Wiki Selling TSLA Options - Be the House

[ReddyLeaf]

Why not roll the calls out/up a bit for a credit instead?

Just waiting for now. Something feels different to me right now, like maybe the shorts are covering in anticipation of a stock split. It’s all really just a guessing game but Monday has historically been a great time to sell calls. It’s when the MMs cover their previous week’s shorting, which were used to hold the SP below a certain call wall.

Rolling for credit is great, but if the SP rises too fast, it’s hard to keep up and next Friday may yield another options loss that also needs to be rolled. Typically weekly rolling will net $10/sh in time value, but what happens if the SP rises $50-$100 by Friday? I’m trading in an IRA and must buyback with cash (no margin or multi-leg trades allowed by my brokerage), before I can sell next week’s calls. As an example, I “lost” about $15/sh on my calls last week. If rolling on Friday only yields back $10, that just means trying to sell another c670, kicking the can down the road, and pushing that $5 loss another week. However, if the SP rises $50 on Monday, I can easily pick up an additional $10-$20 in premium at a much higher strike (effectively rolling, but just at a delayed time). Of course, the opposite is also true: If the SP drops, then I’ve missed the window and don’t pick up even the $10/sh weekly time decay.

 

[CHGolferJim]

Just waiting for now. Something feels different to me right now, like maybe the shorts are covering in anticipation of a stock split. It’s all really just a guessing game but Monday has historically been a great time to sell calls. It’s when the MMs cover their previous week’s shorting, which were used to hold the SP below a certain call wall.

Rolling for credit is great, but if the SP rises too fast, it’s hard to keep up and next Friday may yield another options loss that also needs to be rolled. Typically weekly rolling will net $10/sh in time value, but what happens if the SP rises $50-$100 by Friday? I’m trading in an IRA and must buyback with cash (no margin or multi-leg trades allowed by my brokerage), before I can sell next week’s calls. As an example, I “lost” about $15/sh on my calls last week. If rolling on Friday only yields back $10, that just means trying to sell another c670, kicking the can down the road, and pushing that $5 loss another week. However, if the SP rises $50 on Monday, I can easily pick up an additional $10-$20 in premium at a much higher strike (effectively rolling, but just at a delayed time). Of course, the opposite is also true: If the SP drops, then I’ve missed the window and don’t pick up even the $10/sh weekly time decay.

Under the assumption that there may be a strong price move in the next week or so, I’m looking at a 2-3 week duration for covered calls, selling Monday probably. Think I’ll do a ladder of ATM, +$30 and +$60 or something like that, sacrificing upfront premiums to potentially minimize the amount of rolling.

Re cash balance in an IRA to cover rolling, after confronting the same issue as you did, I confirmed with my broker that cash is not needed to do the BTC as long as the STO is booked the same day (for a net credit, or debit if you have a sufficient cash balance for the difference). The payments are done after trading closes.

 

[Tslynk67]

Just waiting for now. Something feels different to me right now, like maybe the shorts are covering in anticipation of a stock split. It’s all really just a guessing game but Monday has historically been a great time to sell calls. It’s when the MMs cover their previous week’s shorting, which were used to hold the SP below a certain call wall.

Rolling for credit is great, but if the SP rises too fast, it’s hard to keep up and next Friday may yield another options loss that also needs to be rolled. Typically weekly rolling will net $10/sh in time value, but what happens if the SP rises $50-$100 by Friday? I’m trading in an IRA and must buyback with cash (no margin or multi-leg trades allowed by my brokerage), before I can sell next week’s calls. As an example, I “lost” about $15/sh on my calls last week. If rolling on Friday only yields back $10, that just means trying to sell another c670, kicking the can down the road, and pushing that $5 loss another week. However, if the SP rises $50 on Monday, I can easily pick up an additional $10-$20 in premium at a much higher strike (effectively rolling, but just at a delayed time). Of course, the opposite is also true: If the SP drops, then I’ve missed the window and don’t pick up even the $10/sh weekly time decay.

Never forget that if the SP rises 10% and he covered call that you sold for $10 then becomes worth $100, the corresponding strike for next week will have risen by a similar amount for the same strike, so it's not like you need to cover for $100 then resell for $10, but rather you can roll to the same strike for $110 - the big question is whether the SP will keep rising and that strike keeps going more and more underwater or not, then you can choose the free weekly roll 2-3 strikes up, until you catch the SP or it dips - and it will dip at some point. 2020 was an anomaly, very unlikely to happen again

And if you keep running the strike up for a couple of months, you may reach a point where you're OK to sell at that price point

This is where LEAP-cc's can be better, no shares to lose, and you can eventually sell a higher strike on the same expiry date as the underlying call - then let the both expire and you pocket the change

So now I've sold calls 730 and 750 - it's not a lot of rolls to get above 800, then I'm fine to sell, really

 

[CHGolferJim]

Never forget that if the SP rises 10% and he covered call that you sold for $10 then becomes worth $100, the corresponding strike for next week will have risen by a similar amount for the same strike, so it's not like you need to cover for $100 then resell for $10, but rather you can roll to the same strike for $110 - the big question is whether the SP will keep rising and that strike keeps going more and more underwater or not, then you can choose the free weekly roll 2-3 strikes up, until you catch the SP or it dips - and it will dip at some point. 2020 was an anomaly, very unlikely to happen again

And if you keep running the strike up for a couple of months, you may reach a point where you're OK to sell at that price point

This is where LEAP-cc's can be better, no shares to lose, and you can eventually sell a higher strike on the same expiry date as the underlying call - then let the both expire and you pocket the change

So now I've sold calls 730 and 750 - it's not a lot of rolls to get above 800, then I'm fine to sell, really

At Friday’s close, I also like 730 and 750, but am going to wait until late morning Monday to see if there is another little spurt and possibly raise my target strikes, and include a couple ATM, for 0813. Do you generally have a strong preference for 1-week vs. 2-weeks, and if so why?

 

[InTheShadows]

FWIW my IRA does not allow that. I can sell calls against shares, puts against cash, and buy calls and puts for cash- but not sell calls against calls (which is effectively a spread, and not allowed)

If I try I get "You are attempting to open a covered call for a quantity greater than the amount of underlying shares held"

(this is with ML, and I have the highest option level available for an IRA with them)

I haven’t caught up in this thread yet so this may have been mentioned already.

In my IRA I had to sign a spread agreement that enabled this feature. I think it’s level 3 with spread agreement. My ira is with fidelity.

When I first got approved I thought it didn’t work because I had some aapl leaps I tried to sell against and it wouldn’t let me. So I stopped trying. Then about a month ago when I bought some tsla leaps I was able to sell against them. I think it was because the aapl position was already open before I had the permissions.

 

[juanmedina]

What a week indeed. I calculated my totals and I made $27.9k in premium. How can I do this every week ? I feel like not trading earnings or some event where premiums are higher then normal is a missed opportunity.

I have some June 23 $550 and $500 calls and I was wondering a what % profit do you guys are planning to close those? I am just curious about your strategies with Jun 23 LEAPs you bought. I can see the stock 3x by then but not 7x in a year like in 2020.

 

[ReddyLeaf]

Re cash balance in an IRA to cover rolling, after confronting the same issue as you did, I confirmed with my broker that cash is not needed to do the BTC as long as the STO is booked the same day (for a net credit, or debit if you have a sufficient cash balance for the difference). The payments are done after trading closes.

Thanks, I may call my broker and see if there’s something else I need to set or get approval for. Perhaps I can do this by calling and having the broker trade instead of me trading via the web interface.

Never forget that if the SP rises 10% and he covered call that you sold for $10 then becomes worth $100, the corresponding strike for next week will have risen by a similar amount for the same strike, so it's not like you need to cover for $100 then resell for $10, but rather you can roll to the same strike for $110 - the big question is whether the SP will keep rising and that strike keeps going more and more underwater or not, then you can choose the free weekly roll 2-3 strikes up, until you catch the SP or it dips - and it will dip at some point. 2020 was an anomaly, very unlikely to happen again

And if you keep running the strike up for a couple of months, you may reach a point where you're OK to sell at that price point

This is where LEAP-cc's can be better, no shares to lose, and you can eventually sell a higher strike on the same expiry date as the underlying call - then let the both expire and you pocket the change

So now I've sold calls 730 and 750 - it's not a lot of rolls to get above 800, then I'm fine to sell, really

Yes, thanks again for the reminder. I very much appreciate your input on this thread and have learned so much from your trading. Everyone is at a different point in life, trading, experience, risk tolerance, account value, financial needs, etc. I’m quite a bit behind you, ADiggs and others, especially on $$$, but value everyone’s input.

Since I only began invested in TSLA after Battery day, I’m really not ready to lose shares below $1000. I’m also very close to my target number of shares needed for retirement and don’t want to risk losing out. I’m actually over my “needs” now, but have decided to give back to the community by buying a new Plaid for myself and a Model Y for a few family members.

I’m mostly learning about selling options to follow ADiggs method of generating income in retirement without having to sell any shares (though it’s very fun and addictive). I’m planning to lease the new cars with my trading profits and probably need $5k-10k/mo in total living expenses. Unlike many TSLA owners, I live in a very low cost area, have modest needs/wants, and have the house paid off, so very low expenses. Back in 2014, when I was tracking expenses in anticipation of early retirement, I managed to live off $36,000 for the year and still took four vacations (including 3 weeks in Italy, 3 weeks in Hawaii). Because I was unable to break away from work, I decided to splurge on a new 2015S70D, stupidly bought with $80k cash. Now, I only dream about what if that money had bought stock instead. Edit ouch: $80k / $40/sh = 2000 shares.

 

[Knightshade]

I haven’t caught up in this thread yet so this may have been mentioned already.

In my IRA I had to sign a spread agreement that enabled this feature. I think it’s level 3 with spread agreement. My ira is with fidelity.

My IRA is with Merrill... unfortunately spreads are considered L4 options for them (they have 5 levels), and their options agreements don't let you request anything higher than 3 for IRAs.

See attached screenshot.

 

[adiggs]

If I own shares and LEAPS, which will be called away?

The shares.

The leaps / long calls aren't exercised to match up with the short calls. You can do that yourself, but exercising the long calls is a bad plan - that means giving away the remaining time value to whoever gets assigned.

Instead "take assignment" on these covered calls meaning that you choose a time and place and at that point you STC the long call and BTC the short call. This is the point where you give up the underlying resource that is backing your covered calls. I haven't been in this situation yet but I tend to think that this will happen on expiration day or whenever the short call time value is ~0.

 

[adiggs]

Thanks, I may call my broker and see if there’s something else I need to set or get approval for. Perhaps I can do this by calling and having the broker trade instead of me trading via the web interface.

This is the big reason for using a roll transaction over a BTC and then STO. I've been in a situation where I didn't have enough cash to complete the BTC. Which meant that I never got to the STO. @Lycanthrope deals with these situations by breaking the trade down. At the worst, BTC 1 contract, STO 1 contract; repeat until all contracts handled.

I've never had problems using roll transactions in either brokerage or IRA accounts. That specifically means that the closing transaction and the opening transaction are both on the trade ticket, with a credit or debit representing the net change in the two orders together. This is why roll transactions should always be available - your account never enters a state of extreme leverage / margin consumption / whatever that puts the broker at significant risk of your account going really bad and forcing them to make up the difference while you're figuring out how bankruptcy works

 

[adiggs]

Since I only began invested in TSLA after Battery day, I’m really not ready to lose shares below $1000. I’m also very close to my target number of shares needed for retirement and don’t want to risk losing out. I’m actually over my “needs” now, but have decided to give back to the community by buying a new Plaid for myself and a Model Y for a few family members.

THis is why I've switched to using purchased leaps to back my covered calls. I still don't want them to be called away, but from an income perspective, if they're being called away then its because I've sold short calls for high premiums, rolled them for high premiums, and now that LEAP has increased noticeably in value and I'm earning that change in LEAP value on top of the high premiums I've been collecting from the calls.

I have a cautionary note about the ability to roll for credit seemingly forever. It almost always works as long as the shares regress back to your ITM strike price. Until it doesn't and you need new management techniques or to take assignment. My current assessment is that $50 ITM is the point where a 1 week roll will still have a credit available (and that will still be a pretty nice credit as these things go), but you may / probably won't have a strike improvement any longer.

The risk at that point is that the shares DON'T regress - they just keep on going, and $50 ITM turns into $150 and because you aren't improving the strike any longer the size of the loss will just keep growing. So on the call side, only do these if you're really willing to take assignment. For me, from an income perspective, I am willing to take assignment on my purchased calls.


Here is the key - knowing full well that I may be earning $50 over a $150 or $200 move in the share price. Why am I willing? Because this is income generation for me, and the $50 earnings is an amazing income outcome and the risk is that I miss out on a big move. If the shares are going down then those aggressive sold calls are generating amazing income. The move that creates the serious risk starts getting pretty hard to see, and even more unlikely than the other stuff.

And in all of the more typical circumstances - a feint in one direction followed by regression backwards - the covered calls are going crazy with the earnings.

The risk of missing a big move is too large for some, including me up to a year or two ago. Today the risk for me ISN'T missing a big move - the risk is the lack of income from my primary investment, that doesn't produce an income (no dividends). That risk has to do with my ability to pay the bills.

 

[adiggs]

Ouch, what a week for call sellers. Here’s my tale:

Sold CCs early and closed for $6k profit right after the earnings IV & SP drop. Great, take the win and go home, but….no….I took the bait, reloaded and sold some more CCs, which were then completely destroyed, to the tune of a $15k loss. Damn, why did I decide to get greedy? I can easily live on $2k/wk, so $6k is just avarice.

Fortunately, in my larger accounts I had sold p640s, p645s, and p650s as protection for my CCs, so was able to buyback the puts, release the securing cash, and buyback the calls at the $15k loss. These puts generated massive profits even though I had to buyback some that would have expired worthless (STO p650@ $29 & BTC @$2.60, STO p645@$9.07 & BTC@$0.80).

Overall managed to eek out a nice profit for the week, almost all from puts. Unfortunately, had to roll some stupid c665s to 8/06 -c685s. These are in my smallest account and I had to buyback one, roll, buyback another, roll…… Stupid mistake selling calls on this account because there’s not enough cash buffer. I’ve now done this multiple times, so just a warning to others. I’ll probably lose these shares next week unless there’s a SP pause (doubtful). If I’m lucky, I’ll somehow manage to roll another week. Sigh.

I’ve decided to wait on reselling calls for awhile, licking my wounds, until after the annual meeting. Perhaps I might try to skim off $1/shr on Friday once MaxPain has declared itself, or maybe sell $100 OTM. Also, converted some of the puts cash into shares because I’m afraid of falling off the wheel. Still have a significant amount of cash in the two largest accounts, and rolled a couple puts to 8/06 p650s & p680s, so lots of options. I might sell another “I dare you” put (690? 700?) at the MMD just for fun.

It's interesting to see different perspectives. Last week might have been my best week for selling covered calls like ever - certainly a really good week. Then again I seemingly stumbled into just the right positions at just the right times. I do have one lesson from that - we'll see how well I actually implement it.


On Monday I'd been sitting out (no CC) for the previous week, thinking I would also be sitting out earnings. But we had a nice pop on Monday and I want to be aggressive overall with CC positions, so I took that move up in the share price to sell CC. I think I was selling 690s - it was a pretty high delta for me; like .25. Those received a $12 premium that were worth $1.50 first thing Tuesday morning (IV drop, share price drop). Closed them on the spot for about $10 profit / share.

Stayed out until Friday morning when we had a nice pop into the 695ish range when I sold again and went to do some drywall repair around the house. Came back about 2 hours later and discovered the shares were back into the low 680s and the new calls were ahead about $3 / 40%. Took that result off the table immediately, earning a total of ~$13/share over the week.


What I did last week that I haven't done previously, and I see no reason I can't repeat in the future:
- Sell options on a move towards that side. I.e. sell the calls on a move up, sell the put spreads on a move down.
- Take early gains. If there is a sharp move away from the sold leg, then sell early to take the profits, and wait until tomorrow to reopen.
- Don't immediately open a replacement position (roll). Wait until tomorrow or even a bit longer, waiting for a regressing move and reopen then.

What makes this work for me - being willing to sit out for a few days (not previously my preference). Don't wait for a "peak" - just sell on a friendly move -- it's still better than the immediate sale.

AND on the covered calls, I want to take assignment. So being aggressive on the call side is desirable - I'm just waiting for an excuse of a move up to open these.


So I am out of CC at this moment (took the early 40% gain on Friday). If we open higher on Monday then I'll sell new CC immediately, whether I think that the move up is 'done' or not. I'll just know it is that much better than an immediate open on Friday would have been, and my roll options if the shares keep going are also that much better.

And I'll have a pretty strong bias to sell on Monday just to be back in the market.


Same idea on the put side where I'm selling put spreads. Take early profits on a move up - wait a day (or more) to reenter on a regression. And the bias is towards action - a day or 2 out is fine; 3 or 4 days out means I'm missing out on a week of the shares sitting still.

 

[adiggs]

Under the assumption that there may be a strong price move in the next week or so, I’m looking at a 2-3 week duration for covered calls, selling Monday probably. Think I’ll do a ladder of ATM, +$30 and +$60 or something like that, sacrificing upfront premiums to potentially minimize the amount of rolling.

Re cash balance in an IRA to cover rolling, after confronting the same issue as you did, I confirmed with my broker that cash is not needed to do the BTC as long as the STO is booked the same day (for a net credit, or debit if you have a sufficient cash balance for the difference). The payments are done after trading closes.

NOT-ADVICE.

If you firmly believe that there will be a strong move up next week then selling highly aggressive covered calls is the opposite of what you want to do. There is always the question of how you DO want to play a situation, but selling calls into a circumstance where you are convinced the shares are going up is a hope-real-hard position that your analysis wrong.

The three obvious choices in this case:
- do nothing. Right or wrong, you won't win or lose.
- sell puts (or put spreads). WHen your analysis is right and the shares go up, these will quickly head towards $0 and you'll make money
- purchase calls. When your analysis is right and the shares go up, these will gain in value, and you'll make money.

When choosing among the three you are also thinking about the possibility that your analysis is wrong as well as the magnitude of the impact if/when you are wrong. After all - just because you think it, doesn't make it true.

My new technique given the same set of circumstances - wait 1 day; MAYBE 2 days, and then sell the CC. I'm looking for a significant move in my direction, knowing that selling an option tomorrow with a $20 higher share price is going to be a lot more valuable than selling the CC today and earning 1 day of time decay tomorrow.


My point is that taking a position that is directly contrary to your analysis - i.e. betting specifically on being wrong isn't a good choice.

A 4th available choice and one that I frequently design around, is to sell both sides (both calls and puts). The idea is to be earning in either direction, with a hope for the shares to be aiming for somewhere in between (earn on both sides). This is a way of neutralizing yourself to how right you can/need to be. In this case and with your analysis you might bias the covered calls to a lower delta / further out, and the puts to a higher delta / closer strike.


MHO - the reason to go for a longer duration (2-3 weeks over 1 week) is that while you think there is a strong short term move, you also believe it will regress in that longer time frame. So maybe a strong move up next week, followed by a regression the week after. Give yourself more time to be right that the shares are flat, to downish, or at least no more up than your chosen strike.

And of course your analysis might not be so clear - mine usually isn't

 

[adiggs]

2020 was an anomaly, very unlikely to happen again

Agree and disagree. 10x in a year is unlikely. But that 10x came from a much smaller series of really big moves. The big moves that involve never returning to the previous share price are the ones that are trouble, and I think that we've got any number of those still available.

For instance - I think a financial metrics oriented investor can make a pretty easy case for the shares being worth $1200-$1600 in the next 12 months. $4 in earnings assuming flat for the next 3 quarters, and 200x PE, is an $800 share price today. Earnings over the next 3 quarters plus just ended quarter look like they will be much higher than $4. If they were $6 we've got a $1200 share price.

And is 200 PE high enough for 50%+ revenue growth per year, in a business showing leverage where a higher and higher % of revenue falls to the bottom line? Or maybe it's too high


Either way - now I'm thinking that a big move this year is available. If it happens we're not getting to $1200 or $1600 as a steady rise. And if we get there due to these new buyers then we're only coming back when the growth disappears and/or the profits stop appearing. It could be a one way trip.

Or at least this is a risk that I'm incorporating into my own thinking.

I haven’t caught up in this thread yet so this may have been mentioned already.

In my IRA I had to sign a spread agreement that enabled this feature. I think it’s level 3 with spread agreement. My ira is with fidelity.

When I first got approved I thought it didn’t work because I had some aapl leaps I tried to sell against and it wouldn’t let me. So I stopped trying. Then about a month ago when I bought some tsla leaps I was able to sell against them. I think it was because the aapl position was already open before I had the permissions.

Same for me - I'm also with Fidelity. They break the IRA agreement into three pieces (seriously). Options level 2. Then level 2 with spread trading, where the spreads you can trade are the defined risk variety. Put / call spreads.

AND THEN an IRA margin agreement. This margin doesn't enable a margin loan - it's just your broker 'fronting' your settling position so you can trade it immediately.

This is Fidelity, though I'd expect something similar elsewhere.

I have some June 23 $550 and $500 calls and I was wondering a what % profit do you guys are planning to close those? I am just curious about your strategies with Jun 23 LEAPs you bought. I can see the stock 3x by then but not 7x in a year like in 2020.

Similar for me - I don't have a profit % to close though I also own them for the purpose of selling CC. So if the shares head for the moon again and I can keep my CC strikes at or ahead of the share price, then I'll keep on selling CC until >12 months elapsed on the leaps and >3 months to expiration.

>12 months for the long term capital gains (at least in that one account). More than 3 months to expiration so that I can close and get back most (1/2?) of the time value I paid for up front.


Along the way and especially after the 12 months I'll start looking for a good time to roll. I suspect right now that "good time" is more likely to be a relatively low share price as that'll enable me to get into a lower strike ITM option (hopefully still at a profit). I want that deeper ITM position for the -next- 24 months, as lower risk. It means I'll be taking less money out, but its still income.

Example - if the shares run up to $1000 against my $300 strike option, I can sell that for $700 plus the minimal time value remaining. But if its far enough to expiration I'll let it run, fully realizing that the shares could come back down to $800. THen I can close / roll for $500. Or either way I am likely to be replacing it with a new long dated call. Say something that is $300 ITM with a $100 time value.

In the first case I get $700 and give back $400 (establish the new position) for a net of $300 and a $700 strike for the next 24 months.

In the second case I get $500 ($800 - $300 strike) and give back $400 for a net of $100 and a $500 strike for the next 24 months. For my purposes (income) this latter position is far more desirable to me.

Mostly - I don't know how I'll be handling this, and I look forward to seeing what I do, as well as see what others do, to see what works best with a 5-50 year time horizon.

 

[adiggs]

I have a cautionary note about the ability to roll for credit seemingly forever. It almost always works as long as the shares regress back to your ITM strike price. Until it doesn't and you need new management techniques or to take assignment. My current assessment is that $50 ITM is the point where a 1 week roll will still have a credit available (and that will still be a pretty nice credit as these things go), but you may / probably won't have a strike improvement any longer.

I wasn't clear on this point and it matters. Even at $150 ITM on my puts I was still able to roll for 1 or 2 weeks straight out and earn a net credit. Once I was that far ITM the size of the credits starting getting really wimpy. In one memorable case $0.02. But mostly at least $0.50 to $2.

So the further ITM the positions goes, the worse and worse that the credits become.

Also once the strike is deeply enough ITM the increase in expiration necessary to get even a single strike improvement gets longer and longer. At some point you're rolling into a 6 month long position, or a 1 year, or even 2 year position.

My point isn't that it's common or anything of the sort - only that its possible.


The solution as I see it - don't have "roll for credit" as one's sole management technique.
- Taking the loss is an unpleasant but available management technique. It is at least fast, even if painful
- Another technique is to replace with a spread. For this to be useful you'd be replacing 1 deep ITM option with multiple spreads. It's a form of leverage at a much better strike, looking for a leveraged resolution, and putting leveraged losses on the table to make it happen.
- And most importantly to me - being ready to take assignment. This means being ready to accept missing out on the big move to some degree in order to earn more reliable and consistent income as the risk.
(I'm sure there are others).

SO - have a backup plan beyond "roll".

 

[buttershrimp]

THis is why I've switched to using purchased leaps to back my covered calls. I still don't want them to be called away, but from an income perspective, if they're being called away then its because I've sold short calls for high premiums, rolled them for high premiums, and now that LEAP has increased noticeably in value and I'm earning that change in LEAP value on top of the high premiums I've been collecting from the calls.

I have a cautionary note about the ability to roll for credit seemingly forever. It almost always works as long as the shares regress back to your ITM strike price. Until it doesn't and you need new management techniques or to take assignment. My current assessment is that $50 ITM is the point where a 1 week roll will still have a credit available (and that will still be a pretty nice credit as these things go), but you may / probably won't have a strike improvement any longer.

The risk at that point is that the shares DON'T regress - they just keep on going, and $50 ITM turns into $150 and because you aren't improving the strike any longer the size of the loss will just keep growing. So on the call side, only do these if you're really willing to take assignment. For me, from an income perspective, I am willing to take assignment on my purchased calls.


Here is the key - knowing full well that I may be earning $50 over a $150 or $200 move in the share price. Why am I willing? Because this is income generation for me, and the $50 earnings is an amazing income outcome and the risk is that I miss out on a big move. If the shares are going down then those aggressive sold calls are generating amazing income. The move that creates the serious risk starts getting pretty hard to see, and even more unlikely than the other stuff.

And in all of the more typical circumstances - a feint in one direction followed by regression backwards - the covered calls are going crazy with the earnings.

The risk of missing a big move is too large for some, including me up to a year or two ago. Today the risk for me ISN'T missing a big move - the risk is the lack of income from my primary investment, that doesn't produce an income (no dividends). That risk has to do with my ability to pay the bills.

Great post!

 

[buttershrimp]

Agree and disagree. 10x in a year is unlikely. But that 10x came from a much smaller series of really big moves. The big moves that involve never returning to the previous share price are the ones that are trouble, and I think that we've got any number of those still available.

For instance - I think a financial metrics oriented investor can make a pretty easy case for the shares being worth $1200-$1600 in the next 12 months. $4 in earnings assuming flat for the next 3 quarters, and 200x PE, is an $800 share price today. Earnings over the next 3 quarters plus just ended quarter look like they will be much higher than $4. If they were $6 we've got a $1200 share price.

And is 200 PE high enough for 50%+ revenue growth per year, in a business showing leverage where a higher and higher % of revenue falls to the bottom line? Or maybe it's too high


Either way - now I'm thinking that a big move this year is available. If it happens we're not getting to $1200 or $1600 as a steady rise. And if we get there due to these new buyers then we're only coming back when the growth disappears and/or the profits stop appearing. It could be a one way trip.

Or at least this is a risk that I'm incorporating into my own thinking.


Same for me - I'm also with Fidelity. They break the IRA agreement into three pieces (seriously). Options level 2. Then level 2 with spread trading, where the spreads you can trade are the defined risk variety. Put / call spreads.

AND THEN an IRA margin agreement. This margin doesn't enable a margin loan - it's just your broker 'fronting' your settling position so you can trade it immediately.

This is Fidelity, though I'd expect something similar elsewhere.


Similar for me - I don't have a profit % to close though I also own them for the purpose of selling CC. So if the shares head for the moon again and I can keep my CC strikes at or ahead of the share price, then I'll keep on selling CC until >12 months elapsed on the leaps and >3 months to expiration.

>12 months for the long term capital gains (at least in that one account). More than 3 months to expiration so that I can close and get back most (1/2?) of the time value I paid for up front.


Along the way and especially after the 12 months I'll start looking for a good time to roll. I suspect right now that "good time" is more likely to be a relatively low share price as that'll enable me to get into a lower strike ITM option (hopefully still at a profit). I want that deeper ITM position for the -next- 24 months, as lower risk. It means I'll be taking less money out, but its still income.

Example - if the shares run up to $1000 against my $300 strike option, I can sell that for $700 plus the minimal time value remaining. But if its far enough to expiration I'll let it run, fully realizing that the shares could come back down to $800. THen I can close / roll for $500. Or either way I am likely to be replacing it with a new long dated call. Say something that is $300 ITM with a $100 time value.

In the first case I get $700 and give back $400 (establish the new position) for a net of $300 and a $700 strike for the next 24 months.

In the second case I get $500 ($800 - $300 strike) and give back $400 for a net of $100 and a $500 strike for the next 24 months. For my purposes (income) this latter position is far more desirable to me.

Mostly - I don't know how I'll be handling this, and I look forward to seeing what I do, as well as see what others do, to see what works best with a 5-50 year time horizon.

Does fidelity have any good way of taking profits on percentage profit or points ? Like bracket orders? It’s all sorts of awkward for me coming from Schwab. I plan to go back to Schwab because fidelity app is also a bit counterintuitive, can’t really easily close out positions, and gives you selection of “margin” versus “cash” when opening position.…. And seems to keep cash in a sppaxx money market type account which may be good but I find confusing.

 

[stealthyc]

The solution as I see it - don't have "roll for credit" as one's sole management technique.
- Taking the loss is an unpleasant but available management technique. It is at least fast, even if painful
- Another technique is to replace with a spread. For this to be useful you'd be replacing 1 deep ITM option with multiple spreads. It's a form of leverage at a much better strike, looking for a leveraged resolution, and putting leveraged losses on the table to make it happen.
- And most importantly to me - being ready to take assignment. This means being ready to accept missing out on the big move to some degree in order to earn more reliable and consistent income as the risk.
(I'm sure there are others).

SO - have a backup plan beyond "roll".

Additionally there is just to replace 1 with multiple of the same at a more favorable strike rather than spreads. You take considerably more risk but can be a reasonable choice. I had 5x -685p at one point which I converted to 10x -645p as I recall. Those expired worthless in short order but it would have not been until last week that the original ones would have.

 

[ReddyLeaf]

NOT-ADVICE.

If you firmly believe that there will be a strong move up next week then selling highly aggressive covered calls is the opposite of what you want to do. There is always the question of how you DO want to play a situation, but selling calls into a circumstance where you are convinced the shares are going up is a hope-real-hard position that your analysis wrong.

The three obvious choices in this case:
- do nothing. Right or wrong, you won't win or lose.
- sell puts (or put spreads). WHen your analysis is right and the shares go up, these will quickly head towards $0 and you'll make money
- purchase calls. When your analysis is right and the shares go up, these will gain in value, and you'll make money.

When choosing among the three you are also thinking about the possibility that your analysis is wrong as well as the magnitude of the impact if/when you are wrong. After all - just because you think it, doesn't make it true.

My new technique given the same set of circumstances - wait 1 day; MAYBE 2 days, and then sell the CC. I'm looking for a significant move in my direction, knowing that selling an option tomorrow with a $20 higher share price is going to be a lot more valuable than selling the CC today and earning 1 day of time decay tomorrow.


My point is that taking a position that is directly contrary to your analysis - i.e. betting specifically on being wrong isn't a good choice.

A 4th available choice and one that I frequently design around, is to sell both sides (both calls and puts). The idea is to be earning in either direction, with a hope for the shares to be aiming for somewhere in between (earn on both sides). This is a way of neutralizing yourself to how right you can/need to be. In this case and with your analysis you might bias the covered calls to a lower delta / further out, and the puts to a higher delta / closer strike.


MHO - the reason to go for a longer duration (2-3 weeks over 1 week) is that while you think there is a strong short term move, you also believe it will regress in that longer time frame. So maybe a strong move up next week, followed by a regression the week after. Give yourself more time to be right that the shares are flat, to downish, or at least no more up than your chosen strike.

And of course your analysis might not be so clear - mine usually isn't

This is some of the best not advice on this thread!

 

[ReddyLeaf]

It's interesting to see different perspectives. Last week might have been my best week for selling covered calls like ever - certainly a really good week. Then again I seemingly stumbled into just the right positions at just the right times.……snip.….Stayed out until Friday morning when we had a nice pop into the 695ish range when I sold again …..snip…Took that result off the table immediately, earning a total of ~$13/share over the week.

Sold CCs early and closed for $6k profit right after the earnings IV & SP drop. Great, take the win and go home, but….no….I took the bait, reloaded and sold some more CCs, which were then completely destroyed, to the tune of a $15k loss. Damn, why did I decide to get greedy? I can easily live on $2k/wk, so $6k is just avarice.

Just like in comedy, it’s all about timing, and I’m neither funny or timely. However, I’m certainly happy to have gotten out of last week with a profit, just would have been even happier with that extra $15k.