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Wiki Selling TSLA Options - Be the House

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As a result the pattern I'll apply on the next roll (and I expect any rolls in the future) is to roll anything ITM as far as I can subject to a small net credit (~$2/week at today's share price). The idea is to do what I can, every roll, to cover as much of the ITM deficit as possible. This will work as the ITM option is paired with an OTM option that is performing really well (well enough that it's results by themselves makes the overall position very good).

@adiggs

By this logic you be able to roll out 12 months and get into an option that is OTM and get a credit. Is that what you meant?
 
@adiggs

By this logic you be able to roll out 12 months and get into an option that is OTM and get a credit. Is that what you meant?

Yes and no :). That's my favorite answer (next to Yes, in response to an either/or question).


Yes - I could roll out 12 months (or 6, 24, ..) to acquire more time value, and use that to roll further, potentially taking an ITM position to OTM.

But what I plan to do is try my best to keep the rolls down to 2-3 weeks. I'm bumping up a bit from 1 week for 2 reasons - I want to reduce my effort, and 2) it seems like the 2 week options have much better roll outcomes than 2 1 week rolls. The 3 week options are better yet but not enough better to draw me to them for routine use. I will use them when necessary (or even 4 week options).

the problem with going far out in expiration (which I've done previously) is that the covering capital is tied up. With the shares that's not really am issue for me - I don't plan to sell any despite the covered calls I'm writing.

Or at least not until these 2 year calls I've previously rolled into reach expiration. The overall outcome will be excellent for me, but the 2 year 840 calls are feeling .. less than optimal. But no violins are needed; less than optimal means if I do nothing, that account will be ~3x in value at call expiration relative to it's value at that time. 3x in 2 years is actually really good, TSLA in 2020 notwithstanding :)


So while I could roll far out in time, I hope to avoid that need with more frequent trades and a focus on keeping the strikes as close to where I want them to be. Getting deep enough ITM to require a long roll is more likely to end with me taking assignment over the long duration.

To reach that far ITM the position is going to take a long move in one direction in a very short window. A jump this week to $1000 might do the trick, but probably not. That kind of big.

Does that make sense, and does that answer your question?
 
Maintaining same expirations does make sense from a confusion perspective; allowing expiration asymmetry is another way you can manage the position, sort of half-way between same expiry and farther-expiry rolling.

This makes sense, and is in fact what I've done previously (let the expirations be different).

For the confusion / tracking side, it occurs to me that another choice I can make is to roll to the next 2 week position, even if I'm rolling a week early. So instead of rolling up early or rolling out 1 extra week (causing the puts and calls to be offset by 1 week), roll out another week or two - whatever it takes to keep the every other week cadence on the options.

Example - when I line up for Feb 5 and the call goes OTM rapidly, instead of rolling early to Feb 12, I roll early to the Feb 19. There's a bit more money in that roll, and it keeps me on an every other week cadence. There's more time for a big move against me - one reason I like these shorter duration options. But while I prefer 2 week options, I'm ok with 3 week options as well.

Hopefully that makes sense. The extra week in the roll is really just for my own time management - with every other week option expiration, it'll be easier to walk away for a week and not follow the daily gyrations :)
 
I'll also put in another pitch for spreads instead of naked

I've run a spread over the last week and it looks like it's going to work exactly as intended. I've got 10 of the 725/700 credit put spreads open right now, and they are on track to earn $1000 on $25000 at risk (4%) minus the $13 and change in commissions.

The problem I'm having a hard time thinking through about spreads, in a way that makes sense to me, is that while the downside to a credit spread is strictly defined ($25k in the spread I've put on right now), it's also 100%. Whatever capital you devote to a spread, you can lose it all on much less than a 100% move in the underlying.

I think that's due to the leverage involved - smaller capital at risk to improve capital efficiency also lead to leveraged losses when they occur.


The way I'm thinking about things, capital intensity isn't a problem for me, it's desirable. It keeps me out of serious leverage (a good way to turn a big pile, into a small pile) while still generating adequate income. With low leverage, that lets my outcomes be:
- for a big move down, buy shares at a better price than previously available (oh noes!)
- a big move up is to sell shares at a higher price than was previously available.

I both cases I'm sacrificing potential upside (good sale price on shares, good buy price to acquire more) in exchange for current income / cash flow.

About the only leverage / margin I use is enough to round up 1 (or 2) puts over fully cash secured. Otherwise the calls and puts, in or out of the brokerage, are fully covered.

The sale / call side is more of a problem than the put side - tax consequences being the obvious in the brokerage account. With enough gain in the shares / call strike, then the taxes can be paid. I still end up well off (did that sound like heads I win, tails I win!?!).

I guess that one way of thinking about the investing results I need - if I can earn 6% income per year, and the value of the portfolio doesn't otherwise change for the rest of my life, then my wife and I are better off for the rest of our lives than the paycheck I've been earning at my job (ok - I need to beat 6% by inflation as well for that outcome to be true). The run in TSLA over this last year has been that good for us. It might also be why we are allergic to selling shares.

I would like more though and besides, I find that selling options is at least as much fun as I had back when I first started a serious job. (And I don't mean the thrill of running on the edge of being overextended and need to explain to my wife how I lost a big part of the pile)


For that matter - a choice we could make is to invest much more heavily in a real estate REIT I found that is consistently sending me a 2% check each quarter since we made our investment. Putting 1/5th of the portfolio there is even a good idea - maybe I'll do that some day.
 
Along these lines, a thought experiment I just conducted has led me (independently) to a similar conclusion. The question I posed myself, and went looking on the TSLA option chain to explore, is how far ITM is too far? I got thinking about this in the context of the 775 cc I have expiring this week. I already know that I have some good roll options (I think I can roll up $40 on a 2 week expiration contract).

So how much deeper can that option go before it's time to take one of the options laid out by @bxr140 (or as I summarize them - abandon ship)?


I started with a $500 call expiring this week - what could I roll that to? That's $350 ITM or 41%. Even rolling out a month I couldn't get the strike to budge (given a net credit constraint). It wasn't really close either, though that far ITM has $10 between strikes.

Tried again with a $600 call expiring this week. Same problem - the strike still wouldn't budge for a 2-3 week roll, and that's the window I want to stay in (at least today - ask me in a month and I might well have a new answer). That is 29% ITM.

With a $700 call expiring this week, I started being able to budge the strike a little bit. A 2 week roll would move 700 to 705 and a 4 week roll would move me from 700 to 715 or 720. That's 18% ITM.


My conclusion is that I would like to keep my rolling options within 10% of the share price, but I can let that get a bit deeper and still have a reasonable chance at recovery (while earning strike to strike value that makes the roll valuable).

Of course this is all using TSLA options, and is relative to today's DTE (it's mid-week) and IV. These factors change and they matter.


These results are important to me in the context of the pattern I've been exploring the past couple of weeks. That 775 call is halfway between the share price and the strike where further rolls start getting difficult and/or not financially worth continuing.

As a result the pattern I'll apply on the next roll (and I expect any rolls in the future) is to roll anything ITM as far as I can subject to a small net credit (~$2/week at today's share price). The idea is to do what I can, every roll, to cover as much of the ITM deficit as possible. This will work as the ITM option is paired with an OTM option that is performing really well (well enough that it's results by themselves makes the overall position very good).

And if the ITM option is near enough that it can get back to the .40 delta OTM I'm targeting (today - ask me again in a week or 4, and I might have a new answer), then roll to that .40 delta with whatever net credit is left over.

So to what strike do you end up rolling your 775 call to? I have 4x 800 calls for next week and I was thinking about rolling them to a strike where I make no money with the shortest expiration possible but trying to roll to an OTM strike that hopefully we don't reach. So in my case it would be any option that pays $55 currently.
 
So to what strike do you end up rolling your 775 call to? I have 4x 800 calls for next week and I was thinking about rolling them to a strike where I make no money with the shortest expiration possible but trying to roll to an OTM strike that hopefully we don't reach. So in my case it would be any option that pays $55 currently.

When I tested yesterday I could roll two weeks (Feb 5 instead of Jan 29) to the 805 for something like $2 credit.

Their history - I bought the shares at $735, sold the 760 call, and watched the shares promptly go to 810 the first week, and on to 850/880 the next week. So they've been 50-80 ITM almost from the moment this position opened.

That call has been rolled in 1 week increments to 770 and then 775. At $75 ITM and doing the previous math, my window to retain those shares is shrinking, which has had me thinking of what I'm trying to accomplish with each roll.

EDIT to add: I just rolled out 2 weeks (Feb 5) and up from 775 to 805 ($3 credit). As a result, the results from here:
- shares down, I finish much closer ATM or even OTM, and position ends
- shares flat; I'm $30 closer to getting OTM
- shares up - I might or might not have maintained the same ITM. If they're up enough and I don't have a good 2 or 3 week roll, then I just let them go and accept the incremental $30 that I'll sell the shares at (805 instead of 775).


The idea as I see it - the net credit is there to ensure cash flow is positive (and it helps avoid compounding losses with more losses). If the real goal is to avoid assignment, then I'll just start doing what I should have been doing from the beginning - roll up for as many strikes as I can get subject to the net credit restriction.

Here - when I roll to 800 or 805 I'm pretty confident that I won't go OTM with this position. But if the shares are flat or even down some, then I'm that much closer to a roll that puts me OTM (or has a reasonable chance of going OTM). I might have many more 2 week rolls in front of me for this particular position. As long as there is a net credit (for my purpose, even $1/week is plenty for a position that is marking time and chasing the share price). In fact as long as I'm ITM but still able to 'chase' the share price, then every strike improvement is comfortably the most profitable trade there is, even if unrealized. The net credits become my profit if the option does finish OTM at some point.

And at some point, I'll have chased and caught the share price; or I'll have chased and lose contact. At which point I'll accept assignment and all of the incremental profit in the strike improvement that has come from the rolls.
 
On this rolling call (and overall position), the realized results might be helpful as well.

Original sale - 760 call for $9, BTC for $46: realized loss of $37.

Rolled into the 770 call for $49 ($3 credit going from $46 to $49). BTC for $84; realized loss of $35.

Rolled into the 775 call for $86 ($2 credit going from $84 to $86). BTC (today) for $74; realized gain of $12.

Rolled into the 805 call for $77 ($3 credit going from $74 to $77). BTC = ? (Don't know yet).


Overall position right now is roughly $9 + $3 + $2 + $3 = $17 in credits over ~1 month, along with a strike to strike gain in the shares should I let them be assigned of $70 (805 current strike, 735 original purchase). $17 for me in 1 month is a downright good result. Especially as this only covers the call leg of this position.

But that $17 is cash flow. Realized results so far are $60 in losses. That $17 in unrealized gains (the cash flow) is wrapped up in the 805 call ($77 option price). To realize the $17 I need that option to expire OTM (or BTC, knowing that it's only the final $17 that will be my profit, so I need much more than a 75% gain on this contract for the overall position and cash flow to be positive.

The way I count the capital (share value for this covered call), I've got $73,500 in the original shares. $17 credit (for $1700) is 17/735 = 2% in 1 month. If I take assignment then I will realize $87 over 1 month = 12%.

Backdrop - buy shares 73,500; sell shares at $84,500 for a $110 gain instead of $87 for taking assignment on this new contract. If I had known about this jump in January, then I'd have been better of buy and hold. But I didn't and the cash flow has provided me with a lower overall risk position on that original 735 share purchase.
 
A positional choice, specific to earnings, that I'm making. I have a variety of puts expiring OTM on Friday. Most of them are sufficiently profitable that I would ordinarily be looking to close / roll them at this point.

However my plan is to wait for earnings day next week and sell the new puts as Feb 5's at that point. My hope is that I'll collect a better premium with the IV rise into earnings.

As a practical matter, the sum total of these positions is small enough that this becomes another skin-in-the-game experiment (I'm doing a lot of that lately :)). In this one instance, do I do better by delaying the new position by 3-5 trading days, or open now ignoring earnings?


As a result, I am planning to allow these to go to expiration for the further OTM, and close early for pennies for closer OTM. If I'm going to sit out for a few days, then I might as well keep these small positions and give them the time to decay as much as possible.


This week, I also opened a new edition of the covered call / covered put strangle. This setup is around $850ish purchased shares, with an 840/880 strangle. Both legs are very profitable (90% and 70%) and I would otherwise roll these right now to a .35 delta Feb 5 contract (an 805/905 strangle for a $34 and $29 premium (net credit of 32 / 22).

I could roll to the .40 delta and land at 820/890. I like the wider window at the .35 delta despite giving up 6/5 in premiums. More conservative while still collecting pretty close ATM option premiums.

The .35 delta net credits represent great results (something like $54 on $1710 or 3%), though of course I'll be looking to closer early and earn 2/3rds.


I'll come back to this on Wednesday when I do open those new put positions, and see how this decision has aged.
 
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With the share price virtually pinned at 850-ish this week, my sold 850 put has been nicely decreasing in value due to the eroding of theta.

Now I'm just trying to convince myself to not buy it back too early, and let it degrade even more. Or even maybe let it expire ITM.

But it's so much lower now... And I could roll it to next week... :eek:

Edit: I AM WEAK. Rolled to next week, same strike, for a lovely $3k gain.
 
With the share price virtually pinned at 850-ish this week, my sold 850 put has been nicely decreasing in value due to the eroding of theta.

Now I'm just trying to convince myself to not buy it back too early, and let it degrade even more. Or even maybe let it expire ITM.

But it's so much lower now... And I could roll it to next week... :eek:

Edit: I AM WEAK. Rolled to next week, same strike, for a lovely $3k gain.

WEAK!

Well, my historical measure for whether to close/open (roll) is whether I want to be in the new position more than I want to be in the current position.

The more precise measure I've started considering is whether theta is higher on the new position than the current position. At the very least I'll add this theta comparison to the above criteria.


Plenty of trading strategies (option selling anyway) involve a target profitability. I've mostly seen 50%. Since I only trade 1 underlying, I've mostly targeted 67%-90% gains. So this becomes yet another criteria, though I tend to see that 2/3rds profit level with the "better new than current" position criteria happening at roughly the same time.


Maybe just right!
 
...it occurs to me that another choice I can make is to roll to the next 2 week position, even if I'm rolling a week early.

Yeah, for sure. My example was on weekly, but if your baseline strategy is two week positions (which you rightly identify as generally a better way to go than weekly) then sure, roll two weeks. That would give the hypothetical rolled -P even more value to partially/fully offset the underwater -C.

2 week baseline also gives you the opportunity to still only maintenance roll one week, if for whatever reason that looks like it will work out. That would theoretically give you an extra week of actual profit on the strategy.
 
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2 week baseline also gives you the opportunity to still only maintenance roll one week, if for whatever reason that looks like it will work out. That would theoretically give you an extra week of actual profit on the strategy.

Heavens knows that I've seen enough of these opportunities the last several months. In these cases, I frequently arrive at 60-70% profit and have a higher strike, higher premium position that I would rather be in. It's usually at roughly the 1/2way point in the life of the option and as you say, provides the opportunity to get 2 profitable options into that 2 week period!
 

:oops:

Well, my historical measure for whether to close/open (roll) is whether I want to be in the new position more than I want to be in the current position.

The more precise measure I've started considering is whether theta is higher on the new position than the current position. At the very least I'll add this theta comparison to the above criteria.


Plenty of trading strategies (option selling anyway) involve a target profitability. I've mostly seen 50%. Since I only trade 1 underlying, I've mostly targeted 67%-90% gains. So this becomes yet another criteria, though I tend to see that 2/3rds profit level with the "better new than current" position criteria happening at roughly the same time.


Maybe just right!

I wish there was a website or something to let you have a mock call/put and it would let you adjust the Greeks on it with visible results as to what they actually do. For instance, I know that Theta is time decay, so it goes down as the week rolls on even as the stock price. However, I have no clue how to compare it to another option, especially when it's two separate weeks. I mean, yeah, the latter would have a higher theta due to the increased time before expiry. However, that'd be true of any future option, so dunno really what to look for next to the other.

My method is very simple. My current put is now worth $X. The put that's next week is worth $Y. The SP is at $Z, and I have a reasonable belief that it'll go higher/stay the same between now and next week. Examination complete, lol. :D
 
The problem I'm having a hard time thinking through about spreads, in a way that makes sense to me, is that while the downside to a credit spread is strictly defined ($25k in the spread I've put on right now), it's also 100%. Whatever capital you devote to a spread, you can lose it all on much less than a 100% move in the underlying.

Definitely--its not a straight apples to apples comparison to a naked, but when you look at actual capital exposure vs profit vs risk vs downside protection, that's when a spread becomes more attractive, and especially if there's a big unfavorable move, which is the scenario you're worried about.

In a world where everything is kittens and rainbows, yeah, definitely go naked. :p
 
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I mean, yeah, the latter would have a higher theta due to the increased time before expiry. However, that'd be true of any future option, so dunno really what to look for next to the other.

You'll be surprised on this. Time value reaches 0 at expiration - this can't change. It's one reason in fact why I like selling options so much - I've got a defined end to the contract that is in my favor, rather than being against me.

Time value tends to be very high right at the end, and not so high earlier.


Example - the 840 strike put that expires tomorrow is carrying a theta of 5.83 right now, while the 840 strike put on Feb 5 is 1.75. Generally speaking, rolling out will lower theta, everything else being equal (everything else usually isn't equal). I would be rolling to the .35 delta put at 805 with theta of 1.63, so either way I'll be rolling to something where theta will be accelerating.

Then again, the absolute value in the 2 positions is heavily in favor of the roll now. Leaving a $7 premium to a $33 premium ($26 net credit) while also lowering the strike by $35 (less risky with the lower strike).
 
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Definitely--its not a straight apples to apples comparison to a naked, but when you look at actual capital exposure vs profit vs risk vs downside protection, that's when a spread becomes more attractive, and especially if there's a big unfavorable move, which is the scenario you're worried about.

In a world where everything is kittens and rainbows, yeah, definitely go naked. :p

I been doing spread lately and yeah the returns are nice. I sold 31x 01/29 690P/665P on Monday and closed them on Tuesday because my wife freaked me out about her concerns about Biden's inauguration. Anyway it still turn out nicely, $3171 of profit with 80k outlay with 95% probability of success. I been setting conditional stops on the short leg just incase but like @adiggs is saying naked puts still feel safer.
 
You'll be surprised on this. Time value reaches 0 at expiration - this can't change. It's one reason in fact why I like selling options so much - I've got a defined end to the contract that is in my favor, rather than being against me.

Its good practice to never enter any position without a defined entry, stop loss, and exit/target. That eliminates the seemingly unbounded element of long contract.
 
Both legs are very profitable (90% and 70%) and I would otherwise roll these right now to a .35 delta Feb 5 contract (an 805/905 strangle for a $34 and $29 premium (net credit of 32 / 22).

Upon further review, both legs are >70% profitable, with 1 leg close ATM (840 put, shares at 845). I've decided to roll now as the risk of a sharp move down today/tomorrow (whether there is a reason for it or not) is too high to run this skin-in-the-game experiment I want to do. I would hate to be $20 ITM tomorrow and need to roll then.

Therefore I've rolled to the 810/905 strangle on Feb 5 for net credits of $28.70 (put) and $27.50 (call). I like sideways trading!
 
Therefore I've rolled to the 810/905 strangle on Feb 5 for net credits of $28.70 (put) and $27.50 (call). I like sideways trading!

My concern with calls right now is that I think there's a non-trivial chance the stock jumps reasonably quickly to $950 after the earnings call. Not a huge chance, but there's also the chance that it runs up next week before the earnings call. All in all, enough possible upside that I wouldn't want to be stuck with a sold vaguely close to the money call.

Anyway, I had just-a-little-OTM puts expiring this Friday that I "rolled" to next Friday. It looks like ETrade charges double the commission even when the buy-to-close and sell-to-open are put together on one limit order, so it seems like a "roll" is almost always worse than buying to close when the price is high-ish and selling to open when the price is low-ish, even during the same day (that is, I thought a single commission was the supposed benefit, but I don't seem to get that).

So I bought back around $6, which on the one hand feels like I left money on the table with expiration tomorrow, but on the other hand, as someone said upthread, next week's position was the one I wanted to be in more. Overall, this will be my least profitable week in a while, but the price was pretty flat and next week stands to be better than average... so long as there's not a serious case of sell the news. Fingers crossed. :)

Finally, with ETrade I don't seem to have as good a margin situation as some of you. For instance, if I try to sell a 725 put and buy a 700 put, it takes $72,500 margin (the full amount of the sold put). You guys seemed to be saying that represented "$25,000 of capital" when you talk about the return, but if it takes $72.5K margin, I'd consider that to consume $72.5K of capital. Is that just that I don't have portfolio margin? Or are different brokers different for this?
 
For sure, its a non-zero effort to develop a consistent technical analysis strategy. There's also no "right" answer, so its really up to you to figure out what works and what's in your comfort zone.

As far as "short dated". I'd recommend starting by never buying calls closer than 3 months, and never holding them any closer than 1 month. I'd also recommend not going any smaller than a daily timeframe for your TA. (FWIW, I personally don't find weekly that useful on TSLA). If you're a little unsure of your entries I'd also recommend multi-leg strategies where sold legs offset bought legs. If you're comfortable with selling puts, then fold that into a collar (a -P and a +C), which is really the best spread for Full Bull...but know there's plenty of choices. I'd recommend you calendarize that kind of position--if you're buying a 3 month +C, sell maybe a one month -P (or -C).

Just as a random and conservative example, a march $1000 +C (there's no April yet) is $52, or about ~2x the price of a Feb 5 $750 -P ($25). So, if you were going to sell that kind of -P anyway, you could use it to offset ~half the price of the $1000 +C. Assuming on ~Feb 5 you sold another 3 week (Feb 26) -P at ~$25, you would have ~fully paid for the +C, where any value in the +C (whether the contract itself is red or green) ends up as profit to you. (Of course that's assuming both cycles did not go ITM on the -P's). You'd want to either close or roll out the +C at that point also because it would only have three weeks left on it, and certainly if price didn't move as bullishly as you thought you'd make less than just selling the two -P's, but the above is also again a conservative example.

I don't own any TSLA shares right now, but I'm holding 50 March calls, 50 July calls, and 60 put spreads for this week (which I will likely roll). That's about as tapped out as I want to be, so I'm not buying going into earnings. I will also likely dump all the calls before earnings as well, maybe day of, for the purpose of capturing what I believe will be a volatility ~high. In that event I will likely re-direct pre-earnings capital into more put spreads and DITM CCs, again for the purpose of capturing (hopefully) high volatility.

How much margin do you need to do this kind of trading...