Options trading strategy/advice

[adiggs]

Figured I'd post about my beginning to explore TSLA options trading. My original position was opened by selling $29 puts for $1.70. Thankfully they were assigned - I still have those shares

I'm back to selling puts. I had some cash sitting about doing roughly nothing. Looking at option prices, I realized that if I think of this primarily as a dividend play, with a "downside" of being assigned at a really favorable price, then I could put that cash to work.

I'm sticking with the monthly options - I don't want the cash tied up for too long, and I want to be able to adjust their strikes reasonably often.

I've sold some 175 and 200 strike April options. Those options are paying about 4-5% on the cash I'm tying up by selling them. So the 200 strikes - I think they payed $8 per contract ($800 to have $20k ready to buy 100 shares at $200). With shares trading in the $400's, I'm thinking that's a long ways OTM, and unlikely to be assigned in the next 3 weeks. If I could repeat this trade every month for a year, then that's 48-60% per year, which is kind of a good dividend play

Out of the gate, my intent is to hold until close to expiration when the options go under $0.65. At that level, Fidelity will let me close the position for no commission, freeing up the cash to sell the next month options.

The follow through on this - should I get assigned, then I plan to keep right on going, selling covered calls against these shares. Hopefully the assignment is not much below the option strikes, so I can sell calls against the shares at close to the Put strikes. My goal here would be to continue collecting premiums, while also converting back to cash sooner than later.

To be really, really clear - though I've been reading about some of the simpler option strategies for years, this is functionally my first foray into doing something like this. I'm trying to be super conservative as I get in and start feeling my way and learning with money on the line (I learn faster when my money is also involved). Do your own research before making your own decisions.


Reasons I can see not to pursue a strategy along these lines:
1) I was still accumulating and am pretty sure the shares won't get this cheap by April options expiration. Therefore I would want a nearer strike price as then I would be looking for assignment, with the option premium acting as a discount from the strike.
2) I didn't have cash sitting around to tie up this way.
3) I was worried about a 90% stock market crash between now and April options expiration (April 17), and that this will also hit Tesla. I think for this scenario I would be buying puts or sitting things out until I have more information. For me and TSLA, that'd mean sitting things out (for the overall market, I've also been buying SPY puts to hedge against a big market drop).


I think the key to success with this approach is thinking of it as a dividend play that makes use of all the time I spend researching and learning about TSLA. There isn't a single other company I would do something like this - primarily because there isn't a single other company that I'd like to own shares of (rest of portfolio is in market tracking index funds).


Hopefully somebody finds this idea interesting.

And hopefully, anybody with more experience that sees additional ways this can go sideways on me, and / or ways of further optimizing the return without adding to the risk, will chime in with their ideas. Or even just thoughts about what additional stuff to be learning about.

 

[adiggs]

I don't plan to post trades as I make them, but as I learn things, it's helpful to me to write them down to lock in the education. And I hope others find this helpful as well.

I've entered Buy To Close orders for the Puts I sold (April 175 and 200 strikes) for tomorrow's market. If they fill then I'll have closed the positions keeping roughly 90% of the premium in 1 week. I had originally planned to hold until near options expiration (April 17th) or when the options dropped below $0.65 (free commission to close at that point), but I realized a few related things today.

1) Implied Volatility has dropped a lot. As a result, options prices are lower (that's a good thing for me, as an option seller).
2) TSLA has traded upwards, which also reduces the value of the options.

The combination, in just over 1 week of writing those puts, has seen them drop ~90% in value (which means if I can close the position at these prices, I keep 90% of the original premium).

The clincher is that it's so early in this month's option cycle, I think I have time to write these puts again for April expiration. If I'm correct, then I'll collect the option premium twice this month!


My expectation for what will happen Thu/Fri this week, and Mon/Tue next week, is we'll see the volatility go back up (sharply). I also expect the market to react badly to lots of bad news, and for TSLA to go along for the ride. So sometime later this week or early next week, I expect those April options to be priced richly again. Heck - I might be able to collect 3-4% TWICE this month (just once a month is all I ever considered ).

(Remember that the trade motivation for me is more of a dividend / generate monthly cash play, rather than an acquire-more-TSLA trade. Taking possession of more TSLA is my downside, and I'm selling WAY OTM puts to make it as unlikely as possible that I take possession of more).

 

[mrmage]

I tried some strangles a few weeks ago. These bet that TSLA SP will go up or down, but not stay still. I used put and call spreads instead of naked puts / calls to reduce time and IV risk.

With Tesla often changing 10% in a day, I could establish a trade where one spread pays for both without being too far in the money. Here's my trades:

Trade 1
When TSLA SP was around $640 a few weeks ago, I opened two spreads above and below the SP. Because the premium for the call spread was 20% higher than the put spread, I bought 20% more contracts for the put spread so the dollar amount was the same.

Put spread: May15 570 - 500 premium $25
Call spread: Jun19 call 700 - 800 premium $30


When TSLA recently dropped to 440, I closed the put spread to receive $61, which paid for both spreads with a little profit. Now I have a single call spread for jun 700-800 for "free".

Trade 2
I felt +/-20% of the SP for strikes on the short legs was too far apart. I placed another trade similar to the above, except +/-10% the SP which was $740 at the time.

Put spread: Apr17 680-660 premium $7.50
Call spread: Apr17 800-820 premium $7.00


Spread Criteria
1. The max return of either spread needed to be > 2.5x above its premium, preferably closer to 3x. Spreads max out near expiration, so this makes it possible to close a single spread with enough to cover the cost of both.
2. I wanted at least 2-3 months to expiration


Results
I closed the -10% put spread sooner, but the -20% put spread closed when SP was $450. I now have 2 "free" TSLA call spreads to look forward to.

Observations
- Less sensitive to IV than using naked puts / calls
- Doesn't require SP to be as far ITM at expiration as puts / calls
- The market value of the two spreads changes little while out of the money. This makes it easy to bail out of this trade, losing just time value.
- Not a get rich quick scheme - theoretical profit is 150-200%, but in practice is likely to be 25-50%. Otoh, risk seems relatively low as long as TSLA is volatile.

 

[EV forever]

Anyone buying any ‘lottery ticket’ options to bet on the P/D report? 09 April @ 700 are trading below $1. I am so tempted

 

[FrankSG]

Anyone buying any ‘lottery ticket’ options to bet on the P/D report? 09 April @ 700 are trading below $1. I am so tempted

I'm doubtful that even an amazing P&D is going to get us above $700.

I don't think the reason we're currently trading @ ~$500 is because the market is worried about Q1 financials, but more so because the market is worried about the medium term (3-12 months) demand, production, and financials.

Even after a very good Q1 P&D, there will still be a lot of worries about Q2. Perhaps additional comments in the P&D or during the Q1 ER could alleviate (some) of those concerns.

Then again, the market is known to overreact to short term news, and I sure as hell didn't expect TSLA to be @ $960 on the 4th of February, so I could be wrong.

 

[adiggs]

...
My expectation for what will happen Thu/Fri this week, and Mon/Tue next week, is we'll see the volatility go back up (sharply). I also expect the market to react badly to lots of bad news, and for TSLA to go along for the ride. So sometime later this week or early next week, I expect those April options to be priced richly again. Heck - I might be able to collect 3-4% TWICE this month (just once a month is all I ever considered ).

...).

Turns out I was right AND I was early in writing these Put options again for April. I went ahead and sold the April 375 Puts near the peak for TSLA a couple days ago. The larger intent is still in play - generate 'dividends' using far OTM puts, with a backstop of taking delivery of these cash secured puts.

Well the learning of the moment is that when I've got a strong reason to believe in a drop in the share price in the next few days, then wait. The puts I'm selling will be worth more when the share price is down, and less when the share price is up. In this case, I sold the Puts for ~$5 and they are trading now at ~$10. Because of my approach, I don't view this as losing $5 / share. I do view this as missing out on as much as $5 / share in premium, and that'd be nice to have. Most likely, I wouldn't have waited this long, and would have sold the puts 1 or maybe 2 days later than I did sell them, and collect $8/share premium.


Reason I don't view this as losing $5/share - these options have 16 days to expiration, so unless the share price can get down below $375 by then, they'll be worthless (I keep all the premium). If the share price does move that far, then I take possession of $375 shares (boohoo ). And along the way, if I have an opportunity to buy these options back (especially at $0.65 or lower), I'll probably take it and be looking at the May options.


So I've succeeded at collecting a premium twice this month. I also sorta knew when I wrote the second puts I should give it another day or 2 and see how the share price moved.

 

[adiggs]

Turns out that what I've started doing is known as The Wheel Strategy in options trading circles. Here's one brief primer:
Generate Income Using The Wheel Trade - The Option Prophet

I've been learning basics of options here:
Free Beginner Options Trading Course from Option Alpha

From reading reviews of OptionAlpha, there is a particular option trading strategy that they're teaching and using (Selling Volatility) which I will not be pursuing. The reviews though are consistent in their praise for the quality of the education found in the free membership. I've been through Track 1 (of 3) of their video education series and agree with the assessment - I find the education provided fantastic.


The difference in what I'm doing from the Wheel Strategy, is that most articles talk about it in terms of traders - find an underlying stock that works, and start selling puts (and it goes from there). The underlying stock is one you wouldn't mind owning, but you're not looking to take possession. The core objective of the whole strategy is generating income.

In my case, I'm not trying to become a trader. I'm looking to generate income alongside of my core long term buy and hold of TSLA, plus put some cash to work doing better than the risk free return.

That simplifies my stock selection, and I think mitigates at least one of the potential ways of 'losing' in this trading strategy. Namely I've got as much TSLA as I want, so I'll be just fine if the stock price takes off and doubles in a month or 2 (I won't miss out).

If the stock price falls precipitously then I might go through a period of owning more than I want, but that wouldn't be the worst thing. I'm just going to use TSLA options (because I know the company so well) to generate weekly or monthly income. Since I've ridden TSLA from 380, down to 180, up to 980, and back down to 480 (recently, with plenty of additional gyrations over the years), riding the bumps along the way seems to be something I can do.

 

[adiggs]

And now I understand why one of the Wheel Strategy articles I looked at specifically mentioned TSLA as one NOT to do this with. A reasonably common pattern is to sell the OTM Put with a IV of .30 (likely to finish worthless / OTM) with a 30-45 days to expiration. Looking at the April and May options right now, there is literally not 1 single Put selling at that low of an IV (or even close).

So I'll be using my knowledge of trading history, and belief in the strategy / execution of the company, to choose strikes that are likely to not end ITM.

 

[ckessel]

I inadvertently have been using the Wheel the last month on TSLA, definitely caught this week. However, overall I'm still ahead of doing nothing given the high IV.

What I'll change though is any time I sell a call or put, I'll take 1/2 that and buy calls further out so I don't miss out on a big jump.

 

[ckessel]

General options question. I've used sold puts to buy at a discount. Happy with that, I pick a value somewhere below the current price and sell a put rather than having a standing buy order.

I'm curious when would someone sell a put for above the current price? Yea, you get more money, but it's not as much as the change in stock price. For example, if the stock is at 600, selling a $610 put does not get you $10 more than selling a $600 put, it's closer to $6 more. If you're expecting the price to rise and make the put irrelevant, you'd be better off just buying the stock.

And it's not like you can just sell a crazy high put and use the cash for other stuff as the put locks down money/margin. Not really sure what the scenario is where it makes sense to sell a put above the current stock price. Can someone educate me?

 

[adiggs]

General options question. I've used sold puts to buy at a discount. Happy with that, I pick a value somewhere below the current price and sell a put rather than having a standing buy order.

I'm curious when would someone sell a put for above the current price? Yea, you get more money, but it's not as much as the change in stock price. For example, if the stock is at 600, selling a $610 put does not get you $10 more than selling a $600 put, it's closer to $6 more. If you're expecting the price to rise and make the put irrelevant, you'd be better off just buying the stock.

And it's not like you can just sell a crazy high put and use the cash for other stuff as the put locks down money/margin. Not really sure what the scenario is where it makes sense to sell a put above the current stock price. Can someone educate me?

One suggestion - it'll take 40-60 hours, but go through the options training on optionalpha.com. That'll get you more than a static answer - it'll get you knowledge that'll help you answer the question yourself. Hint - I find that watching the videos at 1.25x is still very understandable, and shortens each video noticeably.

One thing I've learned and am working into my Put selling strategy - you can use the option's delta as a VERY close estimate of the likelihood that an option will finish in the money, IN THE OPINION of the market. So if you use whatever strike that has a delta of -0.15 (Put deltas are negative), that strike has a 15% chance of finishing ITM (again, in the opinion of the market, based on what the option is priced at).

You can use that to dial your strike up or down, depending on whether you want the premium and not the stock, or what you really want is the stock and to be paid for the privilege of taking it off somebody's hands

Some trading platforms calculate the actual Probability ITM for each option and display it (delta is consistently within a point or two of the calculated Prob ITM). I haven't found it yet on Fidelity's tools; I've seen it in the videos fro optionalpha in the Ameritrade ThinkOrSwim tool.

 

[adiggs]

Oh - and if you're not sure what delta is, then that'll get covered in one of the videos in the first track! Or you can google for it, but then it's a random bit of information without a more complete grounding.

 

[adiggs]

I inadvertently have been using the Wheel the last month on TSLA, definitely caught this week. However, overall I'm still ahead of doing nothing given the high IV.

What I'll change though is any time I sell a call or put, I'll take 1/2 that and buy calls further out so I don't miss out on a big jump.

With this kind of thinking / strategy, I particularly encourage you to go through the option alpha educational material. Not because I have anything for or against option alpha - I like their educational material a lot (which is why I'm working my way through it), and not because I'm using their option trading strategy (I'm not). Just that I haven't found any other educational material on options that is more approachable, that is more comprehensive, or less laden with advertising for their particular way of doing things.

Going through that, I am increasingly aware of just ignorant my previous forays into options trading has been. I don't know what specifically you'll learn; only that I'm confident you'll learn some stuff that will help you with your strategy (approach to trading).

My own, very capital intensive, version of what you're doing is to own enough shares that I'm happy with how many I have. So if the share price takes off, I'm happy (and I collected an easy premium just prior to liftoff). If I just wait for most of this decade, then I'm confident Tesla will improve far enough that none of the other stuff going on in my portfolio matters. But the rest of the portfolio does matter and I don't want to wait on a single end game, hence my interest in the wheel (which is also extremely capital intensive).

 

[woodisgood]

Newb question regarding writing covered calls.

Let’s say I sell some covered call contracts, and decide to “undo” my trade by buying the same number of those calls back. Does that essentially cancel out as if I had done nothing or do the contracts I sold still execute and my shares are sold and bought back in new transactions at expiry?

 

[ggr]

Newb question regarding writing covered calls.

Let’s say I sell some covered call contracts, and decide to “undo” my trade by buying the same number of those calls back. Does that essentially cancel out as if I had done nothing or do the contracts I sold still execute and my shares are sold and bought back in new transactions at expiry?

The options contract is a different thing than the shares that back it up. So when you "Buy to cover", you are buying back and cancelling the contract. The shares are completely unaffected. Now, if you waited until the market closed and the contract was executed, your shares would be called away; the contract doesn't exist any more, so you wouldn't be able to do anything other than buying more shares on Monday.

 

[Boomer19]

Newb question regarding writing covered calls.

Let’s say I sell some covered call contracts, and decide to “undo” my trade by buying the same number of those calls back. Does that essentially cancel out as if I had done nothing or do the contracts I sold still execute and my shares are sold and bought back in new transactions at expiry?

if you sell 5 contracts may1 775 weekly calls at $41.00 then decide on april 29 to buy all of those back at $32.00 you’ve closed your position.

you collected $20,500 premium and paid $16,000 to “cover” or “close” them

netting the short term profit

if you covered 4 contracts and let 1 fly, it either expires at 0, netting you the full $4,100 for it, or you get assigned if it’s in the money. auto-assignment of short contracts at $0.01 in the money.

you can also be assigned if it’s near the money (long holders choice) which is less likely.

but in the case you were assigned, you’d sell 100 shares at 775 ($77,500) plus the $4,100 you collected for the sale of the 775call option

if the stock trades back the following monday you can buy your shares back with the money you collected above
..less any short or long term cap gains tax

if the stock stays below 816 you’re good. 77500 +4100 / 100

 

[ckessel]

What happens if you sell a PUT vertical and both end up ITM? For example:

• I sell a TSLA $750 PUT and buy a $730 PUT.
• The stock ends up at $700.
• I own no actual stock

I get how stock assignment works, I've been assigned shares (or had them taken) before. I haven't done a vertical before though, not to expiration. Does the broker buy me the 100 shares at $750 and immediately turn around and sell them at $730 for me? How does that work if the stock shoots up to $800 after hours on Friday when the option expires?

 

[adiggs]

What happens if you sell a PUT vertical and both end up ITM? For example:

• I sell a TSLA $750 PUT and buy a $730 PUT.
• The stock ends up at $700.
• I own no actual stock

I get how stock assignment works, I've been assigned shares (or had them taken) before. I haven't done a vertical before though, not to expiration. Does the broker buy me the 100 shares at $750 and immediately turn around and sell them at $730 for me? How does that work if the stock shoots up to $800 after hours on Friday when the option expires?

The actual mechanics - I don't know. Buying the lower strike put limits your otherwise unlimited losses to $20 in your example. The trade you describe is what's called a credit spread (credit as you generate a net credit from the sale).

I think that I agree more than not with the idea that you're better off selling that position as a multi-leg trade. If you leg into it (sell the put; then later buy the insurance put), you might gain on the slippage in time between the two, but you also can lose. The net credit may be small enough that you lose more on the slippage than the trade is theoretically worth.


But your question seems to be about the mechanics of the trade resolution on expiration day, and I don't know the answer to that question, in the detail you're asking.

 

[ckessel]

Yea, I get the net results. I'm curious how the actual mechanics works and if there's a surprise in there for me. I know the assignment has happened on Saturday for me. But, if the stock rocketed to $800 after hours both PUTS would end up useless, so how would that assignment end up working?

 

[ckessel]

I've absorbed pretty much all the OptionsAlpha stuff. The videos available for free are pretty dense in content, well done. Kirk, the owner, calls himself a numbers guy and I can see why. However, as a numbers myself, the trading strategies seem to slim on profit. Maybe someone can explain where I've missed something.

Here's a typical trade they mention, using imaginary stock FOOBAR:
Sell $30 calls for $2.50 each that have a 70% chance of being out of the money at expiration
Buy $35 calls for $1 each
Net credit: $1.50 per share or $150 on 1 option.

Kirk then says that $1.50 is the minimum you're looking for. Why, because:
$500 max loss * 30% chance = $150 -- same as your premium.

So, this is a net zero trade from a math perspective. Now, it's not all that simple, it's really integral calculus to figure out expected losses, not a simple 70%/30%, but it's a reasonable approximation for small gaps in strike prices (which is what they recommend). Still, that net zero is what seems questionable about the strategy. You need to have a positive net on average to make money. And even if you get particularly favorable $1.60 credit, you're only netting $10 on average. And that's not including the commissions, which are going to eat about 20% of that $10 at 65 cents per option on TDAmeritrade. And the smaller the stock price, the more the commission eats at your profit.

Plus, he recommends closing positions at 50% of max profit. If you took in $150, close when it'd only cost you $75 to take it back. Which seems questionable as you're cutting max profit in half, but you're not cutting max losses in half.

Bankroll management, no more than 2-3% of your portfolio on any one trade and no more than 60% actually in trades. Sound advice, use the law of large numbers for safety. But, 60%/3% = 20, so 20 open positions. Each position has a lifespan of about 30 days. 20 positions over 30 days at maybe $10-15 profit per position is a whopping $200-300 a month on profits...

With careful searching and orders, I've played about 6 of these trades to test things out. Small positions, losses are capped, so it can't hurt me too much.

Maybe someone can tell me what I'm missing, because I don't see any way for this to scale to making more than pizza money, even with a bankroll of $100,000 or more.