IV is going up, at 75 right now and a 550p is paying $7.
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Wiki Selling TSLA Options - Be the House
- Thread starter adiggs
- Start date
Closed my 850c for pennies. Now have no active covered call positions. Will likely initiate new cc’s tomorrow.
Also sold another 875p 04/16, though may need to close that tomorrow if price action puts me back in a margin call. Let’s see what impact Elon’s tweet, leaked email, and stimulus bill vote may have on stabilizing things.
Also sold another 875p 04/16, though may need to close that tomorrow if price action puts me back in a margin call. Let’s see what impact Elon’s tweet, leaked email, and stimulus bill vote may have on stabilizing things.
Here too. Closed my 802.50c near the end of the day for $0.22. I had it set at $0.20 but even that wouldn’t hit, so I eventually relented. SP at 680, a full 120 OTM and one day left. I swear I saw one sell at $0.17 while my $0.20 Sell order was valid. Crazy. I probably should have left it alone to expire Friday, but I wanted it closed so I could remove the possibility of having to cover at a higher price, thereby freeing up capital to buy a few shares at 680. I’ll probably wait for a higher SP, maybe Monday, before trying to sell more calls. I just don’t want to risk losing shares below $800 and the premiums are so low right now that the risk isn’t worth the small profit to me.
Xepa777
Banned
Sorry if this is not really "wheel" material but figured this is the closets place to ask this question.
I'm thinking of selling a put on TSLA for March 2023 at a $1200 strike. When you factor in premium it's like $600-ish, and by March 2023 we'll have Berlin and Austin ramped already with Cybertruck sales (and hopefully meaningful FSD progress).
Thinking of using my margin power for this, which is normally otherwise untouched. Other than a clear disaster scenario, as Tesla bulls this is a pretty sound strategy right?
I'm thinking of selling a put on TSLA for March 2023 at a $1200 strike. When you factor in premium it's like $600-ish, and by March 2023 we'll have Berlin and Austin ramped already with Cybertruck sales (and hopefully meaningful FSD progress).
Thinking of using my margin power for this, which is normally otherwise untouched. Other than a clear disaster scenario, as Tesla bulls this is a pretty sound strategy right?
Just looked and if you have the available money to put on the side (or margin) for that long - it is a good bullish strategy - last trade was @ $676 (maybe yours?)
I don't want to lock up equity that long but definitely would if I had the portfolio scale to do so.
First off - I consider this to have become more of a selling options thread than a wheel specific thread (despite the thread name). In practice very few of us are actively rotating back and forth, but at least for me - I do use the wheel as one of the fallbacks to the option sales.
But your real question - I see pluses and minuses. I have done something similar - I sold the Sep '21 put for $250 back in August when the shares were more like $3-400. I figured that going above $600 over that year was easy mode and by going ITM on the sale I collected extra premium up front.
I was then able to close it early in January, keeping 2/3rds of the premium I originally collected.
In my case that was fully cash secured (VERY capital intensive) and that actually became the problem - all of that cash tied up. For March 2023, even if you're not cash secured, that margin will still be occupied. I don't known the margin dynamics, but with any of these long dates option sales, I have quickly come to hate the way they make a chunk of the account go static.
For your situation - do you have that clear of a view into your financial needs for that cash and margin for a little more than 2 years from now? That is a long time. Of course when the shares go to 1800 next year you'll be brilliant and get to close early while keeping most of the premium
Not really. As noted upthread, a sold option is not an ideal directional position. ∆ becomes progressively less favorable the higher underlying goes, and volatility spikes will work against you, which can especially be an issue early on before the value of the sold put has time to mature. And...if price spikes up in like a year you're going to feel like a fool when you've only realized a fraction of your premium.
Also as recently discussed, margin not withstanding, you're better off going with an equivalent covered call. You'll collect an extra ~$1k in premium over the DITM put, and if price isn't at or above $1200 at expiration, you're sitting on long term tax treatment of the shares. And, if you decide you want to bail out of the -C in a year but keep the shares, you're still sitting on long term tax treatment.
IMHO, if you're bullish, buy LEAPs. If you're worried about volatility dropping, hedge by selling shorter expiry calls against those leaps. If you're worried about a market reversal, buy a protective put.
Also as noted upthread, the more diversified your portfolio/positions, the less of an issue the sub-optimal nature of this position becomes. Its a terrible idea if you plan on going all-in on it. Its not a big deal if you're only selling one put in an account with many $M's.
I will second this sentiment. I sold a Jun21 800p (CSP) for $132 awhile back, liking the premium and easily expecting that >$668 SP was a slam dunk. This week that put was over $180, and all that money is tied up until the SP rises to better numbers. I missed buying the $630 dip. I refuse to buy back right now for such a loss (plus the premium went into buying more shares, so I’d have to sell at a loss to buy back at a loss).In my case that was fully cash secured (VERY capital intensive) and that actually became the problem - all of that cash tied up. For March 2023, even if you're not cash secured, that margin will still be occupied. I don't known the margin dynamics, but with any of these long dates option sales, I have quickly come to hate the way they make a chunk of the account go static.
So, choose wisely, especially when it comes to selling long dated options on margin. Isn’t that like double leverage trouble?
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Specifying which lot is sold is something that you do after the trade. IB has a wonky Java app called "IB Tax Optimizer" that has to be downloaded every time you want to use it because it only lets you do it for trades happening in the last 24, maybe 48, hours.
It's not a big deal if you don't do it in time...you just have to call up IB at any point and tell them which specific lot to sell. I think I've done this days to weeks after the trade in question without a problem.
Newbie question: I sold a CC 05Mar21 820 @4.67 on Feb 23
It is now 0.92 and there are 5 more days to go.
Is it better to do buyback than wait for expiry? Waiting 5 days for 92 cents seem like a waste since it's already up 80%. I mean, what do nice folks here generally do in this situation? Wait it out or move on to the next trade? I am just curious what you pros do.
(I am aware that i have to find 0.92 + my minimum premium on the next trade, me being greedy for loose change.)
Thanks in advance and have a great weekend!
It is now 0.92 and there are 5 more days to go.
Is it better to do buyback than wait for expiry? Waiting 5 days for 92 cents seem like a waste since it's already up 80%. I mean, what do nice folks here generally do in this situation? Wait it out or move on to the next trade? I am just curious what you pros do.
(I am aware that i have to find 0.92 + my minimum premium on the next trade, me being greedy for loose change.)
Thanks in advance and have a great weekend!
bkp_duke
Well-Known Member
PREFACE: not advice, my own view on how I approach these.
The answer is . . . it depends.
So, rolling that call right now is probably not the best simply because the stock has been down-trending, so you are going to roll to a call that has a good chance of going up (most likely) if the stock price appreciates. So that is a vote in favor of just letting the current call expire worthless and collecting all of the premium.
There are, however, some people that don't like to chance what a call may do over the coming days and will Buy to Close when the call is in the 75-80% profit range (where you are now). This books the profit of the premium and closes the position, so there is no chance of the call being called away. The downside here is that because you are not rolling the call, you must have enough cash in your account to Buy to Close the position. You are also, of course, giving up that remaining premium.
My 0.02 - if the stock is trending like it is, and I have a $785 CC expiring on 03/05, I am just going to let it either get to 90-95% on the premium, and I will Buy to Close, or just let it expire because I view the odds of that large a share price increase to call away the shares as very low. I will then wait for an up-trend to sell another covered call.
Newbie to newbie, personally I would let it expire this week. Unless we have a miraculous turnaround, which isn’t looking very likely right now, the SP will struggle to get over $800. For next week/month, rolling/selling CCs at such a low strike and premium doesn’t make any sense.
Last week, I did sell some the $802.50 strike, premium was $3.55 at the time, but I still stupidly closed around $0.22-28. I had used the premiums to purchase stock and sell puts (on different stock) earlier during the drop (of course missing the best drops). The sold puts on other stocks were ITM and going against me, so I needed to use most of the CC premium to cover/roll the puts farther down the road. Thus, I didn’t have enough cash to cover a TSLA price rise, so got scared. I definitely didn’t want to lose my TSLA because of a poorly timed put sale on my “learning” stock.
It was a tough learning week because everything was going against me. I kept buying small amounts of TSLA as the price drop continued, to the point where free cash in all of my accounts was literally below the price of one TSLA share. After rolling and closing some of those puts, I’m in much better shape for next week, but one account is still below $500 free cash. All I can do in that account is HODL or sell lower-risk far OTM CCs for pennies. I cannot afford to be wrong, or I lose the shares. So, long summary: If I had those -c820 of yours, I would hold and hope that they expire worthless.
Generally speaking - if I were in this situation I would be moving on to my new position. But I'm running at higher deltas right now, so that $0.92 is a lower premium than I would normally allow a position to go down to (I'd rather be back to a higher delta much earlier).
The way I think about the benefit of closing the current position and opening a new position is the increase in premium that will be decaying of this upcoming week.
An example of how I would be thinking about this situation:
My option chain is showing that 820 call with a .03 delta and .33 theta. Thus nearly no impact on the option price from share price movement AND very low time decay. Without knowing how aggressive / conservative you like to position yourself, some choices I see:
- the 760c is a roughly $3 premium, a .10 delta, and .79 theta. Or as I think of it, now I would have $3 I can earn over this week instead of $1.
- the 725c is ~$7 premium, a .21 delta and $1.34 theta. Or again, the way I think of it, now I have $7 premium to earn over this last week instead of $1.
- the 705c is .31 delta etc..
In all of these choices I'm taking on more risk in exchange for better earning potential.
With my own every other week approach these days, I would be also be considering Mar 19 strikes as well (so a 3 week trade instead of a 1 week trade). Something like:
- 770c, Mar 19 expire; a $12 premium from .21 delta, and $0.75 theta.
In all of these choices, part of my thinking about the starting point ($.92 premium remaining on a .03 delta position) is whether there is a new position I would rather be in. That can include closing the position and staying in cash / shares with no open option position. If there is no other position I would rather be in, then I'd stay put and earn that last $0.92 (because why not - low risk money is low risk money).
And of course if there is a new position I would rather be in, then out with the old and in with the new!
I would usually have a new position I would rather be in by this point in a position's life.
The particular observation here - I agree with @ReddyLeaf 's observation completely. If I were ordinarily only selling CC, then I'd either be sitting out or looking for a different type of trade to benefit from what's currently going on. I've found that no matter how far OTM I go, there have been moves that eat up all of that OTM space and put me on pace for an ITM finish, on calls that I really don't want assigned. My specific worry right now is that a sudden reversal would put CC ITM at a much lower strike than I like.
The next few posts are to update, after a year of me doing this, the trading strategy I've evolved to. It's long enough I'll break it into different posts.
My own trading strategy has been evolving for the year I've been doing this (and I keep learning - so the approach is also still changing), and has arisen out of my own particular priorities (income, delta neutrality, low effort, low risk).
The important inputs that are motivating my end result:
My strategy summary:
Sell both puts and calls, targeting roughly equal deltas, with an effective result of living in a perma-strangle. I would very much like the number of puts and calls to be reasonably balanced. My best account is currently about 2 calls to 1 put, so I'm not militant about being exactly equal puts and calls. That perma-strangle has spent a reasonably large fraction of it's time so far as an inverted strangle (put strike higher than call strike) and has also proven fine.
I'm using higher deltas, though also still figuring out what target I'll work at. For now I've been targeting the .30 to .40 range - I'm still wrestling with what I prefer. I'm pretty sure I won't target <.20 and I'm not emotionally ready to sell ATM straddles (or ~.50 delta). I view these higher delta positions as lower risk by making the position more dynamic and resilient to moves up or down (more on this later).
I use every other week expirations.
(more details following)
My own trading strategy has been evolving for the year I've been doing this (and I keep learning - so the approach is also still changing), and has arisen out of my own particular priorities (income, delta neutrality, low effort, low risk).
The important inputs that are motivating my end result:
- I like the relatively high premiums available at high deltas.
- This is mostly an important risk management / mitigation component (but heck more is also better as well)
- The share price range in which a losing leg can be rolled to buy time is surprisingly (to me) large
- Worst case - a roll out in time with no strike change should always be available for a small net credit. There is pretty much always a bit of premium available in a roll that is 2 weeks longer.
- My objectives, not necessarily prioritized, are:
- low(er) risk,
- risk mitigation strategies available (part of lower risk)
- income
- low(er) effort
- delta neutrality (also a component of risk reduction
- low(er) risk,
- I view capital intensiveness as a feature not a bug. I know that isn't true for most people, but heck - buy and hold is also capital intensive.
- My personal investing dynamics have proven (to me) to be good for buy and hold (or maybe - buy and forget ) and BAD for buying options or anything with a <3 month trading time horizon. Mostly because I'm really bad at deciding when to sell these short duration positions and making that decision is critical to success (I can't ignore the timing). So sticking with trades where "do nothing" is a reasonable to good choice most of the time is a good idea for me.
- I only trade TSLA and TSLA options. This is a function of my long term research and view of Tesla's strategy and execution and is critical to my risk mitigation view of things.
- My current investment hypothesis for Tesla is 10+ years, and has been updated from the 10+ years it was back in 2012. There is a reasonably good chance that my wife and I will own our TSLA shares until we're dead (multiple decades). So if I get assigned on puts, even when I don't want them, my fallback here is "oh noes - I own more shares" (or running the wheel against the new shares).
My strategy summary:
Sell both puts and calls, targeting roughly equal deltas, with an effective result of living in a perma-strangle. I would very much like the number of puts and calls to be reasonably balanced. My best account is currently about 2 calls to 1 put, so I'm not militant about being exactly equal puts and calls. That perma-strangle has spent a reasonably large fraction of it's time so far as an inverted strangle (put strike higher than call strike) and has also proven fine.
I'm using higher deltas, though also still figuring out what target I'll work at. For now I've been targeting the .30 to .40 range - I'm still wrestling with what I prefer. I'm pretty sure I won't target <.20 and I'm not emotionally ready to sell ATM straddles (or ~.50 delta). I view these higher delta positions as lower risk by making the position more dynamic and resilient to moves up or down (more on this later).
I use every other week expirations.
(more details following)
For the objectives, this strategy satisfies them in these ways.
Low(er) effort:
I've worked the 3-8 trading day range previously. I liked the results and how fast I gained learning and experience but didn't like how closely I needed to monitor daily gyrations in the shares. I've moved to aligning all of my trades on an every other week strike. Example - all of my current positions are Mar 5 expirations. These were all rolled from the Feb 19 expirations, and will be rolling into the Mar 19 expiration. This mostly has meant I can ignore the shares for 1 week and then watch them for 1 week.
Summary - every other week expirations for less effort while maintaining frequent adjustments in strikes to dynamically change with the share price.
Delta neutrality.
This is really more of a decision making simplifier and emotional improvement for me, but I realize there are important technical dynamics here. The desired steady state is for the call and put delta to match - this is where the equal number of puts and calls comes from (matching contract deltas turns into an overall neutral delta exposure).
It simplifies my decision making because whatever is good for 1 leg is bad for the other. Ergo - I don't need to figure out a good time to sell a covered call - if it's a bad time for the call, then it's almost certainly a good time for selling the put (the exception I can see is when it's a bad time on both sides). I suck at direction, magnitude, and timing for share changes, so taking these factors out of my decision making = good.
With frequent rolls I can keep adjusting dynamically to changes in option delta, helping me maintain neutrality and thus indifference to what the shares do next. Dynamism over static is a theme.
Summary - remove directionality from my decision making by angling for delta neutrality.
Income.
If I can sell an option for $20 then that's $2000/contract (actual contracts on winning legs have been more like $20-$40 for me). So if I'm selling 10 contracts at a time, then I've got $20k in cash flow (I won't earn all of this as I'll roll before expiration). Selling both puts and calls, now I'm looking at $40k in cash flow in 2 weeks and $80k cash flow in a month. At a $700 share price this is a $1.4M account (50/50 account value in shares and cash) so its capital intensive for sure.
So far, in practice, it looks like the better way to think about the income is that 1 leg is treading water (~no profit, but some small amount of cash flow; say $1, $100/contract, or $1000 in 2 weeks extending the example above) while the other leg is earning 100% of this. Thus $40k/month instead of $80k/month.
And even that is evolving into something closer to 50-80% of one leg is generating the income / profit, and the remainder of that profitable leg is buying a better position on the badly performing leg. That brings me down to a $20k/month income on $1.4M - my math says that is 1.5% on capital per month, and that sounds awfully good for an income source; assuming a taxable account, then simplistically that is a $240k/year pre-tax salary.
Its also my observation that more like 3%/month is a more typical month for months that don't involve 20%+ moves in a single direction. Being TSLA these are reasonably common, so I am not assuming that - just noting that it also isn't that uncommon to achieve. To get closer to 3% we just need 1 leg to roll without help for a small net credit.
Summary (at least for me): I can achieve desirable income characteristics from a relatively small portfolio.
Low(er) effort:
I've worked the 3-8 trading day range previously. I liked the results and how fast I gained learning and experience but didn't like how closely I needed to monitor daily gyrations in the shares. I've moved to aligning all of my trades on an every other week strike. Example - all of my current positions are Mar 5 expirations. These were all rolled from the Feb 19 expirations, and will be rolling into the Mar 19 expiration. This mostly has meant I can ignore the shares for 1 week and then watch them for 1 week.
Summary - every other week expirations for less effort while maintaining frequent adjustments in strikes to dynamically change with the share price.
Delta neutrality.
This is really more of a decision making simplifier and emotional improvement for me, but I realize there are important technical dynamics here. The desired steady state is for the call and put delta to match - this is where the equal number of puts and calls comes from (matching contract deltas turns into an overall neutral delta exposure).
It simplifies my decision making because whatever is good for 1 leg is bad for the other. Ergo - I don't need to figure out a good time to sell a covered call - if it's a bad time for the call, then it's almost certainly a good time for selling the put (the exception I can see is when it's a bad time on both sides). I suck at direction, magnitude, and timing for share changes, so taking these factors out of my decision making = good.
With frequent rolls I can keep adjusting dynamically to changes in option delta, helping me maintain neutrality and thus indifference to what the shares do next. Dynamism over static is a theme.
Summary - remove directionality from my decision making by angling for delta neutrality.
Income.
If I can sell an option for $20 then that's $2000/contract (actual contracts on winning legs have been more like $20-$40 for me). So if I'm selling 10 contracts at a time, then I've got $20k in cash flow (I won't earn all of this as I'll roll before expiration). Selling both puts and calls, now I'm looking at $40k in cash flow in 2 weeks and $80k cash flow in a month. At a $700 share price this is a $1.4M account (50/50 account value in shares and cash) so its capital intensive for sure.
So far, in practice, it looks like the better way to think about the income is that 1 leg is treading water (~no profit, but some small amount of cash flow; say $1, $100/contract, or $1000 in 2 weeks extending the example above) while the other leg is earning 100% of this. Thus $40k/month instead of $80k/month.
And even that is evolving into something closer to 50-80% of one leg is generating the income / profit, and the remainder of that profitable leg is buying a better position on the badly performing leg. That brings me down to a $20k/month income on $1.4M - my math says that is 1.5% on capital per month, and that sounds awfully good for an income source; assuming a taxable account, then simplistically that is a $240k/year pre-tax salary.
Its also my observation that more like 3%/month is a more typical month for months that don't involve 20%+ moves in a single direction. Being TSLA these are reasonably common, so I am not assuming that - just noting that it also isn't that uncommon to achieve. To get closer to 3% we just need 1 leg to roll without help for a small net credit.
Summary (at least for me): I can achieve desirable income characteristics from a relatively small portfolio.
Most importantly - risk management / mitigation.
This one has become REALLY important to me. I could return to the workforce today if I had to pretty easily - I've only been out of the workforce for a month, so my skills haven't gotten rusty yet. Give me 5 years though and I'll be useless in the trade I've been practice - my previous annual pay won't be available any longer.
I really don't want to need to get another job, so I'll give up income for resilience / safety against big changes in the share price.
First - if I can get to 50/50 account value in shares and cash, then the cash damps out account swings - roughly 50% in fact So I miss out on upside moves by having cash that could have been shares. This isn't a problem or risk for me - I have enough shares for exposure to upside moves.
And don't get hit so badly on down moves as the cash is worth as much at $800/share as $400/share.
I think of this as being somewhat like shifting a portion of the portfolio to bonds in retirement with the same rationale. The big difference is a bond that generate 1.5%(+) per month vs. 1.5%/year.
Next - I manage risk dynamically by making adjustments (via roll) within the winning leg when available. The idea here is to be rolling the 'winning' leg and leaving the 'losing' leg alone. Right now, with shares going down, I've been rolling the calls down and leaving the puts in place. Three weeks ago with shares going up, it was the calls that were unchanging over the window and the put leg that was rolling up.
Next - managing risk dynamically makes me far more responsive to whatever actually happens and almost indifferent to even pretty large moves (over a 2 week window). The farther the shares go in a 2 week window, the better the winning leg will perform, offsetting the fact at the same time the other leg is doing badly.
Next - more of an attitude and conceptual thing. For purposes of position management my strategy on the winning leg is to rolling aggressively to improve income and bring delta closer to the losing leg. This has historically been a good choice in the 2/3rds to 4/5ths profit level, at least on these <4 week options.
This one has become REALLY important to me. I could return to the workforce today if I had to pretty easily - I've only been out of the workforce for a month, so my skills haven't gotten rusty yet
. Give me 5 years though and I'll be useless in the trade I've been practice - my previous annual pay won't be available any longer.I really don't want to need to get another job, so I'll give up income for resilience / safety against big changes in the share price.
First - if I can get to 50/50 account value in shares and cash, then the cash damps out account swings - roughly 50% in fact
So I miss out on upside moves by having cash that could have been shares. This isn't a problem or risk for me - I have enough shares for exposure to upside moves.And don't get hit so badly on down moves as the cash is worth as much at $800/share as $400/share.
I think of this as being somewhat like shifting a portion of the portfolio to bonds in retirement with the same rationale. The big difference is a bond that generate 1.5%(+) per month vs. 1.5%/year.
Next - I manage risk dynamically by making adjustments (via roll) within the winning leg when available. The idea here is to be rolling the 'winning' leg and leaving the 'losing' leg alone. Right now, with shares going down, I've been rolling the calls down and leaving the puts in place. Three weeks ago with shares going up, it was the calls that were unchanging over the window and the put leg that was rolling up.
These rolls improve risk dynamics in two ways - rolling the winning leg gets its relatively low delta back up to something much closer to the losing leg delta (delta neutrality).
It also generates an additional premium that can be income or can be used on the winning leg for a better ending strike, thus using the additional cash flow from the winning leg to offset the unrealized losses on the losing leg.
It also generates an additional premium that can be income or can be used on the winning leg for a better ending strike, thus using the additional cash flow from the winning leg to offset the unrealized losses on the losing leg.
NOTE: Its important to realize that these rolls on the winning side are necessary to the overall risk dynamics. Sort of like when you're playing blackjack you have to recognize double and split opportunities as they represent necessary choices in order to minimize the house edge and mazimize your results (reduce risk, improve overall returns).
Next - managing risk dynamically makes me far more responsive to whatever actually happens and almost indifferent to even pretty large moves (over a 2 week window). The farther the shares go in a 2 week window, the better the winning leg will perform, offsetting the fact at the same time the other leg is doing badly.
A current example - for the Mar 5 expiration I started with an 830/875 strangle. The shares went down like crazy and I've had two early close opportunities for the call leg - once in the upper 700s and again in the upper 600s. That latter roll was to 680 for a $35 premium.
After that last roll I was (am) in an 830/680 inverted strangle for Mar 5 expiration. The third call position in the Mar 5 window generated enough income by itself to be 4 months of income. Or for risk mitigation I can use some of that income on the put leg to improve my roll choices, including taking a net debit to move the strike by a lot more than a net credit can make available.
On this particular put, even being $150 ITM, I've had a roll to the 825 strike for Mar 19 and a $1 net credit available throughout the week just ending. Because of (only) that most recent call though, and assuming it finishes OTM (or close ITM) then I can spend as much as a $40 net debit on the put and improve it to a 775 strike instead. Being so far ITM any net debits improve the strike by close to $ per $ (relatively bad). In this case, $40 of debit buys a $50 improvement in the strike and in the context of only that most recent call would still leave me with "only" 1 month of income for a 2 week position. That is a whole lot of risk mitigation / management available.
After that last roll I was (am) in an 830/680 inverted strangle for Mar 5 expiration. The third call position in the Mar 5 window generated enough income by itself to be 4 months of income. Or for risk mitigation I can use some of that income on the put leg to improve my roll choices, including taking a net debit to move the strike by a lot more than a net credit can make available.
On this particular put, even being $150 ITM, I've had a roll to the 825 strike for Mar 19 and a $1 net credit available throughout the week just ending. Because of (only) that most recent call though, and assuming it finishes OTM (or close ITM) then I can spend as much as a $40 net debit on the put and improve it to a 775 strike instead. Being so far ITM any net debits improve the strike by close to $ per $ (relatively bad). In this case, $40 of debit buys a $50 improvement in the strike and in the context of only that most recent call would still leave me with "only" 1 month of income for a 2 week position. That is a whole lot of risk mitigation / management available.
Next - more of an attitude and conceptual thing. For purposes of position management my strategy on the winning leg is to rolling aggressively to improve income and bring delta closer to the losing leg. This has historically been a good choice in the 2/3rds to 4/5ths profit level, at least on these <4 week options.
Most importantly on the losing leg I shift to "buying time" as my mental model. My intent isn't minimizing losses - that will come from when the shares (finally!) reverse and/or using some of those winning leg profits to get the losing leg to a closer ITM strike. That naturally leads to waiting for close to expiration before rolling.
The buying time mental model can be tough when I'm $150 ITM (that put leg) and is proving trivial when I know that even this far ITM I can improve the strike by $50 or more with call side proceeds.
The buying time mental model can be tough when I'm $150 ITM (that put leg) and is proving trivial when I know that even this far ITM I can improve the strike by $50 or more with call side proceeds.
Some misc stuff.
Tracking
I have historically tracked each of my individual trades. That up around 150 trades in the year I've been doing this where my primary tracking goal today are the realized results.
I believe that I need to augment realized results tracking with cash flow tracking. These two can prove to be very different.
It looks like the cash flow runs ahead of realized results with these two matching up over longer periods of time. I.e. - realized results and cash flow will be nearly identical over a year, but can be dramatically different over 1 week. One being positive while the other is negative is easy to have happen in any particular week.
I think the cash flow is important to track as its the most immediate measure of whether I'm getting ahead or not. The way I think of these rolls - there are two kinds of rolls in this approach. What I think of as convenience rolls, where I'm really BTC a winning position to realize that gain and then a STO a new position. It's convenient to think about it as a roll, but I can get the same overall dynamic for this trade as two individual trades.
The other roll though is a necessary roll. The obvious way these arise is that the position goes so badly against you that you no longer have the cash available to BTC. One of these works by using the credit from the open leg to pay off the debit from the closing leg. By insisting on a net credit the accumulating rolled position will represent a larger and larger unrealized gain (while creating larger and larger realized losses - these can take time to turn into a realized profit).
But if one closes one of these multiple-roll positions too early (say a 67% profit) then the overall sequence of rolls can represent a realized loss. I want income from cash flow that turns into realized gains - not cash flow that turns into realized losses.
I haven't yet added cash flow to my tracking spreadsheet, but I think the equation will be reasonably straightforward. I'll track it at a monthly level and use the net open income for the month minus the net close outgo for the month. This is different from realized results to the degree that a position is opened in 1 month (+cash in open month, -cash in close month).
Longer term downtrend dynamics.
I haven't experienced this myself yet but I have some thoughts about how I expect positions to evolve over time. When we're in a longer term downtrend, then I'll see lower and lower value in the shares that I own. But the share count won't change and with my long term buy and hold view of things, I am indifferent to a $400, $800, $1600, etc.. share price.
While the share value is decreasing the cash value is unchanged, thus increasing the fraction of the account in cash (backing puts).
The beautiful thing - when the cash value gets enough above share value, then I can allow any number of those ITM puts I'm rolling along to go to assignment. In which case I am buying new shares at a relatively low share price (over time - I think of this as akin to dollar cost averaging).
And at the extreme, I can make a decision to go heavily overloaded on shares. As a thought experiment - if I roll that 830 put I have today all the way down to $100 and it is still ITM, I probably decide to let approximately all of those puts go to assignment - buying shares at $100 sounds like the bestest thing ever.
Uptrend dynamics.
There's a similar dynamic though not the same. As shares go up, share value will go up while cash value will be unchanged, thus decreasing the fraction of the account in cash. I'll be generating cash from option sales and that might be enough to maintain the 50/50 ratio.
But whenever it falls behind, then I have the option to allow some of those covered calls go to expiration (probably after many rolls), turning some of the shares into cash and moving the account back towards that 50/50 balance. This sure sounds like a sell high result
Both of these longer term dynamics are truly longer term. Rather than something I would think about monthly, I expect this to be more like 1x/year and maybe multiple years between either outcome occurring. I need a pretty low share price to take assignment on a put, and I need a pretty high share price to take assignment on a call.
At today's $680 share price, I probably am not interested in taking assignment on any puts until I've rolled my put leg down to $400. On the call side I'm probably interested in taking assignment on some shares around $800 due to how far away from 50/50 cash I am. Heck - I should probably be interested here at $680, which makes it a lot easier to sell really high delta calls.
Or maybe to tie back to the original thread name - "the wheel" is something that gets turned when a long term trend takes us enough above or below my expected value at that point in time, rather than something I'm doing trading window to trading window.
Tracking
I have historically tracked each of my individual trades. That up around 150 trades in the year I've been doing this where my primary tracking goal today are the realized results.
I believe that I need to augment realized results tracking with cash flow tracking. These two can prove to be very different.
It looks like the cash flow runs ahead of realized results with these two matching up over longer periods of time. I.e. - realized results and cash flow will be nearly identical over a year, but can be dramatically different over 1 week. One being positive while the other is negative is easy to have happen in any particular week.
I think the cash flow is important to track as its the most immediate measure of whether I'm getting ahead or not. The way I think of these rolls - there are two kinds of rolls in this approach. What I think of as convenience rolls, where I'm really BTC a winning position to realize that gain and then a STO a new position. It's convenient to think about it as a roll, but I can get the same overall dynamic for this trade as two individual trades.
The other roll though is a necessary roll. The obvious way these arise is that the position goes so badly against you that you no longer have the cash available to BTC. One of these works by using the credit from the open leg to pay off the debit from the closing leg. By insisting on a net credit the accumulating rolled position will represent a larger and larger unrealized gain (while creating larger and larger realized losses - these can take time to turn into a realized profit).
But if one closes one of these multiple-roll positions too early (say a 67% profit) then the overall sequence of rolls can represent a realized loss. I want income from cash flow that turns into realized gains - not cash flow that turns into realized losses.
I haven't yet added cash flow to my tracking spreadsheet, but I think the equation will be reasonably straightforward. I'll track it at a monthly level and use the net open income for the month minus the net close outgo for the month. This is different from realized results to the degree that a position is opened in 1 month (+cash in open month, -cash in close month).
Longer term downtrend dynamics.
I haven't experienced this myself yet but I have some thoughts about how I expect positions to evolve over time. When we're in a longer term downtrend, then I'll see lower and lower value in the shares that I own. But the share count won't change and with my long term buy and hold view of things, I am indifferent to a $400, $800, $1600, etc.. share price.
While the share value is decreasing the cash value is unchanged, thus increasing the fraction of the account in cash (backing puts).
The beautiful thing - when the cash value gets enough above share value, then I can allow any number of those ITM puts I'm rolling along to go to assignment. In which case I am buying new shares at a relatively low share price (over time - I think of this as akin to dollar cost averaging).
And at the extreme, I can make a decision to go heavily overloaded on shares. As a thought experiment - if I roll that 830 put I have today all the way down to $100 and it is still ITM, I probably decide to let approximately all of those puts go to assignment - buying shares at $100 sounds like the bestest thing ever.
Uptrend dynamics.
There's a similar dynamic though not the same. As shares go up, share value will go up while cash value will be unchanged, thus decreasing the fraction of the account in cash. I'll be generating cash from option sales and that might be enough to maintain the 50/50 ratio.
But whenever it falls behind, then I have the option to allow some of those covered calls go to expiration (probably after many rolls), turning some of the shares into cash and moving the account back towards that 50/50 balance. This sure sounds like a sell high result
Both of these longer term dynamics are truly longer term. Rather than something I would think about monthly, I expect this to be more like 1x/year and maybe multiple years between either outcome occurring. I need a pretty low share price to take assignment on a put, and I need a pretty high share price to take assignment on a call.
At today's $680 share price, I probably am not interested in taking assignment on any puts until I've rolled my put leg down to $400. On the call side I'm probably interested in taking assignment on some shares around $800 due to how far away from 50/50 cash I am. Heck - I should probably be interested here at $680, which makes it a lot easier to sell really high delta calls.
Or maybe to tie back to the original thread name - "the wheel" is something that gets turned when a long term trend takes us enough above or below my expected value at that point in time, rather than something I'm doing trading window to trading window.
And because I just can't stop this morning
A NOT ADVICE idea.
I started experimenting with this general idea at the beginning of the year. I haven't needed to refine it very much from the initial test, but there has been critical experience that I had to get from that test position.
And thus the idea - you might find it valuable to duplicate something I did starting at the beginning of this year.
Namely - in order to create the desired balance of puts and calls, and create a micro position where I could test this out, I bought 100 shares and had enough cash to have bought another 100 shares. At our current ~$700 share price, this is $140k. I didn't actually care what the share price was at that time and I ended up starting one of these positions in two different accounts (two tests!) - one at $735 share price and the other at $850 share price.
So - buy the 100 shares. And then immediately sell the strangle - 1 call and 1 put. I'm using delta as my first pass guide to choose strikes and its pretty high. So you might go with a .30 delta call and put. My option chain says that is a 620 put and a 740 call using March 19 as the expiration date, as I'm writing this shares are at $680, so the strangle is +/- $60, but I got there via delta. Or you could go weekly (Mar 12) which will tighten up the range. You might go with something seemingly more conservative - say the .20 delta on each side (expands the strangle) etc...
I find myself biasing towards .35 or .40 delta these days, but that comes from a more dynamic view of risk management that has been acquired by doing .20 to .30 delta strangles.
And then you just manage that strangle, week to week (or more accurately, trading window to trading window). You can use a larger window, but I would bias towards weekly or every other week if you have the time and energy. The purpose of this position is education and experience, and it'd be pretty sweet to be earning $1400 (1%) per week, or whatever it turns into, while you're gaining that experience.
Within that 'manage strangle week to week', I would play around with different elements. I might roll the winning leg (which can go to any delta) to a variety of different deltas. .20, .25, .30, .35, .40 - these are the ones I've been trying out. The losing leg gets whatever it gets (which as you'll quickly discover, can find you looking at $150 share premiums that you would never open as a starting point, but that's what the roll gets you to).
A big component of what I was wanting to learn - how far ITM could I go and still have a desirable roll available. The first call I sold went deep ITM and taught me I could get $100 ITM (10-15%) and still 'save' the position. The current put is $150 ITM (close to 20%) and I still have a good roll available (good roll for me = net credit plus at least a 1 strike improvement).
You'll find that in an inverted strangle, both legs can finish ITM, which means that both legs are just taking the best roll that they have available and may be yielding roughly 0 cash flow for that trading window (which is also ok - I find that some trade windows can generate 2-5x of my target, so windows with no income are just fine).
As an example using my current specific position - I have rolled my way into a 830/680 strangle, if the shares land at $750 at the end of next week, then I consider that to be a great outcome. Both are reasonably deep ITM ($70 on one side, $60 on the other), but both will have good roll choices available. And the effect of those rolls will be to tighten up the strangle while generating small net credits.
I also prefer this strangle (830/680) over what I started with (830/875). If the shares go down from here, then the call leg has generated just about as much premium as it could to offset this big down move. All of that additional premium can, if I choose, be used to move that 830 put.
The purpose of this test position is to see different elements of how one of these positions evolves and to see how well it does or doesn't work for your own trading mentality. Such as this 830/680, though this is a sizable position for me, not a test position.
Lastly of course - you shouldn't try out this test position until you feel ready for all of the elements. Besides selling both puts and calls, a roll transaction / ticket, that will also include compatibility between my list of inputs that led me to this and your own view of the world.
I needed 2 months to build on the 8 or 10 months of experience of selling options I had already accumulated. It'll be what it'll be, but if you've been selling options already, then you'll probably find this a reasonably minor tweak to stuff you're already doing.
A NOT ADVICE idea.
I started experimenting with this general idea at the beginning of the year. I haven't needed to refine it very much from the initial test, but there has been critical experience that I had to get from that test position.
And thus the idea - you might find it valuable to duplicate something I did starting at the beginning of this year.
Namely - in order to create the desired balance of puts and calls, and create a micro position where I could test this out, I bought 100 shares and had enough cash to have bought another 100 shares. At our current ~$700 share price, this is $140k. I didn't actually care what the share price was at that time and I ended up starting one of these positions in two different accounts (two tests!) - one at $735 share price and the other at $850 share price.
So - buy the 100 shares. And then immediately sell the strangle - 1 call and 1 put. I'm using delta as my first pass guide to choose strikes and its pretty high. So you might go with a .30 delta call and put. My option chain says that is a 620 put and a 740 call using March 19 as the expiration date, as I'm writing this shares are at $680, so the strangle is +/- $60, but I got there via delta. Or you could go weekly (Mar 12) which will tighten up the range. You might go with something seemingly more conservative - say the .20 delta on each side (expands the strangle) etc...
I find myself biasing towards .35 or .40 delta these days, but that comes from a more dynamic view of risk management that has been acquired by doing .20 to .30 delta strangles.
And then you just manage that strangle, week to week (or more accurately, trading window to trading window). You can use a larger window, but I would bias towards weekly or every other week if you have the time and energy. The purpose of this position is education and experience, and it'd be pretty sweet to be earning $1400 (1%) per week, or whatever it turns into, while you're gaining that experience.
Within that 'manage strangle week to week', I would play around with different elements. I might roll the winning leg (which can go to any delta) to a variety of different deltas. .20, .25, .30, .35, .40 - these are the ones I've been trying out. The losing leg gets whatever it gets (which as you'll quickly discover, can find you looking at $150 share premiums that you would never open as a starting point, but that's what the roll gets you to).
A big component of what I was wanting to learn - how far ITM could I go and still have a desirable roll available. The first call I sold went deep ITM and taught me I could get $100 ITM (10-15%) and still 'save' the position. The current put is $150 ITM (close to 20%) and I still have a good roll available (good roll for me = net credit plus at least a 1 strike improvement).
You'll find that in an inverted strangle, both legs can finish ITM, which means that both legs are just taking the best roll that they have available and may be yielding roughly 0 cash flow for that trading window (which is also ok - I find that some trade windows can generate 2-5x of my target, so windows with no income are just fine).
As an example using my current specific position - I have rolled my way into a 830/680 strangle, if the shares land at $750 at the end of next week, then I consider that to be a great outcome. Both are reasonably deep ITM ($70 on one side, $60 on the other), but both will have good roll choices available. And the effect of those rolls will be to tighten up the strangle while generating small net credits.
I also prefer this strangle (830/680) over what I started with (830/875). If the shares go down from here, then the call leg has generated just about as much premium as it could to offset this big down move. All of that additional premium can, if I choose, be used to move that 830 put.
The purpose of this test position is to see different elements of how one of these positions evolves and to see how well it does or doesn't work for your own trading mentality. Such as this 830/680, though this is a sizable position for me, not a test position.
Lastly of course - you shouldn't try out this test position until you feel ready for all of the elements. Besides selling both puts and calls, a roll transaction / ticket, that will also include compatibility between my list of inputs that led me to this and your own view of the world.
I needed 2 months to build on the 8 or 10 months of experience of selling options I had already accumulated. It'll be what it'll be, but if you've been selling options already, then you'll probably find this a reasonably minor tweak to stuff you're already doing.
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