Wiki Selling TSLA Options - Be the House

[wnorris]

Therefore I've got some high level choices. Realize the loss (BTC the -760p at ~$200 each), free up the resources, and get back to earning income from these deep ITM positions that are newly OTM. I think about my sold options in terms of 'slots'. The cash backs a number of puts (slots) and the shares back a number of covered calls (slots). Turning deep ITM put slots that aren't doing anything into OTM put slots that are generating income is appealing to me (duh).

This is something I am contemplating about more and more on my -720p side. I am holding off on a BTC due to a belief that we are more likely to be in an up-trend next week as TSLA is likely oversold and could see a macro move up from last week. Hopefully there will be a little excitement over the Model S/X event the following week.

Based on a willingness to BTC an DITM position I am starting to question the guidance that one should never pay to roll down. Why not if I am willing to fully BTC? I could roll out and down at a cost that would increase the likelihood my DITM -p position will go OTM and give me more breathing room to roll down (if desired) with a credit which I cannot do now that I am ~$140 ITM. This should also allow me to free capital that is held hostage and start selling puts at a more favorable premium again.

 

[adiggs]

Another evening for walls o text from me

I thought I would elaborate on my flat to down view for at least Q2 and reasonably likely for the rest of the year. This is not advice, I am not a financial planner / manager, we all make our own choices and experience our own consequences...


My view arrives primarily from the observation that share price goes up (significantly) with a combination of new buyers / owners of the shares, that are willing to keep buying even as the share price goes up. The question I ask myself: where willthese new buyers come from?

The second observation is that in pre-split $, we've come a LONG ways fast in the share price.

In late 2019 we FINALLY broke out of the seemingly endless $60-80 trading range. There was even a sustained visit to the $40s over the summer of 2019. We know what's happened since, with the shares peaking just over $900 early this year. I look back and I see three major catalysts for this amazing run.

1) We'd been in that $40-$80 trading range for like 5 years. As people like to talk about around here, the spring was getting wound tighter and tighter. Tesla had the lower end share price soon after the Model S release (seriously - I can attest that the previous run from $5 to $60 was fun too ). This was well before Model X release. And yet in 2019 we had the same share price and had added Model 3 in volume production. No company value change? Hah! This was going to break out at some point. I was thinking something closer to $200, but we got to something more like $300.

BTW - recent talk about spring being wound tighter and tighter is just so not in the previous category. A year or two, instead of a quarter or two - now that's a spring.

2) The stock dividend. I am in agreement with @Artful Dodger and others that see significant use of manufactured shares to manipulate and suppress the share price. The stock dividend forced all those participants to remove all of the manufactured shares from circulation and do it fast (or lose 80% on their manufactured shares; they had created $1500 shares that were going to need to be delivered or BTC at $300). My suspicion with no actual data is that hurt badly enough, that they took their time sticking their hand back into the sausage grinder. This acted as further release of the wound up spring as well as significantly altering the supply / demand imbalance. New share price ~$400.

3) The S&P 500 inclusion. This brought many, many, new buyers that were also long term buy and hold investors into the stock. That took a good sized chunk of the company out of circulation - more demand with no change in supply = increasing share price. This is the $400ish to $900ish (peak) move.

The common denominator of all 3; significant new buyers appeared that kept buying even as the shares went up bigly.


Where will the next significant batch of new buyers come from?
I really just see 2 catalysts and 1 almost certainly won't happen this year (the 2nd).
1) FSD / city NOA goes into widespread release. It works well, lots of videos and personal testimony from owners about how great and amazing it is (I look forward to being among them). The world sits up and realizes that these is something that is superficially close to autonomous vehicles and new "story" investors pile in on the possible winner of the possibly winner-take-all market of autonomous driving.

There will be later disappointment as it becomes increasingly clear that city NOA and fully autonomous aren't close together in time. City NOA is still really valuable but autonomous vehicles will be still be years away.

2) The quarterly financials start getting a lot better, really fast. This will happen when Tesla has suddenly run out of either the need or the ability to expand rapidly, and all of today's growth spending is suddenly falling to the bottom line. Also showing up in here as Tesla scales is the sudden realization that there is a lot of leverage in Tesla's business and incremental revenue is going to the bottom line much faster than incremental revenue is arriving. This will draw in the financial metrics investors. They will finally see a non-ridiculous PE that is improving fast, and likely to speed up. Think the new Apple with gargantuan revenue, highly profitable and improving profitability, and running out of good things to invest in. I don't see #2 happening meaningfully in 2022. I DO expect that all of us long term investors will be thrilled throughout the year with the financials and other evidence of progress. Everybody wants to own the new Apple.

I wrap all of the new products, battery chemistry, factory building, etc.. into this bucket. These are the results from the current business that will generate the financials.


Ergo - an extensive period of establishing a new trading range is upon us (my belief). I don't know where that new trading range will be.

I think that returning to $300 (the first catalyst) is unlikely.

I think that returning to $400 (where the second catalyst got us) is unlikely but possible.

I think that something more like $500 is the more likely new bottom. I choose $500 as there will be shares out of circulation because of #3. So demand will be such that moves below $500 will draw too many buyers into the market. These buyers won't keep buying aggressively above and beyond that $900 share price, and really will stop short of that. Now I think I'm talking myself into a $500-600 trading range. For those with longer memories that is a $2500-3000 trading range in pre-split numbers. It's easy for me to remember when that stock price was a fond wished-for dream that was inevitable but surely should have happened a year or two earlier. This is where I tie back to the far and fast idea. A period of digestion and this becoming the new normal is entirely reasonable.

Big moves, up or down, have a tendency to overshoot. Going from $300 to $4500 (pre-split) certainly makes $2500-3000 look reasonable.

 

[adiggs]

This is something I am contemplating about more and more on my -720p side. I am holding off on a BTC due to a belief that we are more likely to be in an up-trend next week as TSLA is likely oversold and could see a macro move up from last week. Hopefully there will be a little excitement over the Model S/X event the following week.

Based on a willingness to BTC an DITM position I am starting to question the guidance that one should never pay to roll down. Why not if I am willing to fully BTC? I could roll out and down at a cost that would increase the likelihood my DITM -p position will go OTM and give me more breathing room to roll down (if desired) with a credit which I cannot do now that I am ~$140 ITM. This should also allow me to free capital that is held hostage and start selling puts at a more favorable premium again.

I totally agree and see the net debit observation your'e making. I've also thought about that. I also think that with your view of an up trend then a partial buyback (net debit to move the strike however much it pleases you to move it) makes a lot of sense as well.


The way I see the net credit "rule" that I follow - it's a quickie short hand for ensuring that I don't start shredding the account. To me the real point is to be very deliberate / intentional about when to take a net debit. One mechanism that might work well for this, if you're selling both puts and calls, is to try rolling both puts and calls at the same time. Set the new strike to where you want it at (which will generate a net credit), and on the same ticket "spend" it to get a better put strike. The ticket will show a net credit (satisfying that guidance / rule) while spending money to improve the put.

I recently intended to do exactly this and forgot, so I did this as two different tickets, and didn't follow through on using the credit to improve the deep ITM strike.

 

[Yoona]

It's been a busy Friday for me, as it has for many others. There was some easy trading where winning positions got rolled into target delta new positions for next week. Nothing interesting.


I AM attempting two rolls that I haven't previously tried.
The interesting bits, details below:-
- a split-flip roll of some -760p that didn't go out (retained the 1 week to expiration) that moved the strike from -400c to -550c. Still ITM but also easy to imagine going OTM.
- a flip roll roll of -640p that also kept the same expiration date, moving a strike from -640p to -610p


Here are positions that needed help, and what I've done with them:
-400c for May 28. A straight roll to June 4. No available rolls improve the strike, so add 1 week; the credit is minimal either way, and this way I get the soonest available feedback. I'm hoping for a situation where a 4 week roll is available that will improve the strike. This is also a candidate for a future split roll (turn a single call into several calls, thereby improving the strike significantly).

This position comes from an experiment started last week with a flip roll from a -760p (the other -760p got a standard straight out roll to get us to the next position). Results thus far is that I'd be slightly ahead if I'd kept this as a put. Slight enough that at other times in the week this one was ahead by a similar amount to how far it is behind now. With my larger view of flat to down, I still like this better than the -760p; even though my larger trading strategy would normally make this the priority.


-760p for May 28.
This is my biggest focus, with the farthest ITM. Last week I did a flip roll, turning one of these into a -400c. That's the one that got a straight out roll above.

The interesting part of this position is trying a split-roll to see how this does at improving things. I settled on a 4 call for 1 put split roll. The 1 for 1 would have landed me at the -400c, adding an additional week to June 4. When I started looking at how things improved using 2, 3, and 4 calls per put, I found some interesting results. Even the option to perform this split roll was setup earlier in the week when I preemptively closed some CC in preparation and didn't open replacements as preparation for this. This provided the uncovered shares necessary (margin to do this is WAY above anything I'm comfortable using margin for, so I had to have shares available for the CC).

The first choice I evaluated is the 2 for 1 split-roll. It improved the strike by something like $90. From 400 to 490 or so. It was such a big strike improvement, I would have gone with this if it weren't still nearly $100 ITM. The 3 for 1 was quite a bit better of course than the 2 for 1 (I don't remember specifics though).

The 4 for 1 split roll gave me my best balance between strike improvement, and minimizing my perceived risk. What I executed turned some -760p into -550c at a 4 for 1 ratio. That is a $150 strike improvement, going from $180 ITM on the put side to $30 ITM on the call side.. I'm still ITM by $30 with these calls, and I have 4x as many calls as I had puts. If my flat to down larger view continues through next week then these even have a chance of being OTM and get closed for pennies. Is it wrong to root for another week of down?

Important additional info about this change in position. I couldn't get a fill without going to a market order. And the bid/ask spread on the overall position was murder. I was only able to execute this 4 for 1 roll in two different transactions. First the BTC on the 760s. Then the STO on the 550c. You'll need margin or a big cash cushion to pull this off. As the contracts were close to $200, that's $20k for each put to BTC. I got it right back on the STO, but I've been in situations where I didn't have the cash to pull off the BTC and therefore I couldn't do a 2 step roll.

And the REALLY interesting dynamic. I expected to roll out as well on this split-roll. That didn't happen - this is a 5/28 to 5/28 roll. I did look at the June 4's as well and they got me very little additional benefit. Adding an extra week for effectively no change in the position was surprising to me. And keeping these only 1 week away is a big bonus to me - sooner feedback and adjustment opportunity, as well as the most voracious part of the time decay curve.


-750p for May 28.
Straight roll to June 4.


-640p for May 28
The interesting part of this roll is this split roll. I found that a 2 for 1 split roll got me a $30 strike improvement: 640 down to 610, while retaining the 5/28 strike There was little meaingful value to adding a week at the same time. So these rolls got me a significantly better strike at the same week. This isn't a free lunch - I have 2 puts where I previously had 1. That's a lot of incremental cash to back these puts. That cash comes from closing out winning puts and using the winning puts backing to cover these.

The other interesting / surprising result to me, and a heads up / warning for what qualifies for deep ITM. This one was about $60 ITM (not $100, $150, or $200 as I've needed to deal with elsewhere) and it's already not budging. Imagine my joy (/s) when I found no strike improvement for either a 1 or 2 week roll. Admittedly the option is still a week to expiration but time value was still approaching 0, so I decided on the early roll anyway for simplicity and reducing risk of early assignment (very very unlikely; I mostly didn't want to lose track of these and accidentally take these to assignment next week). The ones that didn't get the split roll were moved out to June 4 at the same strike.

Thanks for sharing. Believe it or not, I actually understood them. I am thinking a lot about that DITM -P to ITM -C flip roll.

I might try it!
- Pro: the new -C doesn't need margin (since I will uncover long stock for it,) so the margin released by the old -P can now be used to earn IC income, instead of being useless. The margin released by a 1x -p760 6/18 can open 120x Iron Condors 575-650 6/4 with $28k credit. Lightbulb moment: the stuck -P is preventing me from earning $28k/week.
- Con: the new -C steals shares away from my regular CC income, but this is ok since IC earns a lot more.

 

[CHGolferJim]

Thanks for sharing. Believe it or not, I actually understood them. I am thinking a lot about that DITM -P to ITM -C flip roll.

I might try it!
- Pro: the new -C doesn't need margin (since I will uncover long stock for it,) so the margin released by the old -P can now be used to earn IC income, instead of being useless. The margin released by a 1x -p760 6/18 can open 120x Iron Condors 575-650 6/4 with $28k credit. Lightbulb moment: the stuck -P is preventing me from earning $28k/week.
- Con: the new -C steals shares away from my regular CC income, but this is ok since IC earns a lot more.

Do you happen to have an instructional reference for Iron Condors (IC)?

 

[adiggs]

Thanks for sharing. Believe it or not, I actually understood them. I am thinking a lot about that DITM -P to ITM -C flip roll.

I might try it!
- Pro: the new -C doesn't need margin (since I will uncover long stock for it,) so the margin released by the old -P can now be used to earn IC income, instead of being useless. The margin released by a 1x -p760 6/18 can open 120x Iron Condors 575-650 6/4 with $28k credit. Lightbulb moment: the stuck -P is preventing me from earning $28k/week.
- Con: the new -C steals shares away from my regular CC income, but this is ok since IC earns a lot more.

I've been thinking a lot about ICs. I can't remember if I posted about this previously, but the short summary is that if we assume each IC is a full win or a full loss (a gross simplification I know) then the win rate needs to be REALLY high to actually generate positive results.

In your example you're using $60k as backing for a $28k return. That sounds awfully good. If we called it $30k then the math gets really easy.

Wins are worth $30k; losses are worth $30k ($60k minus the $30k received, as one leg has to win for the other leg to lose). In this case a 50/50 win rate is just break even. 2 out of 3 is pretty good - 1 week in three generates a net positive result of $30k - thus $30k every 3 weeks, assuming that there is a setup that is this good each week.

My one foray, plus one investigation after that, suggests that a nearly 50% income on a single position will be very difficult to achieve. I earned $14k on 100 contracts / $50k at risk on the first one I tried. The second one I considered would have been $10k on that $50k stake.

Using the $10k earnings against a $25k loss means that I need 3 wins for every loss to come out slightly ahead (3 wins = $30k; the 1 loss = $25k). 75% win rate for slightly better than break even. Anything short of that won't be a linear reduction or loss.

On the upside a 4 in 5 win rate means $40k in vs. $25k out. And a 9 in 10 win rate will be like zowie.


The only observation here is that win rate won't be 100%, and individual losses will cut deeply into the overall gains. And still requires an assumption of a really high win rate. (There's no free lunch, there are always costs and benefits, risks and rewards).

 

[Yoona]

Do you happen to have an instructional reference for Iron Condors (IC)?

these 2 make it easy to understand:

Iron Condor Payoff, Break-Even Points and R/R - Macroption

Iron Condor Spreads | Iron Condor Strategy - The Options Playbook

Iron condor spreads are advanced option strategies based on out-of-the-money short put and short call spreads with the same expiration month.

www.optionsplaybook.com

 

[Yoona]

I've been thinking a lot about ICs. I can't remember if I posted about this previously, but the short summary is that if we assume each IC is a full win or a full loss (a gross simplification I know) then the win rate needs to be REALLY high to actually generate positive results.

In your example you're using $60k as backing for a $28k return. That sounds awfully good. If we called it $30k then the math gets really easy.

Wins are worth $30k; losses are worth $30k ($60k minus the $30k received, as one leg has to win for the other leg to lose). In this case a 50/50 win rate is just break even. 2 out of 3 is pretty good - 1 week in three generates a net positive result of $30k - thus $30k every 3 weeks, assuming that there is a setup that is this good each week.

My one foray, plus one investigation after that, suggests that a nearly 50% income on a single position will be very difficult to achieve. I earned $14k on 100 contracts / $50k at risk on the first one I tried. The second one I considered would have been $10k on that $50k stake.

Using the $10k earnings against a $25k loss means that I need 3 wins for every loss to come out slightly ahead (3 wins = $30k; the 1 loss = $25k). 75% win rate for slightly better than break even. Anything short of that won't be a linear reduction or loss.

On the upside a 4 in 5 win rate means $40k in vs. $25k out. And a 9 in 10 win rate will be like zowie.


The only observation here is that win rate won't be 100%, and individual losses will cut deeply into the overall gains. And still requires an assumption of a really high win rate. (There's no free lunch, there are always costs and benefits, risks and rewards).

One balanced IC loss will need 2 wins (not 3) to make the whole thing break even. Total 3 weeks. That's because the Max Loss is always bigger than the initial credit.

For example (i'm at the options chain AGAIN):

(1) STO 1x IC 5/28 +p570/-p575/-c650/+c655 is $194 credit after commissions. Margin $500. Max Loss $295. Spread $5.

Week 1 is -$295
Week 2 is +$194
Week 3 is +$194
Net credit $93 on Week 3.

(2) STO 1x IC 5/28 +p560/-p575/-c650/+c665 is $527 credit after commissions. Margin $1500. Max Loss $961. Spread $15.

Week 1 is -$961
Week 2 is +$527
Week 3 is +$527
Net credit $93 on Week 3.

Regardless of spread, it takes 3 weeks total to recover from a loss. This happens if one does not babysit the IC on Week 1 (ie close out or roll if SP is escaping the range).

If the IC is unbalanced, it takes longer to recover:

(3) STO 1x IC 5/28 +p560/-p575/-c650/+c680 is $552 credit after commissions. Margin $3000. Max Loss $2436. Spread $15/$30.

Week 1 is -$2436
Week 2 is +$552
Week 3 is +$552
Week 4 is +$552
Week 5 is +$552
Week 6 is +$552
Net credit $324 on Week 6.

 

[Yoona]

Some observations about today's deep ITM roll activity.

There are a lot of risk/reward, cost/benefit tradeoffs going on here. I've traded some $180 ITM options for several $30 ITM options. I've traded some $60 ITM options for multiple $30 ITM options. I want to bring these out as there's no free lunch and in some ways I've exposed myself to more risk.

One of my positions changed from improving with increasing share price to one that improves with decreasing share price. If the shares go up enough then this change in directionality is going to bite badly. But if the shares go the direction I want, or even don't move much at all, then the strikes will be improving immediately from here with a decent chance of turning deep ITM options generating no income into income generating OTM options in a week or 2.

One of my positions went from benefiting with shares going up,, to a position that still benefits from shares going up but at roughly 2x the rate, with a much bigger likelihood of going OTM; even within the current trading window I see (roughly 560 to 600). Again there is a reasonable chance that badly ITM options will quickly turn into OTM options, and return to generating weekly income.


But what can go wrong? In the first position, if the shares move up - even a little bit to something like $620, then I'll be deeply ITM on the new position AND deeply ITM on the remainder of the original position (a -760p / -550c inverted strangle). It'll be stuck in "no strike improvement" land on the remaining puts AND the new calls. And I probably won't have the resources to continue new split-flip or split rolls. But hey! I'll have deeply ITM options on both sides, so one of them will inevitably go OTM. And I'll probably need to use the negative cash flow solution of realizing losses.

In the second position I'm already deep ITM. If the shares keep going down then the split roll will just double the number of contracts that continue to behave as deep ITM contracts. I'll be better off due to a better strike, but I'll have extra leverage on those downward share price moves.


The motivation for these more aggressive attempts to improve deeply ITM positions is the observation that I've got positions that haven't been earning income for multiple months. They're just rolling along until a significant share move in their direction. Most importantly I think that flat to down on the shares is very much in the cards for the rest of the year, so waiting for a big move up is going to leave this position as dead money; possibly (my belief is likely) for the rest of the year.


Therefore I've got some high level choices. Realize the loss (BTC the -760p at ~$200 each), free up the resources, and get back to earning income from these deep ITM positions that are newly OTM. I think about my sold options in terms of 'slots'. The cash backs a number of puts (slots) and the shares back a number of covered calls (slots). Turning deep ITM put slots that aren't doing anything into OTM put slots that are generating income is appealing to me (duh).

But getting there isn't free. The obvious choice is to realize the losses (buy out the puts) and use the cash that is no longer reserved for those deep ITM puts, to back OTM puts. Or I can try these split-flip, flip, and split rolls to try to improve these positions more quickly (as I am doing). To do so I'm using resources that are currently earning income to instead improve deeply ITM positions, thus no longer earning income.

I'm going the direction I'm going right now as I prefer a cash flow positive solution. Realizing the losses will be a large up front negative cash solution, with an immediate improvement in the week to week cash. I estimated 15-25 weeks for the weekly improved cash flow to recover from the up front negative cash.

Using the split and split flips, I'll stop earning income on both sides. Instead of a big up front negative cash flow, I'll trade for effectively no cash flow for some time to come. Making "no income" a lot easier is that the year has been sufficiently successful to be somewhere between 1x and 2x paycheck income already earned through the end of June.


Why the direction I'm going in? With my longer view of flat to down trading, I do believe that either approach will work well for me. I choose the flip and split-flip as I've got a good chance of a very fast improvement, where fast improvement is minimum income but possibly only for a week or 3. No big negative cash up front (easy / defined risk / and long time for cash to be replaced), but a riskier approach for achieving the improved position that is back to generating income.

I also see us more in a trading range and increasingly likely to stay here the rest of the year. These sideways trading times seem especially well suited to my trading strategy, but both legs need to be using OTM options to really take advantage. I want to stay cash flow positive (even minimally) and I want these deep ITM options gone fast. These split and split-flip rolls creates that opportunity, while retaining the realize the losses choice.

I am consciously using all of my income generation for more quickly improving the deeply ITM options.

I hear you. Using income from good slots to pay for non-stop rolls of bad slots = zero income for all the hard work. Dramatic SP rise makes the flip-roll to -C very bad. Dramatic SP drop makes the split-roll of -P very bad, not to mention the additional margin usage of the new puts. If there is a huge SP swing, eventually one side will OTM, but rescuing the losing side is even more work.

(NOT ADVICE) To my limited knowledge, ideal solution is to generate more income. Aggressive CC? Narrow Iron Condor (my fave)? Iron Butterfly gives a boatload of cash but one needs to get the closing price right. Narrow Short Strangles? (NOT ADVICE)

Uggh. I need Tylenol.

 

[adiggs]

(NOT ADVICE) To my limited knowledge, ideal solution is to generate more income. Aggressive CC? Narrow Iron Condor (my fave)? Iron Butterfly gives a boatload of cash but one needs to get the closing price right. Narrow Short Strangles? (NOT ADVICE)

This is a vector I started going down at the beginning of the year. And it worked really well, until it didn't

I will probably return to this idea, but part of how I got so deep ITM was being more aggressive on both sides, with the expectation that I would also be using earnings on one side to help out the other. Which works well when the side in trouble doesn't go 25% ITM!

That aggression got me to narrow short strangles. I'm already expanding my thinking though, and I expect that my approach will keep evolving, probably ~forever.


And trouble is still .. uhmm ... really good actual end results.

 

[buttershrimp]

This is a vector I started going down at the beginning of the year. And it worked really well, until it didn't

I will probably return to this idea, but part of how I got so deep ITM was being more aggressive on both sides, with the expectation that I would also be using earnings on one side to help out the other. Which works well when the side in trouble doesn't go 25% ITM!

That aggression got me to narrow short strangles. I'm already expanding my thinking though, and I expect that my approach will keep evolving, probably ~forever.


And trouble is still .. uhmm ... really good actual end results.

Was thinking this week of selling one very aggressive covered call with the intention of understanding the mechanics of rolling an itm covered call in schwab’s all in one trade ticket platform. But I think what I’m really wanting to understand with this exercise is how to think of capital requirement rule of thumbs when rolling. I’ve heard some people on the thread mention tying a larger and larger amount of margin with each roll, but I’m thinking I misunderstood.

 

[Chenkers]

i might do the same thing; roll 1x -p760 6/18 into 10x BPS +p550/-p600 5/28 with $1k credit and higher chance to escape

I played around with this idea and I'm liking the look of it. I currently have 1 x May28 -755P and 2 x May28 -780P that are obviously very DITM and at high risk of exercise. On that front I had a May28 -800P exercised last night so I'm very keen to prevent that happening again and to close out these remaining positions ASAP. The 755P and the 2x780P's have values at Fridays close of $17,499 and $39,895 and maintenance margins of $37,442 and $74,883 respectively.

I can roll these into May28 10x595/550BPS and 20x600/550BPS for a net credit of around $2700 and around +$4500 maintenance margin. If we stay around where we are or go up next week then I'm much better off. If we go down then margin will take a hit but I can cover it. And importantly it brings me much closer to closing these out and removes most of the incentive for early exercise. Am I missing anything?

 

[samppa]

I played around with this idea and I'm liking the look of it. I currently have 1 x May28 -755P and 2 x May28 -780P that are obviously very DITM and at high risk of exercise. On that front I had a May28 -800P exercised last night so I'm very keen to prevent that happening again and to close out these remaining positions ASAP. The 755P and the 2x780P's have values at Fridays close of $17,499 and $39,895 and maintenance margins of $37,442 and $74,883 respectively.

I can roll these into May28 10x595/550BPS and 20x600/550BPS for a net credit of around $2700 and around +$4500 maintenance margin. If we stay around where we are or go up next week then I'm much better off. If we go down then margin will take a hit but I can cover it. And importantly it brings me much closer to closing these out and removes most of the incentive for early exercise. Am I missing anything?

Rolling a spread might prove difficult if also the long leg ends ITM.

 

[Yoona]

I played around with this idea and I'm liking the look of it. I currently have 1 x May28 -755P and 2 x May28 -780P that are obviously very DITM and at high risk of exercise. On that front I had a May28 -800P exercised last night so I'm very keen to prevent that happening again and to close out these remaining positions ASAP. The 755P and the 2x780P's have values at Fridays close of $17,499 and $39,895 and maintenance margins of $37,442 and $74,883 respectively.

I can roll these into May28 10x595/550BPS and 20x600/550BPS for a net credit of around $2700 and around +$4500 maintenance margin. If we stay around where we are or go up next week then I'm much better off. If we go down then margin will take a hit but I can cover it. And importantly it brings me much closer to closing these out and removes most of the incentive for early exercise. Am I missing anything?

In my broker's case, the initial/maintenance margin of spreads is same/fixed even if SP goes down. For me, this is another advantage of the roll-split (from -P to spread) : if i heavily use margin, I can now mentally "allocate/budget" my margin usage more accurately into their own slots because they are fixed values.

For example: The recent drop to 560 was a good test. Since i can see realtime margin usage in thinkorswim, i only need to "babysit" the -P's margin. Everyone else (ie spread, IC) was fixed. Even though the -P was cash secured, i am not liking that fluctuating margin. A roll-split will remove my -P uncertainty and it's one less thing to manage.

 

[adiggs]

I'll be doing more reading about credit spreads, and hopefully somewhere along the line I'll find the answer to this question. Figured I would ask here as well as suddenly credit spreads are becoming a lot more popular in the neighborhood (including with me).

For the mechanics / maintenance of the position, it looks to me like if the shares are finishing so that the credit spread is comfortably OTM (both the short and long position), then do nothing is a completely reasonable way to close the position. One might also positively close for a few pennies (I probably will on principle), but letting it go expire is fine.

If both legs are far enough ITM that they'll finish there, then again, do nothing is a reasonable way to end the position. The long and short legs will both be exercised by one's broker and your cash balance will have the spread ($5, $10, $50, or whatever difference in the two strikes) * contracts * 100 deducted. The long and short liabilities created will balance out


But in between - it looks to me like a positive close of the short contract is required. If I've got a $10 spread on and the shares are going to finish $6 ITM (or really anywhere in between), then if I do nothing, the short contracts will be assigned by my broker while the long contracts expire worthless. In this case I need to do a BTC order on the short leg before close of trading, as I really don't want to be assigned contracts * 100 shares (either buy or sell).

In reality I expect that in such a close ITM finish I will roll the spread out a week for a modest credit. And if/when I finish far enough ITM then I'll just take the loss, as losses are figured into the strategy as well.

I suppose that the other choice I have available is to exercise my long contracts so that the two positions net each other out.


Am I missing something? Is this clearly understood by everybody else doing credit spreads and I'm just figuring this out?

 

[adiggs]

I played around with this idea and I'm liking the look of it. I currently have 1 x May28 -755P and 2 x May28 -780P that are obviously very DITM and at high risk of exercise. On that front I had a May28 -800P exercised last night so I'm very keen to prevent that happening again and to close out these remaining positions ASAP. The 755P and the 2x780P's have values at Fridays close of $17,499 and $39,895 and maintenance margins of $37,442 and $74,883 respectively.

I can roll these into May28 10x595/550BPS and 20x600/550BPS for a net credit of around $2700 and around +$4500 maintenance margin. If we stay around where we are or go up next week then I'm much better off. If we go down then margin will take a hit but I can cover it. And importantly it brings me much closer to closing these out and removes most of the incentive for early exercise. Am I missing anything?

I'm looking at something similar (I freely admit to even considering this due to others posting about the idea; I really appreciate the idea for me to ponder).

I'm finding it REALLY interesting that there is little benefit to using June 4 contracts in the BPS over the May 28 contracts. I find this dynamic particularly valuable as the conversion to spreads will lead to some kind of resolution pretty quickly.

 

[adiggs]

One balanced IC loss will need 2 wins (not 3) to make the whole thing break even. Total 3 weeks. That's because the Max Loss is always bigger than the initial credit.

For example (i'm at the options chain AGAIN):

(1) STO 1x IC 5/28 +p570/-p575/-c650/+c655 is $194 credit after commissions. Margin $500. Max Loss $295. Spread $5.

Week 1 is -$295
Week 2 is +$194
Week 3 is +$194
Net credit $93 on Week 3.

(2) STO 1x IC 5/28 +p560/-p575/-c650/+c665 is $527 credit after commissions. Margin $1500. Max Loss $961. Spread $15.

Week 1 is -$961
Week 2 is +$527
Week 3 is +$527
Net credit $93 on Week 3.

Regardless of spread, it takes 3 weeks total to recover from a loss. This happens if one does not babysit the IC on Week 1 (ie close out or roll if SP is escaping the range).

If the IC is unbalanced, it takes longer to recover:

(3) STO 1x IC 5/28 +p560/-p575/-c650/+c680 is $552 credit after commissions. Margin $3000. Max Loss $2436. Spread $15/$30.

Week 1 is -$2436
Week 2 is +$552
Week 3 is +$552
Week 4 is +$552
Week 5 is +$552
Week 6 is +$552
Net credit $324 on Week 6.

Very helpful though I think you're also making my point for me as well. You are assuming that you can get a $1.94 credit each week on your $5 spread, or $5.27 credit on the $15 spread. In both cases you've received more than 1/3rd of the spread amount in your net credit, as well as assume that the same sized net credit is available each week.

If the net credits were more like $1.25 (1/4th of the spread) then you'll need 4 weeks to recover (3 wins for 1 loss).


My own poking around setting up different ICs makes it looking like around 40% credits (at least $5 spreads) are reasonably available, at least if they are opened at the beginning of the week. They fade somewhat by 2 days to go (more like 1/4th). Again my own observations over not nearly enough time looking at these.

It is also interesting to me just how slowly the difference in the spreads changes. As best I can tell these have to be held nearly to expiration and probably need babysitting on the day of expiration to make sure the shares aren't going to fall inside of the spread.


Still really helpful and I'm interested to see how this week develops.

If adequately sized net credits are not available in the follow up weeks then that could extend the break even time. Of course if bigger credits are available then you break even faster

 

[Yoona]

I'll be doing more reading about credit spreads, and hopefully somewhere along the line I'll find the answer to this question. Figured I would ask here as well as suddenly credit spreads are becoming a lot more popular in the neighborhood (including with me).

For the mechanics / maintenance of the position, it looks to me like if the shares are finishing so that the credit spread is comfortably OTM (both the short and long position), then do nothing is a completely reasonable way to close the position. One might also positively close for a few pennies (I probably will on principle), but letting it go expire is fine.

If both legs are far enough ITM that they'll finish there, then again, do nothing is a reasonable way to end the position. The long and short legs will both be exercised by one's broker and your cash balance will have the spread ($5, $10, $50, or whatever difference in the two strikes) * contracts * 100 deducted. The long and short liabilities created will balance out


But in between - it looks to me like a positive close of the short contract is required. If I've got a $10 spread on and the shares are going to finish $6 ITM (or really anywhere in between), then if I do nothing, the short contracts will be assigned by my broker while the long contracts expire worthless. In this case I need to do a BTC order on the short leg before close of trading, as I really don't want to be assigned contracts * 100 shares (either buy or sell).

In reality I expect that in such a close ITM finish I will roll the spread out a week for a modest credit. And if/when I finish far enough ITM then I'll just take the loss, as losses are figured into the strategy as well.

I suppose that the other choice I have available is to exercise my long contracts so that the two positions net each other out.


Am I missing something? Is this clearly understood by everybody else doing credit spreads and I'm just figuring this out?

The only thing i can think of is this : if i forget to close/roll the losing side of a spread (by Friday afternoon) AND there's no margin room to satisfy the ITM, it's an expensive automatic forced closeout by my broker.

I spent the entire morning playing with the options chain. Here is MY final decision on the roll-split and I will trade it tomorrow morning. Nightmare is finally over this Friday:

BTC 6/4 5x BPS +p660/-p675; debit $7,200
STO 5/28 70x BPS +p550/-p560; credit $15,000 (that's not a typo); needs $55k margin for 5 days

"I am going down 675-560=115 strikes to force an expiration."

Net income $7,800. Assumes SP close >560. Assumes small/no change in premiums tomorrow morning. 70x is overkill but "market maker is giving me $15,000 so i can pay them $7,200; it's their loss."

(NOT ADVICE!)

 

[adiggs]

I'm looking at something similar (I freely admit to even considering this due to others posting about the idea; I really appreciate the idea for me to ponder).

I'm finding it REALLY interesting that there is little benefit to using June 4 contracts in the BPS over the May 28 contracts. I find this dynamic particularly valuable as the conversion to spreads will lead to some kind of resolution pretty quickly.

EDIT to add: If one had a stronger feeling about flat to down, than flat to up, you could roll these deep ITM puts into call credit spreads instead of put credit spreads.

And I suppose that as long as you're putting on a credit spread of any kind, then you might as well throw on a credit spread of the other kind with the same spread size. Even if you make the second credit spread really far OTM there is no change in the margin consumed and you pick up that incremental spread credit "for free" (*).


(*) Not actually free. Incremental risk of a serious move in the second spread direction that pushes it ITM. Without it the reason the spread is on would be OTM; with the big move that might blow up the reason you're in the first spread in the first place.

The only thing i can think of is this : if i forget to close/roll the losing side of a spread (by Friday afternoon) AND there's no margin room to satisfy the ITM, it's an expensive automatic forced closeout by my broker.

Will your broker just close the position by taking the difference between strike and closing price? That would clearly be ideal - then you don't need to babysit the position as we near close of trading on expiration day, and you won't need to find out how your broker handles you buying or selling 10,000 shares that you don't have the resources to handle (assuming 100 contracts). I'm pretty comfortable not setting up that position just to experience how that gets handled

My understanding is that ITM options get exercised automatically (or assigned in the case of short positions). If I'm right then you end up with 100 shares * contracts that you're really rather not have. I guess this is an argument in favor of the European style options.

 

[adiggs]

The ongoing pondering of the option chains continues.

With that short 760 put I have, here's an approach that uses all of the cash / margin backing the put for a call credit spread (equally doable with a put credit spread depending on one's belief in direction).

BTC 1x-760p June 4
STO 76x-600c May 28
STO 76x+610c May 28

The $10 spread is $1000 per contract in margin / cash backing. A 760 put uses $76k in backing, so BTC on that frees up the backing. Use that backing for that many call credits with a $10 range. This particular credit spread is generating around $2.70 for each contract. I chose the -600c as something I believe today to be likely to finish OTM.


The put side with a similar end result would be a -565/+555 put credit spread. I think I have a lot more belief in a <600 finish to the week, than a >565 finish.


As bxr keeps pointing out, there sure are a lot of approaches and mechanisms here.


EDIT to add: A benefit of this particular trade structure is that this can be performed against however many of the ITM contracts as one has. If one were deep ITM with 10x-760p then you'd be opening 760 of the call spreads. At least with my broker that will take 1 ticket for each 2 of the puts I roll this way (limit of 200 contracts in a leg).

Fidelity has a mechanism to remove the commissions on option trades. But also involves turning over like $2M to one of their money managers to manage on your behalf. Start trading multiple tickets with 150 contracts on them - the commissions start adding up, over and above the bid/ask spread friction.

Here it is:

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And hey - 3% cash back on credit card purchases - what's not to love!?!


EDIT again to add: Throw in that "free" (margin perspective) put spread that is WAY far OTM. Say a +490/-500 for a ~0.35 credit. Over 76 contracts per 760p you're rolling out of for a bonus $35*76 = ~$2500ish!