Wiki Selling TSLA Options - Be the House

[Flehmenlips]

Its a bit of a deal with the devil, as an underlying much higher than $750 in two years seems pretty likely, but at least in that scenario you're not losing any money (if were to just let the shares go at that point in time).

Yes. My thinking exactly. I did an ROI calc, and it looks like something around 24% per year for those two years is about right if they get called. Of course I'll miss out on all the likely gains, but I hope I can capture those gains by continuing to buy shares and leaps.

Given that your financial need is a huge % of your account its kind of a rock/hardplace, but if its what you gotta do then so be it.

I'd consider @UltradoomY's suggestion to liquidate shares and buy LEAPs in their stead. Doesn't have to be an all or nothing either, but you may be able to find a balance between shares, sold calls, and bought LEAPs where your account balance will still realize upside with what we all assume to be a bright future for TSLA, while still giving you the cash in hand you need right now.

Yep. That's great input. I am doing my best to create such a scenario. Time is against me as the funds are needed on a specific deadline next week. Here's hoping I can pull it off. I'll keep everyone posted on how it goes. I'm hoping I can keep one or two contracts clear to continue playing some shorter term options as well.

 

[bxr140]

What do you mean by "liability is going to stay high for a while"? I've thought about the fact the shares will be locked in CC position, and I don't love it, but I'm hoping it still stands a chance of being better than selling the shares.

Because there's no appreciable time decay on such a long dated expiration, with TSLA seemingly staying a little stagnant (I'm still hoping for a breakout on this symmetrical triangle, but I digress...), and with the cautiously optimistic notion that TSLA is going to be turn up sometime over the next few months vs turn down, the value of the calls is going to stay pretty high for quite a while, meaning that if you needed to close them you'd basically have to pay back most/all of the originally collected premium.

Its much less of a concern if you don't need to close the calls.

I have not held the shares for very long, so I don't think this tax consideration should be an issue. Am I correct in that assumption?

Sounds like it, yes.

If I understand this correctly, you are suggesting a strategy to be: "Set and forget", because "Chasing underlying and volatility by adjusting strikes and expirations is going to be a nightmare."?

Yes. Theoretically, if you were really really good, you could constantly roll strike and expiration based on a combination of current underlying price, your price analysis for where underlying might be going in the short term, and the volatility environment (high or low). always keeping the strike/expiry at a maximized balance between Vega and ∆.

FWIW my trading partner and I are (among other things) contemplating a tool to best identify strike expiration based on volatility, but its not easy...to the point where its like a tertiary priority.

So rolling in, rather than out, and closing if the opportunity presents itself at a reasonable cost?

Yes--if underlying tanks and the corollary ∆ burn on the contract allows you to roll in at the same expiration, that's a win.

 

[bxr140]

The allure of that magic bullet/free money is strong.

If you can't spot the sucker in the room...

 

[Criscmt]

I'm not sure I understand...it still comes back to the same equation: [Margin Requirement] = [$ value of spread] * [100 shares] * [# of contracts]

Am I missing something in your question?

You had the answer for my question. It was clear.
One thing I would say for the ICs, it appears the Margin Requirement is not the higher margin requirement out of the two legs, but more than that.
@setipoo were you saying, it's the sum of the margin requirements of both the legs?

 

[buttershrimp]

Woo hoooooooo!!!!
Sold 17xcc 672.50 for 5/7 at noon…. Took it down to the wire to close 12 cents from strike…. I may still get shares called away but it was so worth the Experience as opposed to the panic fest I did last week!

anything is possibleeeeeeee!!!

 

[bxr140]

One thing I would say for the ICs, it appears the Margin Requirement is not the higher margin requirement out of the two legs, but more than that.

If you're in the USA and using a 'normal' broker like fidelity, etrade, etc. (I can't for sure say this applies to every single broker out there since I haven't used them all), then margin requirement for an IC or any two sided position is indeed just the margin requirement for the "larger" side. @setipoo's margin situation is abnormal (and unfortunate), again if you're trading in the US through a regular US broker.

***I suppose its possible a lower options trading level also conflicts with the above statement--I also have no experience trading at lower options levels.

 

[Tslynk67]

Woo hoooooooo!!!!
Sold 17xcc 672.50 for 5/7 at noon…. Took it down to the wire to close 12 cents from strike…. I may still get shares called away but it was so worth the Experience as opposed to the panic fest I did last week!

anything is possibleeeeeeee!!!

Ride that frikkin' tiger, dude!

 

[bxr140]

I am using existing cash and margin to buy shares so that I can sell the covered calls and use that cash, instead of the cash in my account.

So that's definitely a deal with the devil.
Will work out fine if TSLA stays the same or goes up.
Will do you proper, like the rabbit, if TSLA tanks.

 

[Yoona]

You had the answer for my question. It was clear.
One thing I would say for the ICs, it appears the Margin Requirement is not the higher margin requirement out of the two legs, but more than that.
@setipoo were you saying, it's the sum of the margin requirements of both the legs?

For ***MY*** broker - TD, yes.
And i checked again all my trade statements going way back just to make sure.
Same is true whether balanced/unbalanced IC.

 

[Flehmenlips]

So that's definitely a deal with the devil.
Will work out fine if TSLA stays the same or goes up.
Will do you proper, like the rabbit, if TSLA tanks.

Meaning that I could get margin called and liquidated? I could see that possibility, but if that is the worst outcome, it still seems worth the risk. Unless there is something worse than that. If so, that is the risk I am trying to identify.

 

[ReddyLeaf]

Woo hoooooooo!!!!
Sold 17xcc 672.50 for 5/7 at noon…. Took it down to the wire to close 12 cents from strike…. I may still get shares called away but it was so worth the Experience as opposed to the panic fest I did last week!

anything is possibleeeeeeee!!!

Ride that frikkin' tiger, dude!

Ok, it’s official, we have a new crazy cowboy in the house.

 

[buttershrimp]

Ride that frikkin' tiger, dude!

Wow that was fun…. By waiting until the last day, I was able to “practice” sort of like @adiggs was talking about… just going through the motions can be helpful. My goal was to land just barely on the other side of the strike with enough premium to have a breakeven I could figure out when I’d be losing money if called away and if it went too far beyond, I would roll out with 30 min to go. 10 second to close it was 1 cent above the strike!
Compared to last week when I “rescued” my shares twice and lost the majority of my profit. This week was much better. Turns out the end game matters immensely.

I don’t want to be afraid of getting called away if I will still have a profit.

I probably would be best served setting a certain premium alerts during the week and a strike proximity alert a few bucks from my strike on Friday. I told myself no matter what I would wait until 30 min to close and see how far away I am and not roll unless I pass the breakeven.

I know early assignment is possible but this was really liberating to force myself not to act.

And to be fair, this was much lower risk for me as a noob to wait until the last few hours this week … even with an error, I wasn’t going to get killed.

now I have a new problem… wheel addiction

 

[buttershrimp]

Meaning that I could get margin called and liquidated? I could see that possibility, but if that is the worst outcome, it still seems worth the risk. Unless there is something worse than that. If so, that is the risk I am trying to identify.

I agree, I have 2.5 interest rate on my margin and I only borrow what I can afford to squash if the stock goes to 300. Otherwise I don’t mind using margin … I certainly wouldn’t be using it for anything but my buy and hold stock. Here is photo of giga texas today …

 

[MikeC]

If stock price crashes and I get margin called, the shares are liquidated and contracts closed and even if I get liquidated to zero, I have only lost the amount of margin interest paid to date and possibly the $13k that was still in my account.

I may be misunderstanding, but if margin called aren’t you on the hook for more than that?

Say you buy 400 shares for $700 apiece, worth $280k. If TSLA goes to $200, aren’t you down $200k (minus the premiums from your sold options)?

Regardless if purchased with cash or margin, there’s no free lunch.

 

[juanmedina]

I sold not call this week... I live in fear .

I sold $745 and $742.5 early in the morning for 5/14 and they already down 50%. I will close them early on Monday because I was out today and try to reopen a new position later during the week. I may sell calls at 0.20 delta like @adiggs combined with some max pain data and technical analysis now that the stock is behaving more like a normal stock. Hopefully I will not find myself in a perpetual roll.

 

[Flehmenlips]

I may be misunderstanding, but if margin called aren’t you on the hook for more than that?

Say you buy 400 shares for $700 apiece, worth $280k. If TSLA goes to $200, aren’t you down $200k (minus the premiums from your sold options)?

Regardless if purchased with cash or margin, there’s no free lunch.

I am not sure. This is part of what I am trying to figure out. As I understand it, if the price goes below a certain level (say $500) the brokerage will begin liquidating your shares to cover the margin loan and they won't let it get to a point where you are liable for more than you borrowed. You can lose all of your initial investment, but in the example I gave above, you have essentially replaced your initial investment with covered call premiums and withdrawn it, so you would only be losing the margin interest paid to date. Again, this is how I understand it, but I am seeking advice to correct my understanding if I am missing something. I do know there ARE scenarios where you can use margin to leverage in a way that you can lose far more than your investment, but I don't think the scenario I presented is necessarily one of them. Unless I am not seeing this correctly. Agreed on the free lunch comment. So what am I missing?

 

[MikeC]

I am not sure. This is part of what I am trying to figure out. As I understand it, if the price goes below a certain level (say $500) the brokerage will begin liquidating your shares to cover the margin loan and they won't let it get to a point where you are liable for more than you borrowed. You can lose all of your initial investment, but in the example I gave above, you have essentially replaced your initial investment with covered call premiums and withdrawn it, so you would only be losing the margin interest paid to date. Again, this is how I understand it, but I am seeking advice to correct my understanding if I am missing something. I do know there ARE scenarios where you can use margin to leverage in a way that you can lose far more than your investment, but I don't think the scenario I presented is necessarily one of them. Unless I am not seeing this correctly. Agreed on the free lunch comment. So what am I missing?

I think the brokers will not let themselves get in a position where if your position loses a lot of money, they are on the hook for it instead of you.

I don't use margin myself so not sure of the exact dynamics, but maybe confirm that they will approve you to use the amount of margin you are planning to use with the collateral that you will be having at the time.

 

[Oil4AsphaultOnly]

Sorry for the confusion. I'm going to create a hypothetical scenario to make it more clear:

Let's say I don't own any TSLA stock but have $125K in savings.
I am going to buy a house in two weeks. The down payment needed is $100k. I have the $125k in cash now, but would like to leverage it more effectively. I place it in my brokerage account which has a 40% margin requirement for TSLA. I then leverage the full margin and purchase 400 shares of TSLA at $650 for a total of $260k, using $104k of my cash as leverage. I then sell 4x June 23 covered calls at a 750 strike for a premium of $23,000 per contract, and therefore have $92K in premiums plus my remaining $21k in cash. I withdraw $100k in cash for my downpayment and am left with $13k in cash in my account and still hold 400 shares of TSLA under contract, which if and when called away in two years will give me a return of $40k. If my brokerage is charging say 3% interest on the $156k margin loan, that is a cost of $9360 over two years, and I still net over $30k or $15k per year. If stock price crashes and I get margin called, the shares are liquidated and contracts closed and even if I get liquidated to zero, I have only lost the amount of margin interest paid to date and possibly the $13k that was still in my account. If the stock goes down modestly, and I can source a bit more cash, I can buy the contracts to close and I'm good. Either way, I still have the downpayment for my house and potentially some profit and potentially some $TSLA if I can buy the contracts back. What am I missing here?

Don't use margin myself, but I'm pretty sure that as soon as you withdraw that $100k, you would no longer meet your 40% margin requirement and would immediately be margin called. And I think your remaining $13k becomes at risk (to cover the margin call) if TSLA drops ~$7.50 the day after.

 

[Flehmenlips]

I think the brokers will not let themselves get in a position where if your position loses a lot of money, they are on the hook for it instead of you.

I don't use margin myself so not sure of the exact dynamics, but maybe confirm that they will approve you to use the amount of margin you are planning to use with the collateral that you will be having at the time.

I agree, and as I understand it, that is why they would forcibly sell the shares if the price hits a certain level, and continue to do so as needed in order to protect their position. I did have a long talk with TDA and they assured me that my strategy was sound, but I wanted to review it with other traders as well.

 

[Flehmenlips]

Don't use margin myself, but I'm pretty sure that as soon as you withdraw that $100k, you would no longer meet your 40% margin requirement and would immediately be margin called.

This doesn't compute. I would not be withdrawing the original cash, only the premiums collected, which should be the equivalent of adding $100k cash to the account and immediately withdrawing it again (as I understand it).

And I think your remaining $13k becomes at risk (to cover the margin call) if TSLA drops ~$7.50 the day after.

Yes, this is true. If I am super leveraged on margin and the price drops very far, the $13K and the stocks would be at risk. However, it still seems to me that is ALL that is at risk, along with any margin loan interest paid to date.
To add more to this scenario, if I didn't need to take out the cash, I could simply take the $92k in premiums and buy another 100+ shares with it and then have ample collateral to ease the margin position and have a nice block of shares to either hold or sell covered calls. In that case I would be long 400 shares, under contract for a small potential profit at assignment, and long 100+ shares free and clear, accompanied by a $156k margin debt. All from an initial investment of $125. This seems like a plausible scenario to me. Thoughts?