Paydirt's (TSLA) Option Investing Guide

[Buckminster]

Expensive is a relative term. Compared to the stock which I believe to be still undervalued, options are much more expensive than they were.

2019 LEAPS = a steal
Current Stock = cheap
Current ATM LEAPS = less cheap
Current OTM LEAPS = less cheap again (expensive compared to stock but could still be better than the rest)

 

[adiggs]

I understand the qualitative arguments you're making @paydirt76 about calls being underpriced. They look like arguments anybody with a long term outlook on the company would make, or at least a subset of them. As a long term buy and hold investor in the company (8 years so far, with a 10+ year investment horizon), I agree with all of them.

What I haven't seen is a method for choosing especially underpriced options to buy. Or a calculation, or some other mechanism for transforming a qualitative belief into something specific.


In my own case, I bought some options with ~15 months to expiration, under the hypothesis that we'd have hit S&P 500 qualification last year. In retrospect, I should have closed the position immediately after the Q1 earnings report that was so much worse than expected, not because my long term belief in the company had changed, but because my short term (15 month options) thesis had gotten so much worse. But my long term buy and hold mentality didn't grok that

Instead I held to expiration and had them finish slight ITM and the rest OTM. The week after, they were $50 and $150 in the money. So one way of looking at it was that I was 1 week late. The more accurate view is that there was always going to be resistance keeping the shares down as we got close to that expiration (Jan of this year). SIDEBAR: sort of like what I see this week.

And as a result, one thing I've learned about myself is that I suck at buying options (expiration and strike) as well as managing those options along the way. The mentality that makes it easy for me to hold through a $300s to $100s drop in the shares doesn't work so well when buying options.

But it works great when selling options! It also limits up side potential, which is fine with me as I own enough shares to retire in a few years (or sooner) assuming the share price works as I expect. In the meantime, I can sell options in a pretty conservative way (most of the time) and generate an amazing dividend. I know I'm leaving a lot of potential on the table, but I don't have the time or energy to figure out the trading strategy and to manage the options designed to take advantage of that potential (so I'm looking for education along these lines - I'll even read books to help me, but finding them - that's what I won't invest the energy into doing).


Anyway - I agree with the premise, but I haven't seen follow up information on how to take advantage of the information advantage that we have here. I haven't seen followup information, whether it would come from you or it comes from links / references you used to gain the information. It's the followup information I'm looking for.

 

[paydirt76]

@jeewee3000 the guide is starting from the beginning. Perhaps you are doing everything already and have nothing to learn. This guide is primarily for uber bulls to invite them to move a meaningful portion of their Tesla investment from stock to options for their benefit, not mine.

Each post is written carefully, and in the setting goals section deciding how much you’re willing to lose and risk is talked about. Don’t worry it will be re-emphasized.

Let’s do that here. At a certain point, long calls will be the WORST THING to own. People can YOLO to build an account (with cash, NOT margin), but there will be a time, an extended period of time where long calls DO NOT WORK. So if anyone keeps doubling, tripling, quadrupling down on their options positions. Be prepared to lose it all and NEVER use margin.

My friend wanted me to share this screenshot.

6420E735-447B-45DE-8848-AC3F9E7E5756

• paydirt76
• Jun 18, 2020
• 1

Paydirt Option Positions 2020 06 18

On December 30th 2019, the above account was $356,000. Tesla bulls on Twitter were begged to be open to using options. One, a surfer, with half the account size copied the strategy at that time and has done proportionally well.

The account pictured is all Tesla options profit except for $60k. Prior to the addition of the 3 month options, 1.2M was being kept in cash for a drawdown in Tesla stock and to segregate profit. The 3-month play is approx 13% of investable net worth. It could very well expire worthless.

If the 3-month calls are profitable, they will be cashed out.

The June 2022 calls are about 5,000 deltas worth of calls and the current vehicle to fulfill the goal of being long 5,000 deltas until Tesla potentially hits $6,000 in the future.

Some reading this may think, “Good God, that’s all in a Roth! I can’t do that with a non-retirement account.” That’s right, yet strategies will be shared for taxable as well. Maybe obvious to veterans, but hey...

 

[paydirt76]

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.

Hey @EV forever , there is something for you to gain here. You might be "stuck" on upside calls like my friend... Yes anything did work and upside calls were better. If you look at some more forgiving calls. The June'2022 1000C (not the be all end all)... $345 today with stock at $1,004. The breakeven for these vs stock at expiration is share price at $1,525.

With Tesla growing units at 50% but Wall Street projecting them to grow at 25%, how much goes stock grow in 2 years? June'2022 have the most vega risk $511 per call, but the premium costs the least per day of all the expirations. June'2022 are the calls my friend can sleep at night with and hopefully leave alone for a year (unless stock suddenly spikes to/past $1,500).

 

[paydirt76]

Anyway - I agree with the premise, but I haven't seen follow up information on how to take advantage of the information advantage that we have here. I haven't seen followup information, whether it would come from you or it comes from links / references you used to gain the information. It's the followup information I'm looking for.

First of all, it sucks that your options missed by a week. You're wanting to jump to tactics. I will get to that very soon (and some in this reply, see my reply to EV forever right before this) Maybe you've already decided on a goal or how much you're willing to lose. Those must come first.

Options are VERY hard emotionally, sticking to high level fundamentals is paramount to willing the mental game. You learned that you should have stuck to your catalyst, your reasons for owning the calls. You may have learned that naked long calls are "too risky", you are invited to reevaluate that. Do you agree with the major fundamentals of the fundamentals post?

There was a time when my friend forgot why they owned March 2020 calls. They think it was maybe hopes of a beefy Model 3 ramp in China, early Model Y production hopes, maybe something else. But they couldn't remember, so they sold them. You have to be brutal if the fundamentals of your thesis or catalyst break. Great lesson to keep top of mind.

If you agree with the fundamentals, you might be OK with call writing during weeks where there is no earnings or P&D or China numbers (7th-13th of each month). But by capping your upside you are limiting your profits.

There is no golden ratio, or golden numbers. It can be as much of an art (or even more so) than a science. Admittedly, the numbers with SP at $1,000 are much more intimidating than at $250. Go back to the fundamentals and what would that mean possibly for SP, what would be the timeframe? When do you think is the latest inclusion happens, what % might happen to share price? What do you think happens if Tesla still delivers 500k EVs in 2020? What about when the world is shocked for whatever dumb reason that the Model Y factory is ramping in China in Q1 2021? etc?

A lower risk route might be to convert your shares to LEAPS while taking cash off the table. This could be a delta goal. Then you could trade around deltas. Have cash so when your deltas dip, you buy some more (and vice versa). If shares are held in a taxable account and you are concerned about gains, your shares could be neutralized with deep in the money (but not deepest in the money) LEAP calls to push out your taxes. The IRA is great.

Switching to calls also caps your losses (admittedly with the risk stock goes nowhere). June'2022C are at $345, so the most you lose is $345, but stock at $1,004 you could lose maybe $900. But with switching to calls you also have cash on the sidelines. So you can either pre-commit to investing more if stock gets cut in half or goes down 40%, or the cash is simply now part of your overall net worth, never to be risked again.

For example 5,300 deltas costs 2.8M to buy today thru June'2022. Maybe that's not the expiration best for you. If thru stock, 5,300 deltas costs 5.3M. It could be transformed from stock to options with money set aside to either add more or to enjoy life.

My friend would also welcome a conversation to help you sort through strategy and tactics that you could live with that would express your views and risk. There's no best way to get into specifics without learning more about your specifics. They'd be happy to have the convo. Will get into specifics and present some choices. DM me to set something up.

 

[paydirt76]

View attachment 553165

Sorry @EV forever , just took a closer look at this. This illustrates really well why the June'2022 1000C are very nice from a risk/reward perspective... And why risking March'2022 vs June'2022 doesn't seem to be worth it.

Some other things that can be helpful to look at are...
breakevens vs stock (important to calculate and not guess)
breakevens vs other options
Yes, looking at a interim snapshot date is cool but also look at taking to expiration. OK, duh, you are looking at May'2021 what if because you would probably roll them then, right?
Dollars of premium per delta. (riskier, higher strikes cost less per delta, but break easier) (included in chart, nice)
Dollars of premium per day (days to expiration).

To complicate ALL of this and possibly in some folks minds contradict earlier posts... A year from now, IVs are likely to be lower, especially if S&P inclusion has happened by then. Wouldn't be surprised if the IV curve moved down from 70 front & 60 leaps... to 60 front and 50 leaps. Some flexibility of when to sell/trim is good.

 

[The Martian]

If we keep getting into arguments of how expensive options are, you missed the whole point of @paydirt76 post. He’s not telling you to buy any specific option. He’s showing us his strategies and tactics of using options. I’ve learned a lot so far and eager to see the rest.

 

[EV forever]

Sorry @EV forever , just took a closer look at this. This illustrates really well why the June'2022 1000C are very nice from a risk/reward perspective... And why risking March'2022 vs June'2022 doesn't seem to be worth it.

Some other things that can be helpful to look at are...
breakevens vs stock (important to calculate and not guess)
breakevens vs other options
Yes, looking at a interim snapshot date is cool but also look at taking to expiration. OK, duh, you are looking at May'2021 what if because you would probably roll them then, right?
Dollars of premium per delta. (riskier, higher strikes cost less per delta, but break easier) (included in chart, nice)
Dollars of premium per day (days to expiration).

To complicate ALL of this and possibly in some folks minds contradict earlier posts... A year from now, IVs are likely to be lower, especially if S&P inclusion has happened by then. Wouldn't be surprised if the IV curve moved down from 70 front & 60 leaps... to 60 front and 50 leaps. Some flexibility of when to sell/trim is good.

Agreed. June'22 LEAPs are the better risk/reward options to consider. Also, the lower strikes - 1000 are more expensive, but better risk/reward profile.
I posted in another thread that I closed a position on a cash covered put to free up the cash for tomorrow. Since Fridays are generally the day the SP drops a little, plus it is triple witching day, so likely the price will be held low. I would expect the options premiums to also be slightly cheaper along with the SP. Next week, there may another breakout with the strong positive sentiment carried over from this week.

I will likely buy a few options tomorrow - for long term as well as short term. For long term I am looking for strikes slightly lower than 1000, probably 980. There appears to be too high of a concentration of options at the round numbers like 900 or 1000 and accordingly, which also means a lot of manipulation. OTOH, who knows what the situation will be like 2 years from now?

For short term, I was thinking something in the Oct - Dec expiration window. This is mainly to take a bet on an Q2 ER surprise, with GAAP profit and S&P inclusion. If that does not happen, I want to have some time after to close the position before expiration. Maybe October @ 1000 strike price?

I am fully expecting TSLA price to double in 1 year, and likely triple in 2 years - but cannot rule out another global event in the next two years with the current political climate. Hence the caution and crosschecking.

 

[EV forever]

If we keep getting into arguments of how expensive options are, you missed the whole point of @paydirt76 post. He’s not telling you to buy any specific option. He’s showing us his strategies and tactics of using options. I’ve learned a lot so far and eager to see the rest.

Not trying to keep arguing, but a healthy debate taking opposing viewpoints into consideration is valuable. We all believe that good things are in Tesla's future which will be reflected in the stock price. The debate is about which investments make more sense than others for our specific situations and risk tolerance.

Looking forward to reading the 2nd installment of @paydirt76 investment guide.

 

[paydirt76]

There appears to be too high of a concentration of options at the round numbers like 900 or 1000 and accordingly, which also means a lot of manipulation.

Manipulation? Nah... It's primarily liquidity. ATM strikes tend to trade the most. So it creates a gravity. Also round numbers can tend to create a psychological gravity (800, 900, etc).

But you can trade whatever strike you want and have it however you want. The market makers, Citadel, and the algos are watching all the strikes, all the time. Most experienced probably know this but often you can go in at the midpoint of a $15 bid-ask spread in LEAPS and get a fill. They're being watched! Often go in at midpoint and then move the order by $1 if don't get a fill. Live quotes help too.

Oh, here's something crazy about the $15 bid-ask spreads in June'2022... They are only 3 volatility points apart. The vega is 5 (times 100). So quite literally, if midpoint is 345 and you pay 350, it's the difference between paying 61 vol vs 60 vol.

I am fully expecting TSLA price to double in 1 year, and likely triple in 2 years - but cannot rule out another global event in the next two years with the current political climate. Hence the caution and crosschecking.

Yes, best to temper that and only risk what you can afford to lose. You seem to be on a good path and sounds like you have created wealth which is awesome. My friend has out performed their goal of 5,000 deltas over the last 765 points on the stock, so they have an extra M to make a short-term play. Otherwise, the sense is to keep less than 5% in 3 month or less. If it doesn't work then it just cost you some profits. And keep less than 50% of overall investments in option premiums.

It may be best to decide (1) how much you're willing to lose (if you share finances with someone, be candid how you built the money and if some goes away you still have X in profits). (2) how much you're willing to stomach. Right now my friend has nearly 10,000 deltas because of the addition of the short-term play. Each 1% move ($10 move) is currently a 100k swing with 10k deltas. Be prepared to change your habits in order to weather the ups and downs better. Specific rules are in place for the short-term play. (a) Deliveries must exceed 80k, if not then immediate sell. (b) Q2 2020 earnings must be GAAP profitable, if not then immediate sell. (c) leave it alone to expiration or stock reaches $1,500 (way easier said than done). (3) along with 1, are you OK losing X if the conservative upside is 2x or 3x? (4) at some point, it's probably best to start a system of "ratcheting", sticking with a delta target, or sticking with a net worth target. When it goes up, loosen the sails. When it goes down, tighten the sails. In this case it's best to have pre-committed cash (that you're willing to lose).

(50% in options will tend to give people 100% in stock exposure which is probably too much but also probably how many of your built your wealth)

 

[paydirt76]

Small down day. More Teslarati catching onto strong Model Y production & deliveries, yet FUD prevails.

 

[paydirt76]

sorry that pic was so big. Goodness!

 

[Saltlakeshizzy]

Options action is getting juicy. End of quarter push may make it big. Where's my next installment of the @paydirt76 manual to making it big?!?

 

[paydirt76]

Options action is getting juicy. End of quarter push may make it big. Where's my next installment of the @paydirt76 manual to making it big?!?

All right, so people stopped watching this but I just got another message besides your ping. I hope you're not being sarcastic...

Going to have my friend post a current pic of his account and then we will get some things going. What I may do is share my friend's critical insights for the remaining intended topics. If anyone wants to convert from only owning stock or just dabbling in options, there's ways it can be done, even in a taxable account w/o having to pay taxes this year on gains... If you wanna talk it through, drop me a line in my inbox. let's make it specific to you instead of talking generalities.

 

[paydirt76]

An update on my friend’s position. Not as beefy, yet ready for fireworks. My friend may need medical assistance after the P&D report

As you can see they dabbled in a Shell Game and bought some long-term Square calls. And added to the Sept 2020 Tesla 1,100 calls. Painful decay at the moment. They could have waited to buy as was their first instinct but sometimes there are run ups to the P&D report. Oh well.

 

[paydirt76]

ANY WAY YOU WANT IT



WARNING ON WAITING

This sounds salesy, but there is nothing for sale. The conditions outlined previously in this guide may not last. Some folks want to wait until the know all there is to know about options before they start. This is possible but if you really put your heart into it and do an apprenticeship or whatever, it's going to take at least 6 months to fully learn options. My friend is up over 4M in the past 6 months so if they waited... well, wow.

Don't do that. Instead understand the major risks of being long call, whether it is leaps or closer. Also understand the risks of owning stocks. Some say options are risky, but they are actually a way to DEFINE your risk.

EXPIRATION CHOICES
STRIKE CHOICES
WHEN TO MAKE CHANGES
WHEN TO STOP

 

[paydirt76]

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.

Let's be more specific @FrankSG . I know you're a detail guy...
With TSLA at 1,009.89,
Jun 2022 1000C (which my friend owns) are 342.05
At expiration, breakeven between the two is $1,515

Jun 2022 1200C, breakeven between the two is $1,662

The truth of it though is that the owner of the Leaps isn't going to hold to expiration. But this DOES illustrate the risk of not getting an outsized move in the stock early during your holding period in the option.

My friend realized they got very lucky by getting outsized bullish moves in the stock very early in the holding period. This is precisely why they moved to June 2022 for the majority of their holdings.

Also, while admittedly what is about to be shared is voodoo math, Tesla is growing units by 50% while WS projects 25% unit growth at least 5 years out. Conservatively, wouldn't the stock grow by 50% per year while this persists? Ironically on it's 10 year anniversary of its IPO and of WS chronically underestimating them for 10 years, Tesla stock has compounded at 50% per year (or 50.7% or whatever).

DOUBLE EXPONENTIAL

Exponential growing is mind boggling by itself. Parts of Tesla's technology are benefiting from double exponential growth. If Tesla stock continues to grow at 50% per year (exponential growth), then options positions will grow double exponential. This is potentially life changing, if you are poised to take advantage. But you still need to be risk controlled, you still need discipline. But let's look at 50% per year from here for June 2022...

stock: +125%
June 2022 1000C: +272%
June 2022 1200C: +289% (not much difference but breakeven much higher)
June 2022 1800C: +169% (just for giggles to see)

Let's look at an early move... Let's say TSLA goes to 1,500 by the begin of Sept 2020 b/c of inclusion...
(using Long call calculator: Purchase call options)
Stock: +50%
June 2022 1000C +102%
June 2022 1200C +109%
June 2022 1800C +123%

The inclusion play...
Sept 2020 1100C +300% (but risk is way, way, way higher)

 

[FrankSG]

Let's be more specific @FrankSG . I know you're a detail guy...
With TSLA at 1,009.89,
Jun 2022 1000C (which my friend owns) are 342.05
At expiration, breakeven between the two is $1,515

Jun 2022 1200C, breakeven between the two is $1,662

The truth of it though is that the owner of the Leaps isn't going to hold to expiration. But this DOES illustrate the risk of not getting an outsized move in the stock early during your holding period in the option.

My friend realized they got very lucky by getting outsized bullish moves in the stock very early in the holding period. This is precisely why they moved to June 2022 for the majority of their holdings.

Also, while admittedly what is about to be shared is voodoo math, Tesla is growing units by 50% while WS projects 25% unit growth at least 5 years out. Conservatively, wouldn't the stock grow by 50% per year while this persists? Ironically on it's 10 year anniversary of its IPO and of WS chronically underestimating them for 10 years, Tesla stock has compounded at 50% per year (or 50.7% or whatever).

DOUBLE EXPONENTIAL

Exponential growing is mind boggling by itself. Parts of Tesla's technology are benefiting from double exponential growth. If Tesla stock continues to grow at 50% per year (exponential growth), then options positions will grow double exponential. This is potentially life changing, if you are poised to take advantage. But you still need to be risk controlled, you still need discipline. But let's look at 50% per year from here for June 2022...

stock: +125%
June 2022 1000C: +272%
June 2022 1200C: +289% (not much difference but breakeven much higher)
June 2022 1800C: +169% (just for giggles to see)

Let's look at an early move... Let's say TSLA goes to 1,500 by the begin of Sept 2020 b/c of inclusion...
(using Long call calculator: Purchase call options)
Stock: +50%
June 2022 1000C +102%
June 2022 1200C +109%
June 2022 1800C +123%

The inclusion play...
Sept 2020 1100C +300% (but risk is way, way, way higher)

I'm also highly leveraged. In addition to my common stock I own some Jun'22 $990s and Jun'22 $1,400s among other options.

I am very bullish on the 2nd half of 2020 in particular, so I do think buying call options now is probably still profitable, but far less so than when I bought mine.

The risk/reward is the worst it's ever been (obviously, because we're pretty much at ATH), but if you're very bullish (which I am), they might still be worth buying at current premiums.

I'm already very highly leveraged though, so I don't think I'll be buying any more. Perhaps when Jan'23s come out in September, I'll roll over some of my Jan'22 $500 strike price calls.

 

[vwman111]

@paydirt76
So for your inclusion play, you pick a strike closer to the money like an 1100C vs 1300C or 1500C in order to maximize potential intrinsic value rather than maximizing number of contracts you control?
And with a Sept expiry i assume you are playing the momentum and front running of the S&P purchases rather than then inclusion event itself which could be much later than the Sept expiry date?

 

[juanmedina]

@paydirt76
So for your inclusion play, you pick a strike closer to the money like an 1100C vs 1300C or 1500C in order to maximize potential intrinsic value rather than maximizing number of contracts you control?
And with a Sept expiry i assume you are playing the momentum and front running of the S&P purchases rather than then inclusion event itself which could be much later than the Sept expiry date?

From what I seen everyone has a different opinion. Fact Checking recommends 5-10% above the current price for maximum returns for short term options others recommend buying ITM options for short term option 2-4 weeks. From some books I read ITM options with Delta of 0.9-0.7 gives you some leverage and a good chance of making profit and not loosing all your money if the trade doesn't work out.

You can also use the option profit calculator to get you an idea of the options with the highest profit depending on where you think the stock will go, expiration and how much money you are going to spend.