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Wiki Selling TSLA Options - Be the House

EVNow

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Sep 5, 2009
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No. CC are easier to roll than spreads because you aren't having to buy a Call every time you roll. Spreads have destroyed the portfolios of many people here (and many who have left after losing everything). Spreads = leverage, which means greater losses when things don't go as planned.
Same number of contracts … planning to use spreads so that I don’t lose my shares if SP runs up quickly.

Idea is - lets say I sell 200/205. SP goes to 220, I’d roll to 215/220 (or close to that) … etc. It would be difficult to roll the call forward and up.

I’ll have to back test this …
 

BornToFly

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Same number of contracts … planning to use spreads so that I don’t lose my shares if SP runs up quickly.

Idea is - lets say I sell 200/205. SP goes to 220, I’d roll to 215/220 (or close to that) … etc. It would be difficult to roll the call forward and up.

I’ll have to back test this …
I'm assuming you are selling the 200 and buying the 205. Rolling the -205 to -215 is the same whether it is a CC or part of a spread. But now you are selling the +205, and buying a 220. It will cost you more to roll the ITM spread than to just roll a 205CC to 215.
 

traxila

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Same number of contracts … planning to use spreads so that I don’t lose my shares if SP runs up quickly.

Idea is - lets say I sell 200/205. SP goes to 220, I’d roll to 215/220 (or close to that) … etc. It would be difficult to roll the call forward and up.

I’ll have to back test this …
Don’t understand what is easier to roll about a spread as opposed to a CC. CCs are inherently safer. Your shares might get called away if you neglect to roll them properly, but your portfolio will never be eviscerated and destroyed as max loss rears its ugly head.
 

EVNow

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Sep 5, 2009
16,332
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Seattle, WA
I'm assuming you are selling the 200 and buying the 205. Rolling the -205 to -215 is the same whether it is a CC or part of a spread. But now you are selling the +205, and buying a 220. It will cost you more to roll the ITM spread than to just roll a 205CC to 215.
At maturity 200/205 week1 is about $5. 215/220 week2 should be about $5 too at week1 maturity … since SP is 220.

Basically -200 rolls to -215 and +205 to +220.

I’ve done this a couple times in the past, not recently.
 
At maturity 200/205 week1 is about $5. 215/220 week2 should be about $5 too at week1 maturity … since SP is 220.

Basically -200 rolls to -215 and +205 to +220.

I’ve done this a couple times in the past, not recently.
Are you talking about bull debit spreads (e.g., +200/-205) or bear credit spreads (e.g., -200/+205)? I'm assuming bear credit spreads for the sake of this post.

The problem is that now those rolls look fine; however, once both legs go DITM, it'll be harder to roll them, and those rolls will yield much less credit, if at all.

I've mentioned it multiple times over the past 2 years in this thread -- spreads are extremely dangerous, especially if both legs go ITM. And with TSLA's volatility, it's just a matter of time until they do. Especially down here, it's only a matter of time until TSLA moves upwards, potentially violently so, and will be staying above your long leg for an extended period of time -- without a chance of rolling them up&out for a reasonable strike improvement, because they are just so DITM.

The following thought is about BullPS's but applies to BearCS's as well:

  • BPS's exploded in my face, and almost fatally so, somewhere in 2018. I sold strikes that I thought "the stock price would never reach". I highly recommend against them because they have more characteristics of a bet (or a latent, highly-leveraged long position that you likely will not be able to maintain for longer periods of time, should you get assigned on the short leg) than they are "selling insurance" (which is the case with cash-backed puts).
With all the pain that members have experienced over the last ~6 months with BPS's, I urge you to not do BCS's. Especially not down here.

And if you want to do them nevertheless, backtest.
 

BornToFly

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At maturity 200/205 week1 is about $5. 215/220 week2 should be about $5 too at week1 maturity … since SP is 220.

Basically -200 rolls to -215 and +205 to +220.

I’ve done this a couple times in the past, not recently.
A Bear Credit spread that is ITM will always cost money to roll, because you are on the wrong end of the Bid/Ask spread on two rolls instead of one (with just a CC).
 

dl003

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Nov 22, 2019
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There are 2 ways to play spreads:

1. You have enough money to short 500s of TSLA but decide not to, instead selling 5x $10 call spreads. This is fine as worst case scenario you just close the long leg and roll the short leg out for a while as you can afford to short 500s
2. You have enough money to short 30s only but decide to use that $5k to sell 5x $10 call spreads. This is not fine as you can easily get blown up.

The important word here is leverage. Spreads are highly leveraged. If you use the long leg to limit your loss while being able to outright take full asignment from the short leg, its fine. If you use the long leg to maximize your leverage, its not fine.
 
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MikeC

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There are 2 ways to play spreads:

1. You have enough money to short 500s of TSLA but decide not to, instead selling 5x $10 call spreads. This is fine as worst case scenario you just close the long leg and roll the short leg out for a while as you can afford to short 500s
2. You have enough money to short 30s only but decide to use that $5k to sell 5x $10 call spreads. This is not fine as you can easily get blown up.

The important word here is leverage. Spreads are highly leveraged. If you use the long leg to limit your loss while being able to outright take full asignment from the short leg, its fine. If you use the long leg to maximize your leverage, its not fine.

I’d sworn off BCS because why waste money on the long call when I already have the shares to sell covered calls.

But maybe it would be worth it - to allow me to sell more calls without the fear of having the shares all called away forever if the stock price does run up. Worst case I lose a few thousand per contract instead of losing those shares altogether.
 

traxila

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I’d sworn off BCS because why waste money on the long call when I already have the shares to sell covered calls.

But maybe it would be worth it - to allow me to sell more calls without the fear of having the shares all called away forever if the stock price does run up. Worst case I lose a few thousand per contract instead of losing those shares altogether.
If you have a margin account you can sell
more naked calls over your CCs at higher and higher strike prices that you wish you would have to roll.
 

EVNow

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Sep 5, 2009
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Seattle, WA
I've mentioned it multiple times over the past 2 years in this thread -- spreads are extremely dangerous, especially if both legs go ITM.
The important word here is leverage. Spreads are highly leveraged. If you use the long leg to limit your loss while being able to outright take full asignment from the short leg, its fine. If you use the long leg to maximize your leverage, its not fine.
Thanks for the responses. Still trying to understand. Spread is purely to hedge and not to leverage. I'd be selling as many spreads as I'd with covered calls / cash covered puts.

Just to give more background - here is the scenario. Lets say I've 100 TSLA shares and no cash in the account. What I'm trying to decide is which is less risky. Let us assume SP is like it is now (182.86).

A. Sell 1 C200 Expiring 12/2 for $1.16 Cr.
B. Sell 1 C200 / Buy 1 C205 (i.e. bear credit spread) Expiring 12/2 for $0.47 Cr.

Let us say SP goes to 220 on 12/2. Now the choices are

A1. Roll C200 12/2 to C200 12/9 (for a small Cr). I don't think it would be possible to roll for even/credit to anything higher like C202.5. I know this because I've been doing this recently but on the Cash Covered Put side.

B2. Roll -200/+205 12/2 to -212.5/+220 12/9 for a small Cr / even. If not possible roll to -210/+220 for a small Cr.

To get an idea how B2 might work, I just looked at the similar ITM calls at close from yesterday (11/25) - SP at 182.86 for calls expiring 12/2. Assuming I've to pay $5 to close the 12/2 spread.

-C172.5/+C182.5 : 12.72 - 6.41 = Cr 6.31
-C175/+C182.5 : 11:00 - 6.41 = Cr 4.39

So, looks like I can do this roll - but not with a $5 spread but at $7.5 or $10.

But, I've essentially rolled my short call from C200 to C210 .... which would not have been possible but for the hedging long call that I bought.

C162.5 : 20.85
C165 : 18.87

One more thing - I expect if the SP shoots up, the IV will shoot up as well. I'll have to dust off my trusty old Black-Scholes spreadsheet to do the analysis in that case. I'll do that over the next couple of days and post. Will also check if Fidelity would do the back testing automatically for me.

ps : Just to take this a step further, let us say the SP jumped all the way to 320. My 12/2 spread is still worth only $5. So, I'd able able to roll to -C310/+C320 ! So, by using the spread instead of covered calls, I'd able to save the stock that has now appreciated 60%.
 
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JustMe

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Nov 21, 2016
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I would like to hear from those who have had shares called away from ITM CCs. What were the conditions? (Strike/share price/days to expiration).

I’ve never had that happen. I always roll at least two days out from expiration. Moreover, CCs can always be rolled up or for a credit. If the share price races away and I end up with deep ITM CCs, I sell new OTM CCs to pay to raise the strikes of the ITM CCs. If I was careless and ended up with all my shares trapped under ITM CCs I sell *conservative* bps to rescue one or more of the contracts.

This is not a bad problem to have, compared to managing under water bps/bcs. (Ask me how I know)
 
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jw934

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Jul 23, 2018
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1669482781636.png

My reading is:
The trade at 11:29:56 with $TSLA at 182.155 happened at a local low, suggesting a bullish trade.
The 153.33 Calls traded at the BID, but the 150 call was traded slightly below the ASK (no "A"), suggesting a fixed price spread order since the time of the two sides are the same.
Cost for the 150 strike was $59.55, the only trade of the day. as per Yahoo Finance. Cost for the 153.33 was $57.60. Net cost is hence $1.95/share.
Max value at maturity is the spread at $3.33/share or a 70.77% return, if $TSLA closes at or above $153.33 on 9/15/2023.

1669482919338.png

1669483339062.png
1669483441381.png
 
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MikeC

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I would like to hear from those who have had shares called away from ITM CCs. What were the conditions? (Strike/share price/days to expiration).

I’ve never had that happen as long as I roll at least two days out from expiration. Moreover, CCs can always be rolled up or for a credit. If the share price races away and I end up with deep ITM CCs, I sell new OTM CCs to pay to raise the strikes of the ITM CCs. If I was careless and ended up with all my shares trapped under ITM CCs I sell *conservative* bps to rescue one of the contracts.

This is not a bad problem to have, compared to managing under water bps/bcs. (Ask me how I know)

The one that sticks in my mind the most was the first break out past the pre- pre- split price of 400 in late 2019. It had never been above that price in all those years so I figured short-term 500 and 600 strike calls were safe. But it ran up to 900 something while I rolled too little, too late. Once too DITM, your roll options suck and it’s not worth going out 6-12 months for $5 gain.

Even if in restrospect, I could have stayed with the stock price if I had rolled aggressively, that is with the benefit of hindsight. My BPS this year could have stayed with the stock price if I had rolled perfectly too, but at the time it’s impossible to know if the SP is going to come back to your strike.

Yes, there’s always some way to roll out by increasing leverage, but at some point you end up capping all upside.

The only thing better about getting your CCs run over than your puts is that margin is on your side. Which is a world of difference. But as a bull, it just feels worse to be getting hurt by big share price gains than big drops.
 

dl003

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Nov 22, 2019
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Thanks for the responses. Still trying to understand. Spread is purely to hedge and not to leverage. I'd be selling as many spreads as I'd with covered calls / cash covered puts.

Just to give more background - here is the scenario. Lets say I've 100 TSLA shares and no cash in the account. What I'm trying to decide is which is less risky. Let us assume SP is like it is now (182.86).

A. Sell 1 C200 Expiring 12/2 for $1.16 Cr.
B. Sell 1 C200 / Buy 1 C205 (i.e. bear credit spread) Expiring 12/2 for $0.47 Cr.

Let us say SP goes to 220 on 12/2. Now the choices are

A1. Roll C200 12/2 to C200 12/9 (for a small Cr). I don't think it would be possible to roll for even/credit to anything higher like C202.5. I know this because I've been doing this recently but on the Cash Covered Put side.

B2. Roll -200/+205 12/2 to -212.5/+220 12/9 for a small Cr / even. If not possible roll to -210/+220 for a small Cr.

To get an idea how B2 might work, I just looked at the similar ITM calls at close from yesterday (11/25) - SP at 182.86 for calls expiring 12/2. Assuming I've to pay $5 to close the 12/2 spread.

-C172.5/+C182.5 : 12.72 - 6.41 = Cr 6.31
-C175/+C182.5 : 11:00 - 6.41 = Cr 4.39

So, looks like I can do this roll - but not with a $5 spread but at $7.5 or $10.

But, I've essentially rolled my short call from C200 to C210 .... which would not have been possible but for the hedging long call that I bought.

C162.5 : 20.85
C165 : 18.87

One more thing - I expect if the SP shoots up, the IV will shoot up as well. I'll have to dust off my trusty old Black-Scholes spreadsheet to do the analysis in that case. I'll do that over the next couple of days and post. Will also check if Fidelity would do the back testing automatically for me.

ps : Just to take this a step further, let us say the SP jumped all the way to 320. My 12/2 spread is still worth only $5. So, I'd able able to roll to -C310/+C320 ! So, by using the spread instead of covered calls, I'd able to save the stock that has now appreciated 60%.
Thats the gist of it. For me, I’d like to think about it in terms of how long I have to sell CC to make up for the loss from the BCS. Using your example: 200/205 gives me .5 in premium. If the SP shoots way past the long leg, Id just take max loss on the spread ~ 4.5. So now instead of rolling them out, the question for me is how long do I need to sell CCs to make up for that 4.5 loss? Assuming ~1.1 premium per CC per week, maybe a month will do it. Way better than a DITM CC situation where the stock keeps running away from me? I dont know but I might try this once we are in wave 3 where upside is large and pullbacks are shallow. This way Im starting fresh with a better grasp on the trend, selling CCs into a higher IV environment. That should be the purpose of spreads: defining losses before hand.

One potential issue I see is the risk taker’s dilema. Chartists try to guess the safe strike for maximum profit per CC, whereas to buy a long leg as insurance is to accept we might be wrong. This is difficult to do. On one hand, if we do our homework thoroughly enough, insurance will seems like a waste. On the other hand, if we take comfort in knowing our loss is predefined, we may take bigger risks than neccessary in choosing the short strike.

Yet, the most profitable traders are masters in risk management. Food for thought?
 
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BornToFly

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To get an idea how B2 might work, I just looked at the similar ITM calls at close from yesterday (11/25) - SP at 182.86 for calls expiring 12/2. Assuming I've to pay $5 to close the 12/2 spread.

-C172.5/+C182.5 : 12.72 - 6.41 = Cr 6.31
-C175/+C182.5 : 11:00 - 6.41 = Cr 4.39
I'm not sure what you are saying here. You are not closing an ITM -C172.5/+C182.5 for a credit. You are losing dollars to close a spread that gave you a small premium. To make money on spreads, they need to stay OTM. Basically you need to do weeklies that are 15-20% OTM, which gives little premium unless you do 10X the number of CC you would have done more aggressively because they are easier to roll. At 10X the number, you are now using leverage, and your total possible loss just went up 10X.
 
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EVNow

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Thats the gist of it. For me, I’d like to think about it in terms of how long I have to sell CC to make up for the loss from the BCS. Using your example: 200/205 gives me .5 in premium. If the SP shoots way past the long leg, Id just take max loss on the spread ~ 4.5. So now instead of rolling them out, the question for me is how long do I need to sell CCs to make up for that 4.5 loss? Assuming ~1.1 premium per CC per week, maybe a month will do it. Way better than a DITM CC situation where the stock keeps running away from me?
Right.

Basically by putting a ceiling on your losses you are covered against a bull run.

We can also look at it another way. Risk/reward. CC has higher reward but higher risk. Spread has lower reward with lower risk. This is the reason we learnt about spreads as a safe way to hedge (and thus my surprise on reading the responses to my question here).

I guess over the years, instead of using spread to hedge, people are using it as leverage and actually increasing risk instead of decreasing (and capping) losses.

BTW, I got caught with cash covered puts and got assigned when SP was around ~1000 (pre-split) i.e. about 340 In April. If I had done spreads instead, I'd be in a much better shape. Anyway, now that I got those shares assigned, I don't want to "lose" them at 50% loss.
 
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