Yea, been wondering about this too. I think my strategy will be to just keep investing it and sell enough to pay taxes when the time comes. If I lose on later investments, I can write it off against the gains. The only real catch I can see is if you had a good 2013, then got crushed in 2014 before taxes were due and ended up in a tight spot.
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Newbie Options Trading
- Thread starter Jonathan Hewitt
- Start date
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- investing options TSLA tsla stock
I bought a Model S. It negates $7500 worth of taxes! Kidding, but seriously, haha. I also increased withholding at my work by changing my W-4. I'm still going to owe some as I still need money each month to live, haha. The money that I'm withholding would have gone into savings/investments anyway. I'll have to sell some holdings to make up the difference unless I get some capital losses between now and then.
(Un)fortunately I haven't had the need to worry about the tax consequences of my investments because I have losses from 2008-2009 that will be partially offset by gains from this year, so I won't have to pay taxes on my gains this year. However, I think that most of us here are not full-time traders, we have other full-time jobs, and so I would rather spend the limited number of computational cycles I have for finding good investment strategies rather than worrying about tax consequences. That being said, if I had more time to dedicate to my investments, I would definitely be spending time optimizing the strategies to be more tax efficient. IB has a seminar coming up on how to be more tax efficient w/ your investments.
mershaw2001
I'm short the short sellers
I changed to last in, first out, so that my core position doesn't get changed for tax purposes as I trade. The majority of my gains are locked in a core set of shares that will go to long term gains and then i'll deal with the taxes on that in 20 years when i finally sell my tesla position. The rest of the position: short term options, short term buys on the dip etc are going to be short term capital gains that i'll offset with capital losses.
I teach folks to get their stock broker's license (Series 7) for a living and use cars to explain option basics. Send me a private message and we can do something on gotomeeting. Really easy way to understand basic option mechanics especially since I use buying and selling cars and contracts to buy and sell cars in all of my examples. Probably take about a half hour.
Cal
I'm wondering if anyone could give a good example of how they are effectively using margin? Since my account has been margin enabled I've only used it sparingly for short time periods and nowhere near the full amount. However, I feel that I have a lot of buying power that I am not utilizing that I could be making a return on.
I was thinking of ways to have a return on my margin buying power and came up with one play that seemed pretty low risk: Buy a dividend paying stock with generally lower volatility and then buy otm puts for cheap protection against any catastrophic drop, and then finally sell weekly covered calls against the position to capture the premium. I was considering MSFT and doing a model using 1000 shares over a 3 month time frame would yield around a 10% return depending on the weekly premium you could capture.
I want to be able to utilize margin if another GS 'upgrade' event happens, but apart from that, I've been cautious using margin with Tesla. It seems like a risky position to use margin with TSLA right now, even just to buy common shares. With the economic uncertainty maybe there could be a pullback for a bit, which I'm fine for my long position, but with margin, that gets expensive, and hedging is also very expensive it seems. Or am I way too conservative with that line of thought?
I was thinking of ways to have a return on my margin buying power and came up with one play that seemed pretty low risk: Buy a dividend paying stock with generally lower volatility and then buy otm puts for cheap protection against any catastrophic drop, and then finally sell weekly covered calls against the position to capture the premium. I was considering MSFT and doing a model using 1000 shares over a 3 month time frame would yield around a 10% return depending on the weekly premium you could capture.
I want to be able to utilize margin if another GS 'upgrade' event happens, but apart from that, I've been cautious using margin with Tesla. It seems like a risky position to use margin with TSLA right now, even just to buy common shares. With the economic uncertainty maybe there could be a pullback for a bit, which I'm fine for my long position, but with margin, that gets expensive, and hedging is also very expensive it seems. Or am I way too conservative with that line of thought?
Many of the folks on this forum are very, very sophisticated and have a much deeper understanding than the average guy (including myself) Margin is very risky plain and simple. Of course the draw is the leverage of low entry cost (controlling lots of stock with little down) but the maintenance calls can be overwhelming. I am a very conservative investor. Margin like options are not for the faint of heart or beginner. Both are extensively used by fund managers, analysts and speculators.
Best to learn both on paper or with very small amounts. If you are good at it, the most you lose is time and some early opportunities. If you suck, it's just a paper loss and you'll thank the heavens you didn't actually invest anything!
Most folks wait until they have $ to lose e.g. inheritance, insurance claim etc. They then try to learn with their windfall and later have nothing. I'm sure you've heard about all of those lottery winners with nothing left a few years later.
Best to learn both on paper or with very small amounts. If you are good at it, the most you lose is time and some early opportunities. If you suck, it's just a paper loss and you'll thank the heavens you didn't actually invest anything!
Most folks wait until they have $ to lose e.g. inheritance, insurance claim etc. They then try to learn with their windfall and later have nothing. I'm sure you've heard about all of those lottery winners with nothing left a few years later.
+1000. For all the those considering using margin, please re-read the aapl pdf. Multiple people who used margin were wiped out during appl's volatile swings as they had margin calls and had to liquidate at the most inopportune time. If you want or need leverage, use long dated calls (ie LEAPS) which are fully paid for, and which will give you time to recover if their is a market crash/black swan/war/tsla recall etc. etc. Margin (esp portfolio margin for accounts over 100k) sounds really appealing, that is, until you blow up your account.
I think that timing is everything for the Oct calls... I'll be looking to sell them tomorrow or tuesday (depending on price action) because the time decay is going to be very high. You have OTM options that expire a week earlier than me, so you should be looking to get rid of them tomorrow if its a good day unless you think that TSLA is going to continue climbing up through the rest of the week. As for the Nov calls, remember that IV will be spiking way up during the days leading up to the conference call, and be at its highest the hour or two before the market closes the day that TSLA reports (which people estimate will be 10/6). So this might be a good time to get rid of these options if TSLA keeps on climbing from now till the CC and breaks $200... If not, you can of course hold the options, but you have to keep in mind that IV drop will destroy the value of the call if they are ATM or OTM.
I would be careful with rolling your calls 1 week forward at a time, thats a sure fire way of being destroyed if we have a bad couple of days like we did last week... If you had rolled forward from the week before, your calls would have most likely expired worthless on Friday... I'm pretty sure we will see at least 1 pullback before earnings (~$15 drop), so you need to be protected against that and make sure you don't loose all your money in that case. Considering you have a small amount of cash, I would recommend anytime if your debating between weekly ATM calls, or slightly OTM vs. much further OTM calls that are longer dated (say Jan '14), to go with the longer dated calls. This won't make you as much money as you could have made with the closer term calls, but it will reduce the chances of you going bust. Besides that, just keep your eyes open for a good entry point, like the one we had on Wed/Thurs. Days like that are amazing buying oppertunities for the longer dated options as the time decay won't work against you, however, the call prices will come down b/c of the drop in the stock...
I'll be actively monitoring the stock tomorrow to get out of the shorter term options if possible because I have more exposure to the Oct calls than I am comfortable with.
Agree 100%. I needed some money to buy on the recent dip and decided to sell Jan puts to get some cash to buy calls. Of course this can really hurt on a down turn but since it's somewhat long term it'll have a chance to recover if things did go south. It's also after earnings so if we continue to go up then I can buy them back sometime after earnings after I sell my calls. I stay away from margin like the plague.
Thanks for the extensive reply, it really helps a lot to read and understand the reasoning behind your trades. So regarding the Nov13 calls, if IV spikes up that is good for the premium and value of the option right? Also, you said "So this might be a good time to get rid of these options if TSLA keeps on climbing from now till the CC and breaks $200... If not, you can of course hold the options, but you have to keep in mind that IV drop will destroy the value of the call if they are ATM or OTM." Does this mean that my Nov13 195 would be ITM and thus with your reasoning, be worth keeping since a falling IV won't destroy the ITM option as much as an ATM or OTM?
Also, let us know how what you'll do with your OCT calls, would be interesting to follow your reasoning. I guess I'll hang on to mine until wednesday at least, IF, there is no negative catalyst, since I think we'll have some rebound this week.
Mario Kadastik
Active Member
Ok, just to elaborate on my original comments about IV. The implied volatility (IV) always rises for any stock just before earnings report because an earnings report is a possible catalyst for major stock moves. This rise usually happens gradually as we build up the anticipation to the earnings report and spikes up faster and faster during the last day of trading before the report. Once the earnings is announced (usually after regular trading hours) the unknown factors disappear and the price makes its move. The next day when the trading resumes the IV percentage will take a dramatic drop and accordingly the options premiums will drop significantly.
Now the way to use this is various:
1) if you want to make a play pre-earnings your best bet is to sell your options just before market close to catch the increased IV that pushes the premiums up
2) if you want to make a play for earnings itself it's best to try to position yourself a week or so before the earnings itself and/or use a bit longer term (so not the same week as the earnings itself, but maybe a few weeks out, next month) contracts to get in at reasonable IV and NOT get killed by the IV drop the day after (the IV will drop, but will make up a relatively smaller portion of the options premium with more in the time value).
3) if you want to make a play for earnings IV crunch (risky), then you can sell just before market close the ATM or somewhat OTM call and put straddle. The at the money call+put premium sum indicates what the market is pricing the earnings move to be. So let's say Tesla is trading at $190 and the $190 call and put sum is $40. This means that market is pricing a $40 move. If you feel the move is likely to be slightly smaller or just want to play the IV crunch you sell ~$30 USD OTM straddle (so you sell $160 put and $220 call) for a reasonable price of probably around $20 or so giving you profitability between $140 ... $240. The next day when the IV has crashed and the stock has made its move you can possibly buy the position back for far less than $20 or if the move wasn't even as high as you expected let it expire worthless. The best for such crush plays is if the earnings is on a Thursday afternoon, then the IV is the only thing keeping the premium up as there's almost no time value left for the weekly options.
Now the IV crunch play is risky because if the stock moves far more than your play, then you're short both put and call and might very well get a margin call on it the next day or take quite some losses. Then again I've done it a few times with Amazon and others and it has paid off quite nicely
But I'd not recommend the IV crunch play to anyone who's not 100% aware what they're doing as that's a high risk play.
Now the way to use this is various:
1) if you want to make a play pre-earnings your best bet is to sell your options just before market close to catch the increased IV that pushes the premiums up
2) if you want to make a play for earnings itself it's best to try to position yourself a week or so before the earnings itself and/or use a bit longer term (so not the same week as the earnings itself, but maybe a few weeks out, next month) contracts to get in at reasonable IV and NOT get killed by the IV drop the day after (the IV will drop, but will make up a relatively smaller portion of the options premium with more in the time value).
3) if you want to make a play for earnings IV crunch (risky), then you can sell just before market close the ATM or somewhat OTM call and put straddle. The at the money call+put premium sum indicates what the market is pricing the earnings move to be. So let's say Tesla is trading at $190 and the $190 call and put sum is $40. This means that market is pricing a $40 move. If you feel the move is likely to be slightly smaller or just want to play the IV crunch you sell ~$30 USD OTM straddle (so you sell $160 put and $220 call) for a reasonable price of probably around $20 or so giving you profitability between $140 ... $240. The next day when the IV has crashed and the stock has made its move you can possibly buy the position back for far less than $20 or if the move wasn't even as high as you expected let it expire worthless. The best for such crush plays is if the earnings is on a Thursday afternoon, then the IV is the only thing keeping the premium up as there's almost no time value left for the weekly options.
Now the IV crunch play is risky because if the stock moves far more than your play, then you're short both put and call and might very well get a margin call on it the next day or take quite some losses. Then again I've done it a few times with Amazon and others and it has paid off quite nicely
But I'd not recommend the IV crunch play to anyone who's not 100% aware what they're doing as that's a high risk play.
Basically what Mario just said...
So say for example TSLA is at $200, then your $195 only have $5 of value, however, before the CC they might be worth $15-$20. Then suppose the stock moves up to $205 after earnings, then your call might only be worth $14 ($10 intrinsic value + $4 time premimum) and so you might actually lose money in holding the options if the call isn't good... Of course if it is good, then you can make a lot of money so it depends on how you think the market will react to the call, and that is dependent on the way the stock behaves leading up to the earnings.
I'm willing to say that if TSLA holds around $200 pre-earnings, we might see a $15+ pop (I think the earnings will be very good) and go to the top of the channel which will be around $225... But of course this is my opnion now and it might change if we break $200 way before earnings.
I would like to write a more extensive reply and help out, unfortunately I'm very busy right now. Feel free to post all your questions, I'll have much more time this weekend and would be more than happy to help out any of the new learners on these threads.
Also I recommend following CitizenT, sleepyhead, kevin99, CapitalOpressor etc. because they are far more experienced than I am, and have very good insights and are great contributors on these forums. Good luck
Basically what Mario just said...
So say for example TSLA is at $200, then your $195 only have $5 of value, however, before the CC they might be worth $15-$20. Then suppose the stock moves up to $205 after earnings, then your call might only be worth $14 ($10 intrinsic value + $4 time premimum) and so you might actually lose money in holding the options if the call isn't good... Of course if it is good, then you can make a lot of money so it depends on how you think the market will react to the call, and that is dependent on the way the stock behaves leading up to the earnings.
I'm willing to say that if TSLA holds around $200 pre-earnings, we might see a $15+ pop (I think the earnings will be very good) and go to the top of the channel which will be around $225... But of course this is my opnion now and it might change if we break $200 way before earnings.
I would like to write a more extensive reply and help out, unfortunately I'm very busy right now. Feel free to post all your questions, I'll have much more time this weekend and would be more than happy to help out any of the new learners on these threads.
Also I recommend following CitizenT, sleepyhead, kevin99, CapitalOpressor etc. because they are far more experienced than I am, and have very good insights and are great contributors on these forums. Good luck
Awesome Hershey, thanks a lot, that made sense. Thanks to you too Mario. I will surely have more questions later. I am happy I made my first trade last friday because it's so much quicker to learn if you are actually trading than to just read about it. Right now I am following my weekly option and trying to figure out when to jump ship
I have two contracts and I am considering selling one of them and getting my initial investment back plus more and letting the last contract ride incase we keep going up this week.
Mario Kadastik
Active Member
One thing to keep in mind. Cheap options may well mean that they are unlikely to profit you. I made the mistake when I was starting out that I wanted to be cautious and buy smaller priced options while learning that I'd not suffer big losses. The trouble was that those options were cheap for a reason So taking way OTM calls hoping they'll go up has problems. Being far OTM means their delta is small (i.e. their gain for every dollar the stock gains) meaning they move slowly. At the same time their theta is relatively high (or the amount they lose per day) and becomes in relative terms bigger faster than closer to the money options.
So if you want to play safeish it's better to work with options that are closer to the money (preferably ATM or +1-2 strikes) and longer term. However those have always the largest premium (the deeper in the money the smaller the time value premium, it peaks around ATM and starts to drop off the further you get from the current price). So there is no true golden rule and one has to define very well what the play is for, what the conditions for success are and what are the indications that the assumptions for the play are faulty.
If for example your play is the earnings assuming that post-earnings Tesla will be around 200-220 region. Then you can use the dips to set up positions that benefit from this and relatively strong interim rallies to offload risk (i.e. delayed construct call spreads) or use consolidation phases where IV drops slowly to establish your initial trades. Also, contemplate using spreads instead of pure options. A spread has a lower cost basis and has a dampening effect. A sudden move in either direction is dampened as you only care about the price difference between options, not their absolute value. This works both for losses and profits. So the spread should be built so that at the expiration you're going to benefit most if it indeed comes to fruition that you anticipated. As an example I have the following spreads right now: November monthly 190-200, December monthly 180-200, March '14 200-230. The cost basis for them is far lower than just purely buying the calls for the lower edge and therefore their break even price is lower. They do limit my upside as the spreads higher leg defines my maximum profit point beyond that both options move up the same amount by the time of expiration.
Also in case of spreads they will only give their maximum value ~1-2 hours before market close on their day of expiration or when they are very deep in the money. The rest of the time you're good off if you get 60-80% of the theoretical gains so don't go chasing the last 20-30% if the premium is already there today, well before the expiration.
So taking way OTM calls hoping they'll go up has problems. Being far OTM means their delta is small (i.e. their gain for every dollar the stock gains) meaning they move slowly. At the same time their theta is relatively high (or the amount they lose per day) and becomes in relative terms bigger faster than closer to the money options. So if you want to play safeish it's better to work with options that are closer to the money (preferably ATM or +1-2 strikes) and longer term. However those have always the largest premium (the deeper in the money the smaller the time value premium, it peaks around ATM and starts to drop off the further you get from the current price). So there is no true golden rule and one has to define very well what the play is for, what the conditions for success are and what are the indications that the assumptions for the play are faulty.
If for example your play is the earnings assuming that post-earnings Tesla will be around 200-220 region. Then you can use the dips to set up positions that benefit from this and relatively strong interim rallies to offload risk (i.e. delayed construct call spreads) or use consolidation phases where IV drops slowly to establish your initial trades. Also, contemplate using spreads instead of pure options. A spread has a lower cost basis and has a dampening effect. A sudden move in either direction is dampened as you only care about the price difference between options, not their absolute value. This works both for losses and profits. So the spread should be built so that at the expiration you're going to benefit most if it indeed comes to fruition that you anticipated. As an example I have the following spreads right now: November monthly 190-200, December monthly 180-200, March '14 200-230. The cost basis for them is far lower than just purely buying the calls for the lower edge and therefore their break even price is lower. They do limit my upside as the spreads higher leg defines my maximum profit point beyond that both options move up the same amount by the time of expiration.
Also in case of spreads they will only give their maximum value ~1-2 hours before market close on their day of expiration or when they are very deep in the money. The rest of the time you're good off if you get 60-80% of the theoretical gains so don't go chasing the last 20-30% if the premium is already there today, well before the expiration.
I have recently been using the margin as a strategic reserve. For example I had calls expiring last Friday at $175 and $180. At the end of Friday, they were in the money, and the stock was trending upward. I could have sold the calls for a tidy profit. But I believed that the good news about the battery fire hadn't really sunk in yet, so instead I allowed the calls to be automatically exercised, and then sold the stock this morning for an extra $3 per share, which essentially doubled my profit from the calls. Of course to do that I had to have enough margin to actually purchase the stock! So generally I keep my margin balance around zero, and mostly only use it for things like this.
sub
Active Member
Margin is a scary thing, I've used it only a couple times and very briefly. I always look at worst case scenario and decide if that out weighs best case scenario, when considering using margin the answer almost always a no. I was slightly tempted to pick up some shares earlier this week when price dropped to 170's, but with it going as low as 163 this morning I would have been anxious to say the least if I had used margin. Leaps are a much better alternative.
So, what is a good strategy for situations like this. I bought in heavily during the fire sale (mostly Oct '13 and Nov '13 calls) because I thought that $173 was a discount, it was $21 drop from the 52-week high! Now, if I hold my Oct '13 calls (the one I'm actually worried about) to expiry, than the stock needs to be about $187 ($20+ above where it is today). While I think this is likely if we reach a deal on the debt ceiling this week, I'm pretty sure the government won't do anything until the last minute and then a single day left on those calls probably won't be enough to drive us back up.
I have been trying to buy more to bring my average down, and lower the break-even point. I also bought some $150 puts today in the case that we see another -$10 day (although I think if we break $153 then we won't stop until $133.
What would be a good strategy for situations like these? Do I just take whatever I can of my calls and exit? Or do I do something else to help my portfolio recover faster?
I have been trying to buy more to bring my average down, and lower the break-even point. I also bought some $150 puts today in the case that we see another -$10 day (although I think if we break $153 then we won't stop until $133.
What would be a good strategy for situations like these? Do I just take whatever I can of my calls and exit? Or do I do something else to help my portfolio recover faster?
sub
Active Member
So I found out early this week that Scottrade doesn't allow selling puts, at least for me. Some reading on the net tells me that they don't allow it to most if not all of their clients? Cost me some good money this week when TSLA dropped to Low 160's, I was confident it was not going lower. My plan was to sell puts and buy some calls, both would have paid off nicely at this point. As I went to execute the transaction I was given the denial, wasn't aware of this issue until then. How much of a hassle to move to another broker? I know I won't be able to trade for a while, how long does it usually take? Recommendations?
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