Welcome to Tesla Motors Club
Discuss Tesla's Model S, Model 3, Model X, Model Y, Cybertruck, Roadster and More.
Register

Call spread strategies for high returns and lower risk

This site may earn commission on affiliate links.

mrmage

Member
Supporting Member
Jan 10, 2019
707
5,087
The Peninsula, CA
My core TSLA holdings are in shares and calls purchased awhile ago which I don't trade. However, I want to continue investing in TSLA even at elevated volatility and prices, without incurring too much risk. The high implied volatility has made naked calls too expensive, so calls spreads have been my solution to making high premiums work in my favor.

Everyone knows that premiums for naked calls are expensive now, which hurts ROI. One way to make high IV work is to write covered calls and naked puts. However, these have lower returns than I like, so I'll compare naked calls to call spreads instead.

Case 1: Out of the money calls vs call spreads

For a naked OTM call, I'll use the Jan 2022 1500c that's around $150. Breakeven at expiration is SP $1650. If TSLA goes to $2000, ROI is 230% and $2500 returns 570%.

Compare that to a Jan 2022 1300/1500c spread which costs about $30. Breakeven at expiration is only $1330 and ROI at $1500 is 560%.

In other words, the spread at $1500 gives the same return as a naked call at $2500. The advantage of naked calls is no limit on the upside, but essentially you can look at this as a tradeoff - giving up the gains for 500% and higher for a much lower bar of getting 500% returns.

Case 2: In the money calls vs spreads

For a naked in the money call, a Jan 2022 700c is $395. Breakeven at expiration is SP $1095. If TLSA hits 1500 at expiration, the profit is 100%. If SP remains at $935 in 1.5 years, the net is -40%. The high option premiums kill anything less than solid gains.

Compare that to a Jan 2022 700/800c spread for about $50. Breakeven at expiration is SP $750. In other words, if TSLA is 20% *lower* at expiration, this breaks even. If TSLA is *lower* by 15% at expiration($800), ROI is 100%.

With a call spread, TSLA only needs to be $800 or higher at expiration to net 100%, vs the $1500 for the naked call.

Other thoughts

I've been playing with strangles and rotating buy/sells with spreads, and find they suit my style. By no means am I an expert on all things options, but spreads have definitely been growing on me. If you've been doing interesting things with them, I'd love to hear about it.
 
I suggested spreads instead of naked options for strangle/straddles, because It’s hard to make a good return with naked options when the time value is high.

For example, the cost of 450 Jan 2022 call LEAPs is around 35% of TSLA and 370 put is 30% (both 10% OTM). Buying both for a straddle would cost 65% of TSLA. To break even at expiration, TSLA has to be up or down at least 75%!

Using spreads for strangles / straddles) can return 3:1 for each leg with SP changes of as little as 10%, making the trade likely to be profitable at expiration. My real motivation was selling the bear leg early to break even, then hanging onto the bull leg which I then own for “free”.

I wouldn’t suggest this kind of strangle for someone new to options though. There are many considerations in finding the right spreads and you need to place a 4 way transaction (2 calls, 2 puts) that balance out the bear and bull legs.

However, call spreads are worth considering because they’re more conservative than naked calls. Essentially, they’re covered calls on steroids. They have good returns when premiums are high (eg 100% profit if SP is similar to today’s SP or higher at expiration).
 
which spread are you referring to?

When call premiums are this high, there are usually many call spreads that are fully ITM with 100% net. However, because the bid-ask can be wide, I look for something in the right time frame and with a premium that's close to what I want, then put a limit order in and see what happens.

It's hard to do when markets are closed, but for example, @SP around $420, buy 380c/sell 400c for Dec 2020, Jan/Feb/Mar 2021 for under $10, already ITM, and yield $20 for over 100% gain if TSLA is at least $400.

Or more aggressively, 370c/470c which might cost $35 to $40 and nets up to 150-200%, but still makes 50% if SP stays the same.

Even though the odds are in my favor, buying spreads on dips makes it even more so. Just be sure to close them out before expiration.
 
Hi , i did not see your post until now , i posted here on the TMC , here is the link:



👍
 
Hi , i did not see your post until now , i posted here on the TMC , here is the link:



👍

I (and now my siblings too) make lots of bull call spreads using LEAPs. My sister favors 2 years, but I’ve been favoring one year ones. Although two years is more conservative than one, a much lower strike is also more conservative. Tax consequences come into play too.

For example: An ITM call spread (eg 950/1050 with TSLA SP 1050) with 1 year expiration usually returns >100%, so two consecutive ones should beat the two year 1400/1500 one.

NB: Going off memory and not checking the actual numbers which will vary based on IV and such.
 
Last edited:
I (and now my siblings too) make lots of bull call spreads using LEAPs. My sister favors 2 years, but I’ve been favoring one year ones. Although two years is more conservative than one, a much lower strike is also more conservative. Tax consequences come into play too.

For example: An ITM call spread (eg 950/1050 with TSLA SP 1050) with 1 year expiration usually returns >100%, so two consecutive ones should beat the two year 1400/1500 one.

NB: Going off memory and not checking the actual numbers which will vary based on IV and such.
Understood , 2 consecutive ones would return max 4X . ( also after 2 years !) .

However , after 2 years , with the link you sent me(TSLA Credit Spread calculator ) , it would be

Max return on risk: 3324.7% (1656% ann.) ( according to the chart !) .

this looks like a > 30X return after 2 years.

For 1500/1550 ( apples to apples ) the midprice is 9 and the spread is 20 , for 9 the retrun is 4X , and for 20 the return is 2X.

So what is the advantage over your sisters and yours strategie over mine ???

( ok, 1800 is a bit more than 1500, but 2 years is like infinity in TSLA-land , is it not ??? :rolleyes:
 
I (and now my siblings too) make lots of bull call spreads using LEAPs. My sister favors 2 years, but I’ve been favoring one year ones. Although two years is more conservative than one, a much lower strike is also more conservative. Tax consequences come into play too.

For example: An ITM call spread (eg 950/1050 with TSLA SP 1050) with 1 year expiration usually returns >100%, so two consecutive ones should beat the two year 1400/1500 one.

NB: Going off memory and not checking the actual numbers which will vary based on IV and such.
Sorry , was under the assumption that you were also following the other thread , where i mention my strategy ....
 
Understood , 2 consecutive ones would return max 4X . ( also after 2 years !) .

However , after 2 years , with the link you sent me(TSLA Credit Spread calculator ) , it would be

Max return on risk: 3324.7% (1656% ann.) ( according to the chart !) .

this looks like a > 30X return after 2 years.

For 1500/1550 ( apples to apples ) the midprice is 9 and the spread is 20 , for 9 the retrun is 4X , and for 20 the return is 2X.

So what is the advantage over your sisters and yours strategie over mine ???

( ok, 1800 is a bit more than 1500, but 2 years is like infinity in TSLA-land , is it not ??? :rolleyes:

Probability is a huge factor--every trade needs to factor reward, risk, and probability. Your strikes are WAY higher, thus the probability of your spread returning profit is much lower.

Broken record here, but its really important to understand exactly how options work--how they move in value (up and down), when certain types of positions are better than others, etc. Generally, the passing of time has a huge impact on vertical spreads--basically, you need a lot of time to pass in order to have them return profit. AND, a DOTM spread ALSO requires a major move in underlying price. So...a long expiration vertical spread explicitly needs those two things to go right, and at the risk of stating the obvious, having two things go right is harder than having one thing go right.