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Options trading strategy/advice

Jayjs20

Member
Apr 28, 2016
845
2,179
California
Feel free to roast me over this. My excitement will drown out the noise.

Quick summary, using call options, I took 55k to 250k, back down to 45k from the massive crash this year, and now it's back up to around 227k. Now that it's around this level, I want to start converting those call options into regular stock once it gets into the 350 range. That means I'm going to buy around 250k-300k worth of TSLA stock.

My question is regarding selling covered calls. Let's say, I buy 100 shares at 350 and sell a Jan21 $400 call option and pocket around 5000 in premiums. From my perspective, if the SP hits 400, I would have just made 50 dollars/share profit on top of the premium I get to keep. If the SP does not hit 400, I get to keep the premium + keep the shares I already want to hold anyways.

And for whatever reason, if it crashes down under 275 or so, I'll just switch again from selling call options to buying call options and wait for it to bounce back. Is there any surprise downside to my evil, master plan that'll catch me by surprise? I understand that I'll be losing the upside if it does go over 400.

Thank you and much appreciated.
 

ggr

Expert in Dunning-Kruger Effect!
Mar 24, 2011
6,976
27,511
San Diego, CA
Feel free to roast me over this. My excitement will drown out the noise.

Quick summary, using call options, I took 55k to 250k, back down to 45k from the massive crash this year, and now it's back up to around 227k. Now that it's around this level, I want to start converting those call options into regular stock once it gets into the 350 range. That means I'm going to buy around 250k-300k worth of TSLA stock.

My question is regarding selling covered calls. Let's say, I buy 100 shares at 350 and sell a Jan21 $400 call option and pocket around 5000 in premiums. From my perspective, if the SP hits 400, I would have just made 50 dollars/share profit on top of the premium I get to keep. If the SP does not hit 400, I get to keep the premium + keep the shares I already want to hold anyways.

And for whatever reason, if it crashes down under 275 or so, I'll just switch again from selling call options to buying call options and wait for it to bounce back. Is there any surprise downside to my evil, master plan that'll catch me by surprise? I understand that I'll be losing the upside if it does go over 400.

Thank you and much appreciated.
If that's a serious question (most of the sentences were declarative), yes. If it doesn't bounce back, you're cactus.
 

Jayjs20

Member
Apr 28, 2016
845
2,179
California
Thanks I guess. Sorry if it sounds elementary. Between the youtube videos, articles I've read and other forums that I've asked, they all confirms that this should work. I felt like I needed to be 1000% sure before I put money into this plan. It just feels so wrong because this feels like a substantial amount of free money if you're willing to limit the upside and don't mind waiting for it to bounce back if it crashes.
 

TradingInvest

Active Member
Mar 8, 2017
1,696
13,659
USA
Feel free to roast me over this. My excitement will drown out the noise.

Quick summary, using call options, I took 55k to 250k, back down to 45k from the massive crash this year, and now it's back up to around 227k. Now that it's around this level, I want to start converting those call options into regular stock once it gets into the 350 range. That means I'm going to buy around 250k-300k worth of TSLA stock.

My question is regarding selling covered calls. Let's say, I buy 100 shares at 350 and sell a Jan21 $400 call option and pocket around 5000 in premiums. From my perspective, if the SP hits 400, I would have just made 50 dollars/share profit on top of the premium I get to keep. If the SP does not hit 400, I get to keep the premium + keep the shares I already want to hold anyways.

And for whatever reason, if it crashes down under 275 or so, I'll just switch again from selling call options to buying call options and wait for it to bounce back. Is there any surprise downside to my evil, master plan that'll catch me by surprise? I understand that I'll be losing the upside if it does go over 400.

Thank you and much appreciated.

"I understand that I'll be losing the upside if it does go over 400."

My comment is regarding your last sentence. Let's say you sold a $400 Call for $50. By the time it's near expiration, the stock is at $440. The Call you sold would be trading around $40, you could buy back the call and keep the $10 profit. So selling 400 call for $50 will be net positive up to $450. I'm sure you know this well.

The potential problem is if we get a huge rally, your gain is limited at $450. Your shares may get called away. If the stock only rallies to 500 at expiration, you could sell cash covered Puts and try to get back into the stock. If the stock rallies to 800, then you may have a hard time to get back in.
 

anthonyj

Stonks
May 16, 2018
2,358
18,233
Naples, FL
I would sell 80-90% of your calls and buy stock now. Keep half of the stock locked away for a long time, other half you can play with. Not investment advice.
 

FrankSG

Active Member
Jun 27, 2019
1,608
21,265
Singapore
I understand that I'll be losing the upside if it does go over 400.

Most of your plan is sound, it's just that it doesn't sound wise to me to limit your upside to 450 in the next 14 months or so.

Try to look up how Tesla's price/sales ratio has changed over time. This trend cannot continue, and it's going to break out at some point if Tesla keeps executing. There are many things that could easily push TSLA SP over $450 in the next year:

  • Early Model Y
  • Significant Solar Roof installations
  • Significant Autonomy progress
  • Huge battery breakthroughs presented at battery investor day

Macro-economics are the biggest risk stopping Tesla from reaching new all time highs in 2020 imo.
 

Jayjs20

Member
Apr 28, 2016
845
2,179
California
I understand what you're saying, and my 59 call options prove that I believe in the company, but man I've been burnt so many times before. Early on, I took so many trips to 100k, only to retreat back to 50k over and over again. This year, I took a trip to 250k, only to revisit 45k. I'd be a millionaire by now if I wasn't so blindingly optimistic. Pretty much everyone believed that we'd be 400s-ville from just the model 3 success alone, yet we're only at 337 after the mother of all rallies. And it doesn't sound like the bears are going anywhere. FUD's not stopping. CNBC will still invite on shorts without telling the audience that they're shorts. And yes, there's also one big orange elephant in the room. Long story short, I don't think it's not over yet. On the flip side, there's always the potential chance of being added to the SP500 some time next year, so I can't be too conservative.

I'm still toying with different ideas. Maybe write a covered calls each month and select SP+50 as the strike price. Maybe look into selling puts. I'll sleep on it a few more nights.
 
Last edited:

FrankSG

Active Member
Jun 27, 2019
1,608
21,265
Singapore
I understand what you're saying, and my 59 call options prove that I believe in the company, but man I've been burnt so many times before. Early on, I took so many trips to 100k, only to retreat back to 50k over and over again. This year, I took a trip to 250k, only to revisit 45k. I'd be a millionaire by now if I wasn't so blindingly optimistic. Pretty much everyone believed that we'd be 400s-ville from just the model 3 success alone, yet we're only at 337 after the mother of all rallies. And it doesn't sound like the bears are going anywhere. FUD's not stopping. CNBC will still invite on shorts without telling the audience that they're shorts. And yes, there's also one big orange elephant in the room. Long story short, I don't think it's not over yet. On the flip side, there's always the potential chance of being added to the SP500 some time next year, so I can't be too conservative.

I'm still toying with different ideas. Maybe write a covered calls each month and select SP+50 as the strike price. Maybe look into selling puts. I'll sleep on it a few more nights.

Are you only holding options? It's impossible to predict peaks and bottoms with complete accuracy, so don't beat yourself up too hard over it.

What I'm currently doing (and I think this makes a lot of sense if you believe in the long term 5-10 year vision) is dividing my TSLA money between long term options and stock. I am keeping most of my money in shares, because I believe it's such a safe investment over the next decade, but I also believe that the stock will (over the long term) rise much more than the market is expecting, so I take advantage of that with long term calls.

Earlier this year I put ~10% of my TSLA money into long term (Jun'21 and Jan'22) options. Currently the split is closing in on 75/25 due to the recent run up. I plan to start taking small profits soon once we go up a little bit more, and lower that ratio somewhat. Then if there is a recession and/or the stock drops a lot again and if I drop back to single digit percentages in long term options, I'll probably add some more options again to get back to a 90/10 split or so.

This way most of my TSLA money is pretty safely invested in stock, and it should most likely do very well over the next decade. But I can still take advantage of the larger than expected upswings in TSLA stock that I'm expecting thanks to my long term options.
 

Jayjs20

Member
Apr 28, 2016
845
2,179
California
I currently am holding only options. I think there is enough juice for Jan21 400s to hit 50 within the month so I'm holding out for that. News seems to be positive right now. IV is at a relatively low point at the moment since we're still getting over the ER, and we do have a few events in the works, so IV might increase from that to help push it over that 50 line. If not, I'll stake it all on Q4 earnings.
 

FrankSG

Active Member
Jun 27, 2019
1,608
21,265
Singapore
I currently am holding only options. I think there is enough juice for Jan21 400s to hit 50 within the month so I'm holding out for that. News seems to be positive right now. IV is at a relatively low point at the moment since we're still getting over the ER, and we do have a few events in the works, so IV might increase from that to help push it over that 50 line. If not, I'll stake it all on Q4 earnings.

Yeah, I'm still holding my options for a bit too. Hopefully if we're at 350-360 in the next two weeks, I'll likely take some profits by selling some of my $400 Jun'21s after Truck unveil. There's another fed meeting 9/10 December, so that brings macro uncertainty imo.

But yeah, all I was trying to say, I don't think it's wise to limit your upside and sell call options if you decide to transfer to holding shares. Especially with a 2021 expiration. The only headwind I see at the moment is a 2020 recession. Or perhaps a seasonally weak Q1 (tax credit expires in Netherlands too), but it's already expected to a certain degree, and Giga 3 ramp timing could completely overshadow this. On the other hand there's tons of potential upside in the form of Giga 3, Battery Investor Day, Model Y, Solar Roof Ramp, Autonomy Progress, Semi launch.

I know you got burned a couple of times, and that Tesla has basically traded in between 150 - 380 for the past 6 years, but Tesla's price/sales ratio can't keep dropping forever. It's already very cheap considering Tesla's growth (and unaccounted Technology lead/Autonomy/Energy/etc.), but in the next year or two either Tesla stops growing, or Tesla SP reaches new all time highs, or the market will come to value Tesla about the same as Toyota. I don't think they'll stop growing, nor that they will be valued the same as Toyota, so that leaves new all time highs.

I wrote a blog about this subject last month. There are some more details in there if you're interested:

Tesla in 2020 & 2021: My bet on TSLA Jan'22 Call Options
 

Jayjs20

Member
Apr 28, 2016
845
2,179
California
I changed up my strategy a little.

The problem with my previous strategy was that, if the stock were to go down, I would lose a substantial part of my holding before I was able to transition from selling calls to buying calls. So, I went ahead and decided it was better to sell puts instead of buying shares. Next problem was that collecting premium was nice, but it isn't very much money (compared to my previous all-in-on-call-options + pray-it-only-goes-up) strategy. I resolved this by selling a ton of them. There's also the issue of the SP going out of the control one way or the other. I somewhat resolved this by selling far out of the money in both directions. Bonus step: I also calculated which expiration date gave me the highest 'dollar amount' to 'days remaining' ratio, and it turns out that it's 6 months out. I also did some calculations and found that if I rolled every 2-3 months, that will get me the highest return rate.

So, I sold May 2020 285 puts x20 and sold May 2020 400 calls x20. I chose those levels because it kept me even between my calls and puts at $20 a piece. All together, that nets me 80k for a 6 month wait. Alternatively, I roll them. In 2 months, those $20/option should be worth around $11-12, netting me around 16k-ish/month income, and I can continuously readjust the strike price every few months as the SP moves. What's also nice is that, if I find myself in profit and it's time to roll them, I can target a higher dollar amount, so the 16k/month would turn into 17k, then 18k, and so forth, as time goes on. By my calculations, this is around a 3.8% return per month at a low/moderate amount of risk, which I guess I'm ok with.

If the SP does hit 285 again, I'll just sit on my TSLA stock and wait for it to bounce back. If it looks like it's going to break 400, I'll have enough in margin to hold on to it and see what happens from there.

Color me surprised when I did some research and found that I'm not the first person to realize this strategy. They apparently call it a short straddle and it's not recommended for stocks with a lot of volatility. Well, oh well. I've had a lot of crazy get-rich schemes, but this feels a lot better then my 'sell every morning and buy back at 1 dollar under every single day' strategy that didn't last long. Hopefully this one will last a bit longer.
 

lencap

Member
May 27, 2013
141
417
Raleigh, NC
Options trading is a very complex subject. There are lots of strategies that may be suitable given your market outlook, but responding to them in a short post is difficult at best and misleading at worst. One thing to also consider is tax treatment. Selling puts will always generate short term capital gains. So will selling calls. Owning long dated calls (over a year) can provide the potential for long term gains which may be useful for you to consider. So converting long dated calls into stock may affect your return after tax considerations.

Given the size of your investment, and the fluctuations in your capital following significant price moves, I'd strongly suggest that you read Options as a Strategic Investment by Larry McMillan. I believe the 6th Edition is the most recent (2012 publication date).

Larry's book isn't a simple read, it's a textbook. If you're familiar with some topics covered in the book you can skim through them, but I'd suggest reading the entire book. There are little nuggets of information that you may otherwise miss. I used this book as a starting point to train derivative traders on proprietary trading desks. If you study the book you'll know more than the majority of professional traders. There are lots of other books out there, but from my experience they are either too elementary or require higher levels of math knowledge.

You're likely familiar with some option related sites that may be helpful to you in determining future value of your positions, option decay as all the "greek" valuations. If you'd like more info feel free to PM me.
 

FrankSG

Active Member
Jun 27, 2019
1,608
21,265
Singapore
I changed up my strategy a little.

The problem with my previous strategy was that, if the stock were to go down, I would lose a substantial part of my holding before I was able to transition from selling calls to buying calls. So, I went ahead and decided it was better to sell puts instead of buying shares. Next problem was that collecting premium was nice, but it isn't very much money (compared to my previous all-in-on-call-options + pray-it-only-goes-up) strategy. I resolved this by selling a ton of them. There's also the issue of the SP going out of the control one way or the other. I somewhat resolved this by selling far out of the money in both directions. Bonus step: I also calculated which expiration date gave me the highest 'dollar amount' to 'days remaining' ratio, and it turns out that it's 6 months out. I also did some calculations and found that if I rolled every 2-3 months, that will get me the highest return rate.

So, I sold May 2020 285 puts x20 and sold May 2020 400 calls x20. I chose those levels because it kept me even between my calls and puts at $20 a piece. All together, that nets me 80k for a 6 month wait. Alternatively, I roll them. In 2 months, those $20/option should be worth around $11-12, netting me around 16k-ish/month income, and I can continuously readjust the strike price every few months as the SP moves. What's also nice is that, if I find myself in profit and it's time to roll them, I can target a higher dollar amount, so the 16k/month would turn into 17k, then 18k, and so forth, as time goes on. By my calculations, this is around a 3.8% return per month at a low/moderate amount of risk, which I guess I'm ok with.

If the SP does hit 285 again, I'll just sit on my TSLA stock and wait for it to bounce back. If it looks like it's going to break 400, I'll have enough in margin to hold on to it and see what happens from there.

Color me surprised when I did some research and found that I'm not the first person to realize this strategy. They apparently call it a short straddle and it's not recommended for stocks with a lot of volatility. Well, oh well. I've had a lot of crazy get-rich schemes, but this feels a lot better then my 'sell every morning and buy back at 1 dollar under every single day' strategy that didn't last long. Hopefully this one will last a bit longer.

I'd strongly suggest rethinking selling call options on Tesla at this point in time.

You might want to read the last 1-2 pages in near-term quarterly financials thread, because with Tesla ramping up both Giga 3 and Model Y next year, and Giga 4 in 2021, they are on the cusp of doubling, maybe even tripling their revenue in the next 1-2 years.

Combine this with the fact that Tesla has shown massive improvements in operating efficiency in the past 2 quarters (much reduced OPEX), and I think the chance of a LARGE ($600+, likely higher) breakout in the next year or 2 is highly likely.
 
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EVNow

Well-Known Member
Sep 5, 2009
9,317
27,895
Seattle, WA
So, I sold May 2020 285 puts x20 and sold May 2020 400 calls x20.
What I do is sell puts (small #) every week. I don't do that across major events.

Across major events I normally buy calls (& puts to hedge) - unfortunately not in the latest ER.

If you had sold those May '20 puts & calls, before Q3 ER, calculate how much you would have made/lost.
 
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FrankSG

Active Member
Jun 27, 2019
1,608
21,265
Singapore
Well, oh well. I've had a lot of crazy get-rich schemes

One more thought. If you're looking for a get-rich scheme, and it doesn't have to be a get-rich quick scheme, you might want to consider just buying and holding a large # of shares. It might sound a bit boring, but if you're looking for a relatively risk-free way to get rich and you believe in the company, I think holding a few 100k worth of TSLA shares for the next decade will do just that.
 
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Lycanthrope

S3XY old dude
Nov 15, 2013
8,849
67,542
At home
Just to jump into this thread...

I have 10 Jan 2021 $650's, which I bought for $1, currently trading around $14, so 1300% up. I could leave them to run, but fear they might begin to lose on time value.

I'm thinking to sell and buy one of the following:
- 2x Jan 2021 $420's (yeah, I know), current price $66, or
- 3x Jan 2022 $580's, current price $40-ish

The 2021 420's are almost in the money, every $1 above 420 would bring me $200 profits, the 2022's add another year of time. But in both cases I lose the 10x multiplier I currently have.

Any thoughts?

My goal is to get to $80k total value (or more, of course), in order to buy my wife's Model Y for 'free'.
 

FrankSG

Active Member
Jun 27, 2019
1,608
21,265
Singapore
I hope the original OP didn't go with his plan of selling May'20 $400 Call Options x20, because he'd be hurting right about now :(

Just to jump into this thread...

I have 10 Jan 2021 $650's, which I bought for $1, currently trading around $14, so 1300% up. I could leave them to run, but fear they might begin to lose on time value.

I'm thinking to sell and buy one of the following:
- 2x Jan 2021 $420's (yeah, I know), current price $66, or
- 3x Jan 2022 $580's, current price $40-ish

The 2021 420's are almost in the money, every $1 above 420 would bring me $200 profits, the 2022's add another year of time. But in both cases I lose the 10x multiplier I currently have.

Any thoughts?

My goal is to get to $80k total value (or more, of course), in order to buy my wife's Model Y for 'free'.

It's hard to give this kind of advice tbh. You should mostly make up your own mind & plan and go with that.

With that being said, all your ideas seem reasonable. Holding onto the $650s until expiration is risky, but holding onto them until May or so after a full quarter of Giga 3 production and possible S&P inclusion could pay off.

The Jan'21 $420s look okay, but I'd personally prefer Mar'21 or Jun'21 calls, because they're more likely to include the financials of a quarter with high volume Model Y production. Mar'21 $440s for $66 for example.

Jan'22 $580s also look okay. I'm holding some Jan'22 $500s myself that I picked up for $37 and are currently trading at $67. I hope to be able to sell these for $200-$400 if things go well.

Then again option premiums are very high right now, so perhaps selling all or half of the $650s, and looking to enter a call option position at a later point could also be considered.
 
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Lycanthrope

S3XY old dude
Nov 15, 2013
8,849
67,542
At home
I hope the original OP didn't go with his plan of selling May'20 $400 Call Options x20, because he'd be hurting right about now :(



It's hard to give this kind of advice tbh. You should mostly make up your own mind & plan and go with that.

With that being said, all your ideas seem reasonable. Holding onto the $650s until expiration is risky, but holding onto them until May or so after a full quarter of Giga 3 production and possible S&P inclusion could pay off.

The Jan'21 $420s look okay, but I'd personally prefer Mar'21 or Jun'21 calls, because they're more likely to include the financials of a quarter with high volume Model Y production. Mar'21 $440s for $66 for example.

Jan'22 $580s also look okay. I'm holding some Jan'22 $500s myself that I picked up for $37 and are currently trading at $67. I hope to be able to sell these for $200-$400 if things go well.

Then again option premiums are very high right now, so perhaps selling all or half of the $650s, and looking to enter a call option position at a later point could also be considered.

Thanks Frank some good food for thought there.

In any case, I slapped an optimistic $80 gtc sell order on the Jan 21 $650's - you never know the way this stock is going right now :)
 

SageBrush

REJECT Fascism
May 7, 2015
12,155
15,077
New Mexico
I'm just starting to learn about options and would like to ask a newb question. @Papafox wrote in his daily thread that
Hedge funds working alone to nudge TSLA below 400 for Friday's close simply might be too little resources for too great a challenge.

Am I wrong to think that a share price of $400.01 would cost the hedge funds 1 penny a called share ?
 

anthonyj

Stonks
May 16, 2018
2,358
18,233
Naples, FL
Just to jump into this thread...

I have 10 Jan 2021 $650's, which I bought for $1, currently trading around $14, so 1300% up. I could leave them to run, but fear they might begin to lose on time value.

I'm thinking to sell and buy one of the following:
- 2x Jan 2021 $420's (yeah, I know), current price $66, or
- 3x Jan 2022 $580's, current price $40-ish

The 2021 420's are almost in the money, every $1 above 420 would bring me $200 profits, the 2022's add another year of time. But in both cases I lose the 10x multiplier I currently have.

Any thoughts?

My goal is to get to $80k total value (or more, of course), in order to buy my wife's Model Y for 'free'.
How about keep half of those $650s, sell half and buy one of the $420s? Or even better, sell 6 or 7 of the $650s and get 2 of those 2022 $580s
 
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