Wiki Selling TSLA Options - Be the House

[hershey101]

$3500 calls for next week traded as high as $18 this morning... Hopefully you folks sold some... That's a free $1,800.

In general, if you want to sell around a major news event (eg earnings) best time is wed. 1 hr before close when IV is at it's max... Maybe do it a bit earlier in the day to get a tradeoff between high IV and potential EOD sell-off as people look to get out and book profits before earnings.

In any case, I won't be surprised to see those $3500c for next week trade $20+ in the coming days... That's literally free money! Take it.

 

[juanmedina]

Any once considering selling Jun 22 calls $3500 for 34k? I am thinking about it, I can get 22 shares with that money. If we hit 1780s again in a few weeks or days those calls probably can be sold for 40k+.

After the S&P 500 inclusion and the decrease in volatility I should be able to even close the position early for a nice profit. I am not planning on selling my shares unless we crash hard and trade them for LEAPs. I looked at some financial models and some bull cases have the stock at around $3800 Q4 2022 and bear case in the $2000s.

 

[adiggs]

On the call side, you could sell a call and watch the stock rocket past your strike. Example - you sell an 800 strike call and watch the shares rocket up to $1000 (or $2000). You just missed out on all that upside beyond your $800 strike (ouch).

This quote aged well (or didn't age well, depending on your point of view).

This is from back at the start of the thread, when I was talking about risks to this strategy. In my case, selling the 1460 Call on July 9 for a July 10 expiration. Shares were trading at $1385 at that time; then they went to $1750ish the next day.

Ouch.

 

[troyhouse]

so i sold 2 07/24 2800c for 10$ and already 30% up. I will close it before the earnings.

 

[Nate the Great]

I decided to create this thread as a more focused variation of the Option Trading and Advice thread, with that focus on the option strategy known as The Wheel.

The thing to understand up front - I'm not a financial advisor, nor am I particularly expert in options trading. So far my experience is almost completely in the options selling side. My forays into option buying either ended in large losses, or are currently losing (index puts). But the option selling has worked great for me!

My first and strongest recommendation - if you're new to options trading, or haven't studied it systematically, then I commend the training here:
Free Options Trading Course from Option Alpha | Option Alpha

This took me about 30 hours to go through all of it (1.25x speed worked great for me). And I urge you not to skimp.

This is both general option trading education, along with education about a particular option trading strategy (selling volatility). You're going through that material for the general education, and you'll pick up information about that particular strategy at the same time (it happens to make use of the same edge in the market as The Wheel).

From here on, I'm assuming the level of knowledge conveyed in that linked education.

With option alpha where did you start at? "Guided Tracks"

 

[pz1975]

IVs for options this week still very high. I was just able to sell 1200 puts for 2.67 and 2000 calls for 3.90. I can keep the funnel wide this week now and still likely make a nice profit. I avoided all option sales early this week after seeing the huge move Friday and restarted yesterday once things looked stabilized for now.

I bought and sold weekly calls Monday and made a small profit but could have done better if I’d sold sooner.

I’m not selling any options for next week except for some 2000 and 2250 calls I sold last week but will close those before the ER.

 

[adiggs]

With option alpha where did you start at? "Guided Tracks"

Yes. One of those Guided Tracks (if I remember their terminology right) is the Beginner track.

The way I think of the 3 tracks:
Beginner - basics of options (puts, calls, greeks; stuff like that)
Intermediate - getting into a trade (more emphasis on the specific trading strategy they're teaching, but still good general info)
Advanced - getting out of a trade (as above in Intermediate)

About 10 hours for each track is what I think it took me, so about 30 hours total. I found playback at 1.25x speed worked very well - still very understandable. And the topics covered, some of them reasonably advanced (example - rolling a trade to buy time and reduce losses), is all stuff that is assumed for people posting and reading the thread.

More generally, I'd consider that amount of study time to be the minimum I would do now, based on what I know, before starting on options with actual money on the line.


There's a lot more on the site, including about a 1 hour interview with somebody in the OA ecosystem that is running the wheel. Their version of the wheel is very different from what I'm doing, but it's conceptually identical. Less capital intense (by a lot) by using options as the backing for the sold options, but still worth a listen (I think I found that particular blog / interview by way of a site search, but I'm not sure now).

 

[adiggs]

I rolled my put position from 1570 with expiration this week, to 1450 with expiration next week. Net credit of $28 or so, and I lowered the strike by 120 points while picking up 50 points of IV (I assume that the IV increase is largely the explanation for how I lower the strike by 120 and add 1 week to expiration; all while picking up $28 in premium.

I could have waited for later in the week to do this, but the old strike was deeply enough in the money that the time value was getting low ($20 or 30 or so). And I think there's too large of a chance the share price is going back to 1700 soon, so I wanted this position now rather than waiting for some more time decay between now and Friday (I'm reasonably confident that the one thing the share price WON'T do is be flattish between now and Friday).

I would like to avoid earnings, or sell options on Wednesday specifically to take advantage of the IV crush. That choice really isn't available to me, so I'm positioned now to take advantage of IV crush next Wednesday.


One idea that comes from OA - when rolling options within a "Sell Volatility" type of strategy, only roll when you're collecting a net credit. I violated that for the big call roll from the 1460 strike to the 1700 strike, but the extra $240 between strikes easily overcomes the $80 paid to make the move in the strikes. Otherwise, I'm obeying this dictum and net collecting premium. The 1700 strike call might not finish ITM, in which case I keep all of the $233 premium (which will largely reverse the loss taken arriving at this position).

 

[MTBEndodontist]

I would like to avoid earnings, or sell options on Wednesday specifically to take advantage of the IV crush. That choice really isn't available to me, so I'm positioned now to take advantage of IV crush next Wednesday.


.

I missed this part here. Could you elaborate on why you think there will be an IV crush? Is it because profitable earnings is baked in?

 

[troyhouse]

Someone posted this and want to get some feedback:

I could sell 5 covered calls expiring Jun 2022 @ $3500 for ~$340. This would net me ~$170K, which I'd use to buy more shares.

If TSLA exceeds $3500 and my shares are assigned away, and capping my gains to 3500. If TSLA doesn't hit $3500 in the next 2 years, I still have the extra shares. Following are some questions:
1. When the shares gets assigned, I still get to collect my gains. For e.g. if my avg price was 500 and the shares gets assigned at 3500, I still get to keep the gains.
2. Any other negative items that I would have overlooked.

 

[adiggs]

I missed this part here. Could you elaborate on why you think there will be an IV crush? Is it because profitable earnings is baked in?

Two reasons that are tied together at the hip:
1) It's a pretty strong pattern that people use to trade. Doesn't mean it happens every time, but it's common enough for people to use across many companies.
2) The way I think about it, IV builds due to the uncertainty around each earnings announcement. Is it a good one? A great one? A bad one? A really really bad one? True for any company, not just TSLA. So IV ratchets up as people take each side (one of the trading strategies is a straddle where you take BOTH sides ).

Once the earnings announcement happens, you have resolution of the uncertainty. That resolution drops the IV significantly (which changes the option premium by Vega). At least that's the theory I'm working from.

 

[adiggs]

Someone posted this and want to get some feedback:

I could sell 5 covered calls expiring Jun 2022 @ $3500 for ~$340. This would net me ~$170K, which I'd use to buy more shares.

If TSLA exceeds $3500 and my shares are assigned away, and capping my gains to 3500. If TSLA doesn't hit $3500 in the next 2 years, I still have the extra shares. Following are some questions:
1. When the shares gets assigned, I still get to collect my gains. For e.g. if my avg price was 500 and the shares gets assigned at 3500, I still get to keep the gains.
2. Any other negative items that I would have overlooked.

For 1), when the shares get assigned, any remaining time value goes to zero. You have no commitment to deliver the time value, only the shares. This is a primary reason share assignment rarely happens before expiration - the exception being options that are far enough ITM that there is very little time value remaining to improve the position. Then again, little time value also means there's little value to age out as well.

The only negative I see, really, is that your shares are 'tied up' for now until June '22. If you decide you want to sell them, you will also need to buy back the calls you've sold. Then again, if you're selling due to the share price moving against you, the calls you sold should have also gotten cheaper, so if you have the cash available, you'll probably be able to buy to close those calls for less than you received.

If you're confident you're not selling, then being tied up isn't a negative and $34k per covered call is a pretty good sounding dividend.


If you do this, I expect that one dynamic you will see is that the calls you sell spend a lot of time being priced above what you sell at, and possibly a lot higher. If the share price trends towards 3,000 on expiration day, then you'll see much higher prices. It'll look bad, but it's mostly time value and the time value goes to 0 at close of expiration day.

This sounds like you could time things and get more premium, and this might even be true. I personally suck at timing, so I don't bother trying - I just take the price I like at a strike I like and don't worry about the rest of it (which is mostly true, but I can't avoid at least some energy around timing).


That's what I can think of.

 

[vikings123]

Someone posted this and want to get some feedback:

I could sell 5 covered calls expiring Jun 2022 @ $3500 for ~$340. This would net me ~$170K, which I'd use to buy more shares.

If TSLA exceeds $3500 and my shares are assigned away, and capping my gains to 3500. If TSLA doesn't hit $3500 in the next 2 years, I still have the extra shares. Following are some questions:
1. When the shares gets assigned, I still get to collect my gains. For e.g. if my avg price was 500 and the shares gets assigned at 3500, I still get to keep the gains.
2. Any other negative items that I would have overlooked.

1. Look for the break even price on the option you sold. As long as the SP is below that price on the day of expiry you are in green not counting the ROI of the additional shares you bought with the premium.
2. The only downside is the stock price going parabolic and going to 5000$ in 2022. If SP stays below the strike price you get to keep both the stock and the premium. I also don’t know how taxes work for the premiums, that might be something worth looking into. Maybe someone else on the forum knows.

edit: I would suggest waiting for earnings before you sell them. I mean it’s 95% sure that we will be GAAP positive, the only question is guidance.

 

[troyhouse]

Thank you for the feedback @adiggs and @vikings123.

Completely agree to wait for earnings and even s&p inclusion news before doing any of this.

 

[Mokuzai]

2. The only downside is the stock price going parabolic and going to 5000$ in 2022. If SP stays below the strike price you get to keep both the stock and the premium. I also don’t know how taxes work for the premiums, that might be something worth looking into. Maybe someone else on the forum knows.

Also have the choice to roll it if the SP goes in the money...possible for it to still get away from you but may be able to improve the premium/strike with rolling if you're willing to tie up those shares even longer.

Premium would be a short term cap gain/loss in whatever year you buy it back. Yes it's a couple years out but you got paid immediately on the sale so it's looked at as short term.

 

[vikings123]

Also have the choice to roll it if the SP goes in the money...possible for it to still get away from you but may be able to improve the premium/strike with rolling if you're willing to tie up those shares even longer.

Premium would be a short term cap gain/loss in whatever year you buy it back. Yes it's a couple years out but you got paid immediately on the sale so it's looked at as short term.

Do you mean whatever year you sell? For eg: If I sell a 2022 call for 35K today, do I pay short term capital gains on the 35K right away in 2020? I believe the answer is yes. If so my break even price needs to be adjusted for these taxes. Correct?

 

[Mokuzai]

No it's when you close the position. So it'll be a short term cap gain in 2022.

 

[vikings123]

No it's when you close the position. So it'll be a short term cap gain in 2022.

Interesting. And at that point it also becomes long term gains or is it treated as short term gain? Thanks for the info, very useful.

 

[Mokuzai]

Short term.

 

[vikings123]

Short term.

Looks like there is one exception: Pasting the info I found on fidelity.

If a covered call is assigned, the strike price plus the premium received becomes the sale price of the stock in determining gain or loss. The resulting gain or loss depends upon the holding period and the basis of the underlying stock. If the stock delivered has a holding period greater than one year, the gain or loss would be long term.