain is $0 for 2020. And you have these trades open:

    10 Long Jun 22 $1500 (This position hasn't changed, and the $1800 call profit is transferred to these calls)
    5 short Jun 22 $1510 (This position is reduced as we use it to realize loss)

    Would this work? And be aware of wash sales rules when closing the short $1510, because it is a tax event and there is loss occurred.
     
  9. adiggs

    adiggs Active Member

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    That looks like about a perfect setup. One thing to look for on Monday is a big spike up (I of course can be wrong, but that's what I'm expecting will happen). If that does happen then you might get to write an even higher strike call than 1450 (hopefully assigned). If so, then when (eventually) it gets assigned, you'll have the premiums along the way PLUS the strike to strike gain.


    I've decided I want to see what the wheel looks and I'm openly courting assignment on some puts. Two in the money at the current price level, but a week away from expiration. I'm expecting them to be OTM by end of the week though, and I'll just have to try harder to get assigned on a put.
     
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