Paydirt's (TSLA) Option Investing Guide

[Buckminster]

Just keep in mind that the Jun'22 $1,200s are currently trading at almost $300, so although you would double your money if the stock goes to $1,800 by then, simply holding the stock would also nearly double your money while taking on far less risk than holding Jun'22 $1,200s.

Therefore, in order for those options to make sense at current prices, you have to be of the opinion that it's likely that the SP will go much higher than $1,800 by Jun'22, which I think is not an unreasonable opinion to have. However, if your price target for Jun'22 is more like $1,700-$2,000, I don't think those Jun'22 $1,200s are worth the extra risk you're taking on, and the stock would be a better investment.

I think most people here are buying Jun'22s as an insurance policy. They are expecting dramatic gains much earlier and will buy higher strike price options in 2021. Buying an extra year has been the cheapest and lowest risk of protecting yourself up until recently. I agree with your earlier point that Jun'21s look better value at the moment. I bought Jun'21 1200s - very similar to your 1300s.

 

[vwman111]

I think most people here are buying Jun'22s as an insurance policy. They are expecting dramatic gains much earlier and will buy higher strike price options in 2021. Buying an extra year has been the cheapest and lowest risk of protecting yourself up until recently. I agree with your earlier point that Jun'21s look better value at the moment. I bought Jun'21 1200s - very similar to your 1300s.

Given the potential with Tesla (i.e. $7000 by 2023), are you better positioned to go out as long as you can to take advantage of the increase in share value. i realize there is a risk that we get into a trading channel but 2022s vs 2021s seems a better strategy to weather that storm. Investing in 2021s will likely a trigger a taxable event in that year while 2022s buy you an extra year. If Tesla continues a strong upward trend for several years then the 2021s will need to be rolled into options that are likely more expensive at that time.

My newbie understanding was to buy as long as you can unless you are looking at a specific event with a shorter time horizon and exiting your position after that event and then reconsidering if and where you want to reinvest your money.

 

[Buckminster]

Given the potential with Tesla (i.e. $7000 by 2023), are you better positioned to go out as long as you can to take advantage of the increase in share value. i realize there is a risk that we get into a trading channel but 2022s vs 2021s seems a better strategy to weather that storm. Investing in 2021s will likely a trigger a taxable event in that year while 2022s buy you an extra year. If Tesla continues a strong upward trend for several years then the 2021s will need to be rolled into options that are likely more expensive at that time.

My newbie understanding was to buy as long as you can unless you are looking at a specific event with a shorter time horizon and exiting your position after that event and then reconsidering if and where you want to reinvest your money.

Jun'22 1800s are $164 at the moment. It they were less than $100, I would be all over them.
Lets see what Jan'23s look like in September.

I'm focussed on Oct this year plus I need to be able to sleep at night..

 

[strago13]

Jun'22 1800s are $164 at the moment. It they were less than $100, I would be all over them.
Lets see what Jan'23s look like in September.

I'm focussed on Oct this year plus I need to be able to sleep at night..

Because of what @FrankSG mentioned above, I recently bought more stock in the low 900's because it was less risky than buying calls. They are way overpriced right now.

I too am eagerly awaiting the publication of the 2023's, hopefully they wont be ridiculously priced.

 

[paydirt76]

I don't think those Jun'22 $1,200s are worth the extra risk you're taking on, and the stock would be a better investment.

Yes, selection of strike is important...

The stock is the stock.

Calls are underpriced on their face as has been already established in this guide. Period. Full stop. (<--- re-read the first sentence) Certainly, a different strike with a different payout can be chosen for different breakeven. When my friend started, breakeven was more of a concern, so they started with an ATM strike on leaps. When there was all this bullish news in late 2020 that went unreported by major media, OTM strikes were rolled to.

Now the stress of the large position and not wanting to agonize over things has gotten to my friend and they went back to ATM strike. They are in the June'22 1000 calls, which has a much lower breakeven. 1200s were mentioned as the premium may be less hard psychologically to get behind. Yes, Tesla has been range-bound for long periods in the past, but bulls should not be intimidated by "large" stock price numbers.

June'22 1000 calls have a premium of $330 with stock around $980. (Lowest premium per day of all expirations. Highest cost per delta.) Breakeven is around 1,500 vs owning stock. With Tesla growing units at 50% and WS projecting 25% growth, etc... Just a matter of time before Tesla breaks WS again.

The major next section of the guide will tackle selection of expiration and strike. Yet it should be known that option prices are fair in Tesla IF Tesla were a regular stock, it is not a regular stock.

Yes, ultimately, we need to know our risks and understand breakevens, but as long as this opportunity exists if long-term investors focus too hard on it, they will miss out on substantial gains. Calls can be switched to from stock to take a bunch of exposure OFF the table. All the dollars from zero to $700 on current shares are being tied up in a product (stock) that offers linear growth vs the exponential grower of investing in options in Tesla stock.

This is still a unique time to truly create wealth.

This is the way. (for now)

 

[paydirt76]

I'm focussed on Oct this year plus I need to be able to sleep at night..

Hey Buck, we are crossposting a bit which is fine. Yes, a 3-month play was revealed... Sept 2020 1100C at $107. Being done with 13% of investments. 1M invested in Sept. Leaps are over 35% of investments with under 3M invested in the leaps. All Tesla gains. Risking the gains helps with the psychology of options.

My friend is going to do their best to ignore Tesla share price over the next 3 months. Focus on P&D report (if deliveries over $80k, check, if not 3 month calls will be dumped). Ignore any WS reaction to P&D report. Then wait for earnings report (if $1 earnings, check then wait for either September expiration or an e-mail that Tesla has crossed a given price level, if not $1 or more in GAAP earnings calls will be sold immediately at a big loss).

This % invested in Sept is a result of certainty of inclusion and the 4 to 1 payout of the calls if 1,500 is breached. Inclusion is now believed to be over 50% because Model Y crazy good gross margin and ramped Model Y production.

With Tesla, sometimes you have to break the rules of a disciplined investor to maximize profit. Risk MUST be accepted upfront when the decision is made and new rules must be made and followed. They have been outlined above for Sept.

 

[paydirt76]

Because of what @FrankSG mentioned above, I recently bought more stock in the low 900's because it was less risky than buying calls. They are way overpriced right now.

I too am eagerly awaiting the publication of the 2023's, hopefully they wont be ridiculously priced.

Strago, if you cannot afford the June'22 1000 calls, that's a different story. These have a good leverage to risk ratio. Yes, a lot of vega (volatility risk). Volatility is not overpriced for the reasons I have outlined earlier in this guide. Have an open mind.

Take in the 3 FUNDAMENTALS and sit with them. If you believe them to be true, it will not matter if Tesla moves at a 45 vol but you paid 60 vol on Jun'22 calls because the volatility ended up being to the upside, or because close-to-close volatility was 45 annualized, but weekly close to close ended up being 60.

Read my posts carefully. Please ask questions. If you disagree with the 3 Fundamentals, comment why.

 

[juanmedina]

Because of what @FrankSG mentioned above, I recently bought more stock in the low 900's because it was less risky than buying calls. They are way overpriced right now.

I too am eagerly awaiting the publication of the 2023's, hopefully they wont be ridiculously priced.

Why 2023s would be priced reasonably? Just curious

TSLA option premiums since February have been much, much higher than they were before. There is no question about this, and @EV forever 's table illustrates this beautifully.

The most extreme example of this that I encountered myself were the Jun'21 900s I bought mid-January when SP was ~$500. In mid-March at the bottom of the COVID-19 dip at a SP of ~350, you'd expect these options to be down severely, perhaps as much as 70%. However, these options never went into the red, and even at bottom I was still up slightly on them, which is just absurd.

Last weekend, as part of my MBA interviews I was interviewed by an alumni, who used to work as VP of derivatives for 7 years at a bank that is an issuer and market maker of options. We talked about options and options pricing for a bit, and he confirmed that part of the equation is expected future volatile, which he said is mostly based on past volatility. Two other factors that help them determine option prices are:

1. In Hong Kong specifically, apparently there is volatility index that is taken into consideration. It sounded a bit like the VIX.
2. Simple supply and demand, and how much the market is willing to pay for options.

With regards to number 2, I know that the TSLA options market is enormous as of April this year, when I looked into how big the TSLA option market really is. However, I'm now wondering how big the TSLA options market was pre-February, and whether a large increase in TSLA options activity since then might've also influenced recent TSLA options premiums. Although I reckon that the dramatic increase in past volatility, which started in early February when the trading range was broken wide open, has been the biggest catalyst, and has made market makers adjust their calculations for expected future volatility.

With all that being said, TSLA options premiums are high, but whether they are too high or not depends entirely on how bullish you are. I reckon the SP could double over the next 6-12 months off of H2'20 financials, so a few weeks ago when SP was $800, I thought the Jun'21 options still looked decent, and I decided to pick up some Jun'21 $1,300s.

At the time, I thought the Jun'22s were too expensive for my liking, but I was already highly leveraged. Had I not owned any options, I would've still preferred owning some Jun'22s over being 100% invested in stock, but I would've bought less than I did in mid-January and early-April at better prices.

How much did you paid for the Jun'21s Frank? I assume around 90ish or 10-11 shares per contract?. Right now they are about 15-16 shares per contract they still seem like a decent deal.

 

[vwman111]

Hey Buck, we are crossposting a bit which is fine. Yes, a 3-month play was revealed... Sept 2020 1100C at $107. Being done with 13% of investments. 1M invested in Sept. Leaps are over 35% of investments with under 3M invested in the leaps. All Tesla gains. Risking the gains helps with the psychology of options.

My friend is going to do their best to ignore Tesla share price over the next 3 months. Focus on P&D report (if deliveries over $80k, check, if not 3 month calls will be dumped). Ignore any WS reaction to P&D report. Then wait for earnings report (if $1 earnings, check then wait for either September expiration or an e-mail that Tesla has crossed a given price level, if not $1 or more in GAAP earnings calls will be sold immediately at a big loss).

This % invested in Sept is a result of certainty of inclusion and the 4 to 1 payout of the calls if 1,500 is breached. Inclusion is now believed to be over 50% because Model Y crazy good gross margin and ramped Model Y production.

With Tesla, sometimes you have to break the rules of a disciplined investor to maximize profit. Risk MUST be accepted upfront when the decision is made and new rules must be made and followed. They have been outlined above for Sept.

@paydirt76, I just want to make sure i am understanding the logic correctly. Delta on the Sept 2020 1100C is 0.457 which is the same Delta as on the Jan 2022 1500C.

If we both currently have the same number of contracts , then our gain from between now and a $1500 blow off top in Sept should be similar because of the similar deltas? (i realize the delta profile changes as you go ITM and that you have higher theta)

If we both had $1m to invest today in either of those options, your return would be significantly higher as you could buy almost twice as many contracts. premium on the Sept 2020 1100C ~$95 (=105 contracts) vs premium on the Jan 2022 1500C ~$180 (55 contracts).

If share price increases to $1500 then you will have $400 of intrinsic value at expiry which equals a 400% gain on the Sept 2020 1100C. Where as the Jan 2022 1500C will likely have a delta of .65 (an assumption as it gets ATM). which would provide a $325 movement in the option price and therefore only a 180% gain.....I guess i just proved the incorrectness of my first statement.

 

[mongo]

@paydirt76, I just want to make sure i am understanding the logic correctly. Delta on the Sept 2020 1100C is 0.457 which is the same Delta as on the Jan 2022 1500C.

If we both currently have the same number of contracts , then our gain from between now and a $1500 blow off top in Sept should be similar because of the similar deltas? (i realize the delta profile changes as you go ITM and that you have higher theta)

If we both had $1m to invest today in either of those options, your return would be significantly higher as you could buy almost twice as many contracts. premium on the Sept 2020 1100C ~$95 (=105 contracts) vs premium on the Jan 2022 1500C ~$180 (55 contracts).

If share price increases to $1500 then you will have $400 of intrinsic value at expiry which equals a 400% gain on the Sept 2020 1100C. Where as the Jan 2022 1500C will likely have a delta of .65 (an assumption as it gets ATM). which would provide a $325 movement in the option price and therefore only a 180% gain.....I guess i just proved the incorrectness of my first statement.

Gamma is the variable that adjusts Delta vs stock price.
From Long call calculator: Purchase call options
If TSLA was 1500 in September, your 1100 calls would be would $400 at expiry, up 308%
The Jan 22 1500 would be up ~140% at that point in time.

If TSLA were at 1,100 the Septembers are worthless, but the Jan 22s would be up ~10%

 

[The Martian]

4) S&P 500 Inclusion. 99% qualifying earnings inclusion probability by Jan 2022 at the latest.​

​

Great post. Do you mean to say Jan 2021?

 

[strago13]

Strago, if you cannot afford the June'22 1000 calls, that's a different story. These have a good leverage to risk ratio. Yes, a lot of vega (volatility risk). Volatility is not overpriced for the reasons I have outlined earlier in this guide. Have an open mind.

Take in the 3 FUNDAMENTALS and sit with them. If you believe them to be true, it will not matter if Tesla moves at a 45 vol but you paid 60 vol on Jun'22 calls because the volatility ended up being to the upside, or because close-to-close volatility was 45 annualized, but weekly close to close ended up being 60.

Read my posts carefully. Please ask questions. If you disagree with the 3 Fundamentals, comment why.

Affording the call isn't the problem, its the price at which options are selling right now. I bought a JUN 2022 1800 call for $33.55. Stock price was in the low ~$500's at the time. That same call is now (at the time of this writing) ~$170.00. All I am saying is that now isnt an ideal time to buy options because they are really expensive. So, instead, I bought shares.

 

[paydirt76]

@paydirt76, I just want to make sure i am understanding the logic correctly. Delta on the Sept 2020 1100C is 0.457 which is the same Delta as on the Jan 2022 1500C.

If we both currently have the same number of contracts , then our gain from between now and a $1500 blow off top in Sept should be similar because of the similar deltas? (i realize the delta profile changes as you go ITM and that you have higher theta)

VWMan, The closer your expiration is to now if you get the move in the timeframe needed, then the closer expiration will benefit more, but it is obviously riskier. If the catalyst doesn't happen, the calls will be broken. The sense is that there is a greater than 50%+ probability of positive Q2 earnings triggering inclusion. The calls selected payout $3 per $1 dollar risked if price gets to $1,500. Why 50%+?

(1) Model Y being sold are high margin ASP ~ $60k and they may deliver 12k more than last quarter. Profit per vehicle could be more than $20k, so this is $240M gross profit that Q1 didn't have. (probable 40%)
(2) It is suspected that FCA credits realized/booked are not dependent on European deliveries in that specific quarter. This number could be $350M again in Q2, we just don't know (possible, not probable 10%)
(3) Stop sign & stop light recognition and stopping is a major FSD item (and one of two main items left). If Tesla mgmt agrees, they could value Traffic Control as up to 1/3 of outstanding deferred FSD revenue. (1/3 could possibly be up to $233M?) Recognition of $140M or 1/5 is more likely (possible, not probable 15%)

Admittedly these calls are a super aggressive move, but if you believe you have a fair "coin flip". Heads you win 39% of your investable net worth, tails you lose 13% of your investable net worth... would you do it?

 

[paydirt76]

Great post. Do you mean to say Jan 2021?

Martian, happen to agree that it is all but certain that by the late January 2021 earnings report Tesla announces S&P inclusion qualifying earnings. As you know, if it happened in January the Jan'21 expiration is worthless in this scenario because they would already be expired. So, Mar'21 would be a desirable expiration (much less aggressive than Sept'20 but also less rewarding if Q2 2020 is the magic time).

 

[paydirt76]

Affording the call isn't the problem, its the price at which options are selling right now. I bought a JUN 2022 1800 call for $33.55. Stock price was in the low ~$500's at the time. That same call is now (at the time of this writing) ~$170.00. All I am saying is that now isnt an ideal time to buy options because they are really expensive. So, instead, I bought shares.

Strago, you keep repeating that the calls are "really expensive" without addressing/questioning/refuting the points I've made that the opposite is true. Your replies will be ignored until you show a curiosity or open-mindedness instead of repeating old beliefs. If you want to just believe what you believe and keep doing what you're doing, don't bother with this guide. Not worth your time.

 

[FrankSG]

Why 2023s would be priced reasonably? Just curious

How much did you paid for the Jun'21s Frank? I assume around 90ish or 10-11 shares per contract?. Right now they are about 15-16 shares per contract they still seem like a decent deal.

Jun'21 $900s
Paid ~$20 when SP was ~$500 for 4 shares per contract in Mid-January

Jun'21 $1,300s
Paid ~$90 when SP was ~$820 for ~11 shares per contract a couple of weeks ago

The $1,300s appear to be ~16 shares per contract now, which isn't terrible. If you're confident it'll go to at least ~$2,000 or so and think we could see $2,500 if things go really well, they're still pretty good. But whereas you'll about double and triple your share investment in those scenarios, I'll about triple and nearly 5x if SP goes to $2,000 and $2,500, so risk/reward is worse than it was a few weeks ago.

 

[paydirt76]

so risk/reward is worse than it was a few weeks ago.

Frank, you’re doing it too bud. It is self evident that volatility is higher now than it was. But using out modded “shares/contract” and implying the “rent is too high” doesn’t make make the rent too high. You haven’t addressed any of my points in this guide for why calls are actually very cheap.

Curiosity got you to make an investment in Tesla to begin with. Keep your curiosity, it’s an asset.

Old dogs can learn new tricks. My friend did. As a market maker, they just about never bought vol for more than historical vol. But by doing so before an opportunity closed, they 65x a $60k Roth account into 4M today.

Today’s date is June 18, 2020. If anyone else in this thread claims IV is too high without speaking to the points made, you will be ignored.

 

[mongo]

High price doesn't mean unreasonable price.

People bought Jan 21s 650s for $1 way back when. By the time I looked at them, they were $16.
Then $40
Now they are $400
At which point were they too pricey?

 

[jeewee3000]

Frank, you’re doing it too bud. It is self evident that volatility is higher now than it was. But using out modded “shares/contract” and implying the “rent is too high” doesn’t make make the rent too high. You haven’t addressed any of my points in this guide for why calls are actually very cheap.

Curiosity got you to make an investment in Tesla to begin with. Keep your curiosity, it’s an asset.

Old dogs can learn new tricks. My friend did. As a market maker, they just about never bought vol for more than historical vol. But by doing so before an opportunity closed, they 65x a $60k Roth account into 4M today.

Today’s date is June 18, 2020. If anyone else in this thread claims IV is too high without speaking to the points made, you will be ignored.

My apologies @paydirt76 , but I'm getting a lot of red flags from your postings.

People that are replying with "IV is too high" are not anti-you, they are just stating their opinion so that others reading this thread get a feel for the different visions on the matter.

You're telling people "this is the way to go", without adressing the risks. You may be wealthy (you claim to be) but many TMC-posters are not. I know everybody is responsible for their own actions, but the way in which you formulate your strategy has the potential to ruin lives.

To the not-so-experienced traders/investors reading this, let me warn you that, although LEAPS could be hugely profitable when you buy them now, you could also lose huge parts of your investment or be stuck for years just trying to break-even.

COVID19 is just an example of how unexpected things can happen that can screw up the world/TSLA. Other black swan events are possible, and in this case stock is much safer than LEAPS. With LEAPS you can indeed roll forward again and again, but at a cost. When the LEAPS eventually pay off, you might not see the profits you hoped for. At least the profits can be delayed by years.

Another example: for years we on TMC (including me) thought TSLA was bound to exit the trading range of $180-$380 and shoot to $400-$600. The true breakout only happened months ago, whilst everyone thought Model 3 would help the stock almost immediately.

Now we are fixated on Battery Day, S&P inclusion and/or Q2/3/4 2020 results, FSD, ... Even if these events turn out positively for Tesla as a company, the stock price may take longer to reflect that. Or Elon tweets that he wants to take Tesla private at $1500/share and this time has actual funding lined up, then all calls/LEAPS with strikes above that get their value erased in seconds.

These are just some of the risks.

I do support LEAP plays as a pretty safe way to gain more value out of a fixed investment, but I'm fully aware that the LEAP part of my portfolio is like a balloon that could grow rapidly, but it could pop/deflate just as fast. Your postings don't seem to reflect the risks that much, IMHO.

As a comparison, our fellow TMC member @FrankSG outlines strategies just like you, but in a more objective way.

Besides you and Frank (current TMC-gen), many others have explained their LEAP strategies. So please don't act like the prophet you seem to think you are with your revolutionary strategy (which would've been a lot handier last september, like Frank and I were already doing).

Some examples:
My Holding + Trading Approach
Some views on current price action
...

You can ignore me all you want, I won't post here again. I just wanted to point out your unhealthy attitude regarding spewing advice.

 

[EV forever]

Today’s date is June 18, 2020. If anyone else in this thread claims IV is too high without speaking to the points made, you will be ignored.

You can ignore me all you want, I won't post here again. I just wanted to point out your unhealthy attitude regarding spewing advice.

Hey folks, lets call a truce for a short time and not ignore each other - this discussion is very valuable to relative newbies like me in getting a good grasp of options. 3-4 years ago when I first started dabbling in TSLA options, a several folks here replied to my naive questions with their valuable experience and knowledge. I continued dabbling and learning - luckily for me TSLA SP was not high, option pricing was quite low and even with plenty of mistakes I did not lose much (didn't gain much either). All that changed last October when finally TSLA broke out of the narrow channel it was stuck in and has more than tripled in value. Even inexperience noobs like me made close to 10X in their portfolios, with plenty of mistakes along the way. When I add up all the $$ I put into options, it was maybe ~30K, which was a small portion of my total portfolio and I could afford to lose it all. If I had been luckier (or smarter) I would have put the entire amount in the -TSLA200918C425 options I bought for $18 each back in Oct'19 are over $550 now - or >30X. I still have 2 of those options, which I am planning to exercise for a cost basis of 425 to add to my long term hold shares.

The situation is a bit different now, as the stakes are much higher and it is important to keep risk in mind. The premiums are higher than they were at end of 2019 - but are they too high is the debate we are currently having. As @FrankSG and others have pointed out - it is all about risk/reward and where we expect the TSLA price to be. We all agree with @paydirt76 - the TSLA stock is poised to go higher, but how high and does this justify the option premium price.

So the questions are

1. How high do we expect the stock to go? Will it go up by 50% or will it double or triple?
2. At what point does the project return on the option significantly exceed the returns in investing in stock.

I did some calculations specific to my situation - having approx 225K that could be used to invest. See the table below. I tried to keep strike prices consistent across various options and my total investment around 210K. The time period I am using is <1 year from now, since for me this is in an IRA account and I dont have to be concerned about taxes. I am also copying my previous message comparing premiums from last year to now. This was done last night, so SP is slightly outdated. The expected price on 15May2021 is from Fidelity's Options Profit loss calculator. My takeaway from this for myself - the LEAPs would be worth it if the SP is double or more in this time period. Anything less than doubling of SP, the stock would be a better investment.

(@FrankSG has done a fabulous job of explaining this in his blog, but I still have to do this for myself)

Many of us are feeling that the LEAP prices are too high - paging @FrankSG for comment too.
You mentioned that while premiums are high, so is the stock price - which is true. So I calculated the premiums as % of stock price for a variety of options. Last year, thanks to reading these forums, I bought several call options in Oct-Nov timeframe. The options were cheap and I made very good returns on those. I used those as reference to compare to the prices of options currently.

• The first table below is all the options from last year from my brokerage statement. The premiums and strike prices are calculated as percentage of the stock price on the day I purchased them.
• The second table is prices of options if I wanted to buy these today. I have tried to keep days to expiration and strike prices as % of today's closing price similar to those back in Oct-Dec last year. The premium listed is mid-point of bid/ask for that particular option.

Even as percentage of SP, the premiums appear to be quite high for options today. The main difference is likely volatility - I don't know how to evaluate this.

On a different note, I did calculate my TSLA portfolio in terms of deltas - it is surprisingly high! I am happy with the number of shares for long term hold - those will not be risked or sold. But, I could possibly see myself using options to increase this further over next couple of years.

edit: mistake in March option date - it should be March'22





a goal of reaching 5000 deltas over the next couple of years.