Wiki Selling TSLA Options - Be the House

[dl003]

I don't understand this part. I thought that when you sell covered calls, the premium is a cash payment to your account that is available immediately and is available to use and spend however one chooses. Is this different with long dated covered calls?

Yes you can spend it however you like as long as you stay within the confine of your margin requirement. If you spend it on more shares, it will be fine as the money is still in your account; you are simply “rebalancing” your account from cash to equity. But, if you withdraw it, that simultaneously reduces your account value and increases your margin; now your account just shrinks. Remember: the sale of the LEAP calls does not immediately add to your account value. Your cash balance increases which gives you more flexibility; your account value does not.

 

[Flehmenlips]

Yes you can spend it however you like as long as you stay within the confine of your margin requirement. If you spend it on more shares, it will be fine as the money is still in your account; you are simply “rebalancing” your account from cash to equity. But, if you withdraw it, that simultaneously reduces your account value and increases your margin; now your account just shrinks. Remember: the sale of the LEAP calls does not immediately add to your account value. Your cash balance increases which gives you more flexibility; your account value does not.

Thank you for this distinction. I understand now.

 

[stealthyc]

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.

Do you have portfolio margin?

 

[Yoona]

Do you have portfolio margin?

no, it is standard 2:1 leverage.

 

[bxr140]

What I was referring to is that if the SP goes past the long leg there is no saving the spread.

This is definitely not a correct statement to make, as evidence by:

I got lucky that time because the stock decided to move favorably and I was able to save the spread.

You didn't get lucky, it just that you leveraged one of the two practical methods of getting out of an underwater credit position. The other is time. One just has to have the patience to roll out and toward underlying for as long as it takes for underlying price and/or time (via time decay) to drain the water out of the pool. Its a shitty place to be, but again the position type has no bearing on a trader's ability (or not) to recover.

Mind, its not possible to get out of every underwater credit position. Let me tell you about these $200 covered calls I had before the stock split...

 

[asburgers]

What a mess!!

I agree. At least this is not a single-company phenomenon.

 

[asburgers]

IV starting to edge up on thin-ish volume. I already hold too much of this to buy more.

 

[ReddyLeaf]

Anxiously awaiting @bxr140 ’s analysis in the technical analysis thread. I don’t like what this newbie is seeing. Look out below. 600? 550? Damn, I should have let those -c702.50s ride.

 

[Yoona]

200 Iron Condors +p595/-p600/-c675/+c680 will give $50k credit, if i can stomach the ride (and this range) to Fri.

Margin reserved ~$120k.

*** NOT ADVICE: this is personal thought; gambling is not investing ***

 

[Criscmt]

Credit spreads and IC are great until you screw up. At least with naked puts and covered calls you have something to show for if you are wrong. I do credit put spread a lot but I am usually way OTM for instance for last week I had -610/+590s and it was still more profitable than a straight naked put with IIRC a third/fourth of the cash required vs a similar strike put. The problem is that if the SP goes past the long leg you are done. @setipoo what is your win rate? do you have spread sheet or something showing the strikes that you picked? Thanks.

> The problem is that if the SP goes past the long leg you are done.
As long as you have enough margin to roll the puts, you should be ok?

 

[Criscmt]

200 Iron Condors +p595/-p600/-c675/+c680 will give $50k credit, if i can stomach the ride (and this range) to Fri.

Margin reserved ~$120k.

*** NOT ADVICE: this is personal thought; gambling is not investing ***

What's your plan if the SP goes well out of the range, on either side, say bounces to $720 by 05/14?
Did you calculate if you have enough margin to roll them?

 

[Criscmt]

Anxiously awaiting @bxr140 ’s analysis in the technical analysis thread. I don’t like what this newbie is seeing. Look out below. 600? 550? Damn, I should have let those -c702.50s ride.

Are you seeing high possibility of 550 for this week?

 

[Criscmt]

Also assignment risk, but assuming all legs are closed if assigned.

The worst case 200*$5*100 = $100,000 loss, right?

 

[stealthyc]

The worst case 200*$5*100 = $100,000 loss, right?

minus the premium credited I assume

 

[adiggs]

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.

I've learned that perpetual roll isn't a great place to be.

It's important to quantify "not a great place to be". That leg has effectively stopped generating income, with a small ($1) net credit on each roll. These rolls have been 1, 2, and 4 weeks in duration (so far) and have moved me from a ~820 put down to a 760 strike. It's also taken 2 months(ish) so far.


What really hurt is that I got a reversal in there which left the call leg ALSO deep ITM. Where 'hurt' is as above - small net credits while dragging the strike price back to the underlying.


Also worth noting that both legs got there by selling high delta strikes that yielded about 4-6 months of income in a month. So I'm still in the overall winning window (relative to income target). And the calls are no longer deep ITM (which is the leg I most want to avoid being deep ITM).


@Lycanthrope had a comment about rolling losing positions and the ability to perma-roll. It's not risk free by any means. The first and primary restriction on the position is that it has to be open ended. I.e. if it takes a year worth of rolling for the strike to catch up with the underlying then there isn't a problem rolling for that year. I figured that out, thankfully without painful experience, when I thought about two things:
1) using tax man money to sell a few more puts (what if they went ITM - then what!?!)
2) Using margin to back the puts (or calls). If the shares go down fast, then the margin shrinks and at some point I can't continue to hold the puts until the shares reverse.

For myself I figure that to do this well I need to be able to earn my target income level on either leg; I don't need both legs to be profitable to reach my target income level.


Something I tried out today - with the shares around $640 this morning I rolled my 5/7 655 put out to 5/14 and 640. That got me a small net credit and a $15 strike improvement for a 1 week roll. That was a much better 1 week roll than I normally have available when ITM, so first blush is that I'm better off taking the roll early for a bigger strike improvement even if that means 1 or 2 weeks of strike improvement instead of earning income. Those puts are still paired up with calls that are doing quite nicely

 

[dl003]

The problem with spread and IC is that it's easy to get overleveraged. I used to have a lot of issues with them because it was really difficult for me to manage risks. I know a guy whose ICs on AAPL went wrong and his collateral quickly blew up 10x to $500k in a single week. The calculation on rolling was funky to say the least. Since I switched to selling naked calls (each 100 shares collateralized for more than 1 (5-6) call), it became more straight forward. I don't make nearly as much as @Lycanthrope with his acute sense of where the stock may end up and his balls of steel, but still pretty decent. 1-1.5% return on my capital each week is sustainable.

 

[bxr140]

At least with thinkorswim, you can open iron condors as a single transaction.

With the major American platforms (ostensibly, trading within the USA) mult-leg option tickets are no problem. For the 'classic' strategies like condors and butterflies and such they sometimes have dumb tools to "help" you build the ticket...most of the time I recommend just building a "custom" ticket even if it ends up being an IC or whatever.

 

[bxr140]

The problem with spread and IC is that it's easy to get overleveraged.

Its true that if one doesn't control a position relative to account size, its easy to take on A SHITLOAD of risk with spreads. However, the corollary issue is that naked positions make it easy to take on A SHITLOAD of margin (and expose the account to a margin call) so its kinda poe-tay-toe poe-tah-toe. Its all discipline in management.

If you're less confident in directional movement for sure fewer naked contracts will carry 'less unfavorable' downside than more spread contracts from a dollar perspective but, as noted upthread, the recovery strategy/timeline is basically the same if you get into unfavorable territory.

Let me tell you about that time I halved an account balance on an IC position gone sideways...
Let me also tell you about that other time I halved an account balance on a naked position gone wrong...

 

[ReddyLeaf]

Are you seeing high possibility of 550 for this week?

No, very low possibility. 600 definitely looks in play. I’m saving a bit of cash in reserve for rolling my 5/14 -p680s, so no more buying above 600 for me.

 

[adiggs]

I've asked previously about Poor Man’s Covered Call

@bxr140 asked about doing one of these in an IRA.


I'm happy to report that step 1 in my experiment with one of these succeeded today. I was able to purchase the Jan 2023 400 call for $315 and sell the May 14 685 call for $4, for a net debit of $311. I entered this trade as a multi-leg trade.

The next part of my experiment will be closing the short call and opening a new call (from what I've read I expect no troubles). I'll make a point of doing this in a roll transaction (BTC old, STO new). This will cover the mechanics of doing this.


I chose the 400 strike and the Jan 2023 expiration for a couple of reasons. This is also a single position so my level of analysis is less than it will be in future positions.

The 400 strike was chosen to be pretty far ITM. My intention is to be able to buy 2 of these contracts for the cost of 100 shares. That doesn't get me 2 delta (more like 1.6) but it does get me some leverage and pretty deeply ITM on this long call so that I get reasonably close to $ for $ change in the contract. This was my primary concern.

EDIT to add: It is also my understanding that PMCC requires that the long call be ITM. How far ITM is a different question - my desire is to be far enough ITM that I think its unlikely I'll be unable to keep selling calls.

I wanted the expiration to be far enough out that I can reasonably hold the contract for 12m + 1 day to get long term tax treatment. My thinking right now is that I will roll the long call in that >12m range (and well before ~18 months) in order to minimize time decay, acquire long term tax treatment (given that call is ahead - if its behind then I might roll at <12m in order to harvest some tax loss).

And of course my plan is to sell covered calls against this long call option.


I was originally thinking the Jun 2023 (max duration) but found the time value seemed high for the extra 6 months. The additional analysis I want to do is to figure out what my ideal expiration time is for this long call. I am, in effect, buying the time value when I buy the contract, so I want a nice balance of low cost (time value) and lots of time (so I have more opportunities to sell covered calls). This 20ish month contract seemed like a good contract to start with. I'll have that 12m window to sell calls and still have 8 months to go when I reach long term treatment on the long call.


Larger plan - given that I can prove out the rest of the mechanics to my satisfaction, then these are contracts I plan (for now) to only trade in an IRA (where short and long term tax treatment is irrelevant; I use this account as a second source of education so I try to use my brokerage account constraints that I impose on myself). Anyway - I'll use these to get the rest of the way to my target level of call contracts and match those up with a comparable number of puts. The actual ratio I'm looking for is something like 1 call per 1.25 puts. I.e. 4 call contracts and 5 put contracts open at a time.

I am targeting something like that ratio as I am primarily mitigating against a repeat of 2020 (to the moon Alice - to the MOON!) in my planning, and having more puts means I'll be earning more / faster as shares rise (which I can promptly spend to keep the call strike in range of the underlying. And besides it seems like I earn more selling puts than calls.

Given that this works as desired, then I may be trading in some shares in my brokerage for long dated calls to retain my upside exposure while also raising some cash so I can get the put contracts I'm selling in that account up to that 1:1+ callut ratio.