Wiki Selling TSLA Options - Be the House

[ckessel]

For a put, you keep the premium above the strike. $745 in this case. Or is that really a Call?

I think of premium as completely separate. I sold a $745 put, I pocketed $33 per share, so $3300 on 1 put. Done, no need to think any further about the premium. It's in my piggy bank.

Now, on the option itself, if the stock closes below $745 I'm forced to buy 100 shares at $745. If it closes above $745, nothing happens.

(I believe, for cost basis calculations and taxes, the premium applies to the purchase price, so it'd report I bought the stock at 745-33=711. But, conceptually I think of it separately.)

 

[woof]

I find these types of strategies work better with SPY options then TSLA. Why? Because SPY is 3x cheaper, has many different choices of option expiration dates, (not just weekly), has much more volume/liquidity (and thus bid/ask spread smaller), and doesn't have earnings, out of the blue upgrades/downgrades to deal with.

SPY options also trade 15 minutes past close and that's where much of the fun seems to happen. And SPY itself can be traded 24hr on some platforms (Think or Swim for sure). With shares priced in the 280ish range, less money is needed for cash secured puts (or margin...but please don't trade options on margin!).

In a tax free account, day trading SPY can be quite an education in options. And when (not if!) something goes horribly wrong, you won't lose your TSLA shares!

 

[adiggs]

So here's an interesting idea, something I just looked up today for the first time.

I have sold puts and calls expiring next week. They're currently valued in the $4-5 range each. The theta (time decay) on these is listed as about $1. They're pretty far out of the money, so that's part of why theta is so high on these.

I wouldn't be surprised if, between Friday and the weekend, I wake up Monday to options that are in the $1 range (very good for me as option seller), with theta down to $0.50 or .60 (if I'm right, then only $1 of total option value left to decay over 5 trading days).


So the ah-hah, that I will be following along on, is that further OTM options such as I'm selling - the week before, and the weekend before, options expiration is a particularly good time for me as time decay becomes overwhelming for anything that isn't pretty close to the money.

The other ah-hah is that if I'm willing to deal with weeklies, then I'll want to close these early in the week, and sell the next week options ASAP so I can have another end of week plus weekend theta decay.


If anybody else has been tracking this closely, and has anything to add, I'd appreciate it. I feel like I've discovered that the sky is blue, and it's been there in front of me all week .

I'm thinking that this might be the time, given roughly flattish share price, when options prices move the most (and in my favor). Maybe I'm talking myself more and more into weekly options (sigh).

 

[adiggs]

Another interesting observation - mostly for my own benefit to write out what I think I'm seeing. TSLA was down today $26 today to $705.

If you look at the May 1 expiration options, you'll see that the Put options above a .16 delta or so gained value as you would expect on a down day. What I find interesting is that the options below about .10 delta all lost money, despite the drop in the share price.

In effect, with such little time remaining to option expiration, today's share price drop wasn't big enough (in the opinion of the market) to make a difference - those options are going to expire worthless. Or alternatively, the share price drop increased the option price less than the time decay reduced the value of those options.

Between .10 and .16 delta, some are up and some are down - tells me that the market is small enough that the actual crossover is somewhere in there, but I can't just spot it by eyeball.

So working on a formula for my trading - maybe I'll be selling the weeklies at the .10 delta?


This is additional reinforcement for me of the idea that when buying options, you have to be right on direction and timing. And if IV moves enough on you, you can STILL be wrong (3 dimensions of value for an option).

Option sellers at least have time decay on their side (timing), meaning that we can still be wrong on direction and/or IV. Regarding direction, option sellers have more room to be right (difference between share price and strike price) and in exchange, we can be disastrously wrong (share price moves far ITM - leveraged losses).

 

[ckessel]

...plus weekend theta decay.

I did a google search on this topic a few weeks ago and the article I found indicated there isn't much decay on the weekend. That the algorithms for decay tend to consider only trading days in the decay. Not sure of the veracity, I didn't hunt much farther.

 

[adiggs]

I did a google search on this topic a few weeks ago and the article I found indicated there isn't much decay on the weekend. That the algorithms for decay tend to consider only trading days in the decay. Not sure of the veracity, I didn't hunt much farther.

that certainly makes sense - thx

 

[ckessel]

With the stock at 725, my sold 745 PUT has expired in the money. However, I earned $34 of premium on it for a net gain of $14 per share (so, $1400 for 1 put contract).

I'm very happy with this result. I'll be holding stock going into earnings week. I'm not sure yet what I want to do on Monday. I'm reticent to sell a CALL going into this earnings. At this point I'm leaning towards simply pausing my wheel trades until after earnings.

 

[adiggs]

With the stock at 725, my sold 745 PUT has expired in the money. However, I earned $34 of premium on it for a net gain of $14 per share (so, $1400 for 1 put contract).

I'm very happy with this result. I'll be holding stock going into earnings week. I'm not sure yet what I want to do on Monday. I'm reticent to sell a CALL going into this earnings. At this point I'm leaning towards simply pausing my wheel trades until after earnings.

I know I'll be out of all my options sometime on Tuesday or Wednesday this week. Which also means, as usual, I'll be holding all of my long term shares as usual (as I've been doing since 2012).

The options I'm getting out of are weeklies that expire 2 days after earnings - I still don't want the tail risk of a HUGE move that the options expose me to. As a bonus, the time decay will probably take them under $1 by then - and maybe well under


I'm finding that earnings is breaking up the flow - sell options, close them and sell new options. Close them and sell new options. I need to stop the wheel ahead of earnings, then probably wait a few days to see what the tea leaves reveal.

 

[adiggs]

Another interesting observation - mostly for my own benefit to write out what I think I'm seeing. TSLA was down today $26 today to $705.

If you look at the May 1 expiration options, you'll see that the Put options above a .16 delta or so gained value as you would expect on a down day. What I find interesting is that the options below about .10 delta all lost money, despite the drop in the share price.

In effect, with such little time remaining to option expiration, today's share price drop wasn't big enough (in the opinion of the market) to make a difference - those options are going to expire worthless. Or alternatively, the share price drop increased the option price less than the time decay reduced the value of those options.

Between .10 and .16 delta, some are up and some are down - tells me that the market is small enough that the actual crossover is somewhere in there, but I can't just spot it by eyeball.

So working on a formula for my trading - maybe I'll be selling the weeklies at the .10 delta?


This is additional reinforcement for me of the idea that when buying options, you have to be right on direction and timing. And if IV moves enough on you, you can STILL be wrong (3 dimensions of value for an option).

Option sellers at least have time decay on their side (timing), meaning that we can still be wrong on direction and/or IV. Regarding direction, option sellers have more room to be right (difference between share price and strike price) and in exchange, we can be disastrously wrong (share price moves far ITM - leveraged losses).

Some more small scale research on this - I was surprised to see that far OTM options with say 7 trading days to expiration can have Theta over $1/day. Which leads me to the observation - if I can open and close these far OTM options with the right timing, maybe I can keep my time decay going at an average of $1/day over all the contracts. That's $100/day for each contract, and can make for some righteous dividends

My thought of the moment, after looking at the 5/1 and 5/8 weeklies and evaluating the .05, .07, .08, .10, .12, and .15 delta puts and calls, I have arrived at a couple of conclusions.
- The puts at any given delta are priced higher than the calls. I don't know if that will always hold, but that leads to the conclusion - everything else being equal (and it's not), then selling puts > selling calls. Priced higher is around 20-25%?
- More importantly, even as far OTM as I'm looking, the theta on all of these options is between .66 and 2.07 - mostly in the 1.25 range.

Theta is higher, the higher the option price and the closer to expiration. Theta will drop as the option price nears 0 (if your option is priced at 0.10 and you're 5 days to expiration, then Theta is kind of capped to about 0.02 / day ).


There seems to a small pricing premium, based on this limited research, going from the 0.05 delta to 0.07, and the theta is still over $1. So my current formula / trading plan - sell the 0.07 delta weekly puts and calls - either the current week or the out week depending on trading days. Aim for say 5-12 trading days. The focus here is to keep the time decay high and steady, and close positions when the time decay fades enough (.50?) that the daily time decay is lower than that available with the next weekly.


All within the larger strategy of being overwhelmingly long, and avoiding tail risks (such as a surprise profit at earnings, leading to a 3x / 5x run in the shares over a few weeks or a month; I've seen that happen at least twice so far). As @ckessel, I find that I'm not nearly as worried about tail risk to the downside - that just leads to owning more shares. Tail risk to the upside costs me my shares in a run - I want to stay well clear of that. And trading weeklies limits the exposure by adjusting call strikes on a weekly basis.

 

[saniflash]

I did a google search on this topic a few weeks ago and the article I found indicated there isn't much decay on the weekend. That the algorithms for decay tend to consider only trading days in the decay. Not sure of the veracity, I didn't hunt much farther.

I also tried to learn more about this a couple of months ago and was not super successful. I found a site that said "yes theta applies over the weekends because, if you consider a PUT an insurance, a catastrophic event (e.g. meteor) can also happen on a Saturday or Sunday.

The puts at any given delta are priced higher than the calls. I don't know if that will always hold

AFAIK this is business as usual and a result of volatility skew. Volatility down is usually higher than volatility up, because market crashes happen more suddenly and usually have a higher magnitude than rises in the market, which tend to be smaller, more steady steps. Hence the insurance premium you have to pay for the first type of event is higher than for the latter event.

 

[adiggs]

Continuing my efforts at a 'formula', ignoring the fact of earnings mid-week, I went looking at the 5/1 and 5/8 expiration options. The question I was pondering - if I were going to roll the 5/1 option to the 5/8 option, how does time decay compare between the two? My notion is that I want to keep Theta higher, and maybe when the 5/8 options have a higher theta (and probably more than a penny higher), then it's time to roll.

On the put side, I have the 5/1 500 with Theta down to .55. If I were to roll to the 5/8 Put first thing Monday, I would be going to the 525 strike (delta at .07) with theta of .80. A .25 improvement in Theta that will widen daily - that sounds like a good reason to roll (I won't though due to the earnings on Wednesday - I want out of this position by close on Wednesday, so I'll ride the 5/1 option as low and long as I can). Related to this, I've captured 67% of the original premium on this position as well, further supporting the idea that the timing is good to roll this option.


On the call side, I have the 5/1 1000 strike with Theta at 1.09. I would be rolling to the 5/8 1050 strike with theta at .86. Therefore it isn't yet time to roll - I'm getting better time decay where I'm at, though this relationship might flip as soon as Monday. On the option premium side, I've captured 42% of the premium, so it looks like there's room to run here as well. I wonder if I'll find that the 50% profit level is where the time decay is even or better on the longer dated option? Wouldn't that be convenient


I'm also considering moving up to the .10 or .12 delta options (more risk, significantly more premium, more time decay), but that idea's going to sit for a week or 3 while we see what the post-earnings trading looks like.

Perfection for me in these trades is I arrive at the end of the year, selling options weekly, and never get assigned.

 

[adiggs]

One thing OptionsAlpha drives home, and I've certainly experienced, is being on the selling side of high IV is the long term money maker. With earnings not too far away, and IV really high, selling puts/calls looks like the better plan.

I'd like to add some context to this, at least the way that I see it. I agree with OA as long as we're talking exclusively about options - selling high IV options is the reliable long term money maker, over buying options.

But I also believe, more strategically, that although it is capital intensive, buy and hold is the serious long term money maker.

So I see these two approaches as complementary, but after 8 years of buy and hold and 1 month of the wheel, I've got a LOT of trades to get right on the wheel to come anywhere close to the results I've gotten from buy and hold.


I have an example from my own life. I sold some puts back in 2012 on TSLA - $29 put for $1.70. Thankfully, it finished ITM and I acquired shares at 27.30. I still have those shares, and those shares today represent something like 20% of my portfolio. For added luck, without planning it one way or the other, I sold those puts in a Roth IRA, so I won't even be paying taxes on the ~30x they've appreciated.

My point here is that I see the wheel as complementary to a long term buy and hold investment in TSLA. Part of that complementary idea is that I follow Tesla (mostly) and TSLA very closely (roughly all my eggs in this basket and I watch it very closely). If I didn't have long term buy and hold shares, I would either be concentrating on acquiring those, or I'd at least be concentrating on using the profits from this to start acquiring some long term buy and hold shares.

Because I follow Tesla and TSLA closely, that gives me additional knowledge that isn't widely available, when I'm figuring out which strikes to sell, and when to just stop selling options entirely. I personally wouldn't apply this option strategy to anything else - because I don't know anything else well enough to know that I'm ready to buy even when it drops by 1/2.


I've also begun selling calls against those long term buy and hold shares. That's one reason I go much further out on the call side, even though it results in lower premiums. I also do a 'strategy check' if you will with each sale. Not just 'does this trade satisfy my tactical approach' (which I've begun developing in more detail in recent posts), but also a tail risk evaluation that comes from the strategy check. Will I be ok with a huge move up or down that results not just in ITM, but going beyond in a big way?

As an example, if TSLA trades back down to $400, I would probably find weekly calls around $600 or maybe $700 that sell for my target covered call range. Those calls will fail my strategy check though - if the stock runs up to $950 as it did a half year ago and I lost the shares at $600, then I would have a hard time looking at myself in the mirror. Ergo - don't sell those calls. I might still sell the $1000 strike calls, knowing perfectly well that there's very little money in doing so. And I might just stop selling calls at all until the share price recovers.

(On the downside, I'm more likely to get more and more aggressive in my put sales, daring the share price to drop low enough for me to get assigned. Go ahead - assign me shares at $200! I dare you! Heck - I double dog dare you! I don't expect the market to be so accommodating)

 

[ckessel]

Really glad I got those PUTs assigned to me last week!

While I'm fine being risky on PUTs and getting assigned, I think, like adiggs, I'm going to take a much more conservative approach with selling calls. I have to remind myself that I need to think about picking a price where I'd be ok selling it anyway. It's been rare we never see a stock price twice. Every all time high is followed by a crash at some point. I think the only prices that might not have been seen twice were some we passed in the 2013 Q1 explosion.

So, with that in mind, I'll probably pick my sold call options above the all time high. Which, we're not terribly far from now, so maybe well above

 

[adiggs]

Learning about the interplay of delta, theta, time to expiration - that sort of thing. The Friday expiration 1000 Strike calls I sold for 5.59 last week had drifted down to about $3 on Friday. Theta was down to $0.80 I think it was.

With today's big jump in the shares, those options are now selling for $6.25. (Oh no - I'm losing money on this trade!).

With option expiration another day closer, theta is up to $2.80 now, and delta indicates the market is now pricing an 11% chance of these finishing ITM.


I'm sticking with the original plan for now - I was planning to find an opportune exit on Tuesday or Wednesday, and be out of this position before earnings. With the huge time decay on these, the share price needs to continue rocketing upwards to offset that time decay, much less continue to push the option price up (against me).

 

[EV forever]

Yep - TSLA IV and HV are both insanely high. Further, IV is in the 57th percentile, which per OA is good for a credit strategy.

After my post last night, I tried running similar graphs on other stocks - almost everything I searched currently has HV >> IV. That includes AAPL, MSFT, SQ, COST and GOOG that I am interested in owning, but also several other random ones that I checked. This probably reflects the crazy market that we are currently experiencing.

So today for the first time ever, I sold a call for April 24th @850 for $12.00 to leverage the stock I already own. Kept the expiration date very close as I don't want to carry this into the earnings next week. So I currently have sold two options for credit - not sure if this combination has a name. Next week on 29th prior to earnings I plan on buying some lottery ticket calls.

Sold Put for May15 @ 500 for $11.50
Sold Call for Apr24 @ 850 for $12.00

Thought I would post an update on this

Closed these positions
04/27 - Buy to close Put for May15 @ 500 for $4.20 (total was $420.69 with fees and commission- no kidding!, so profit of 728.59 in 10 days)
04/21 - Buy to close Call for Apr24 @ 850 for $1.25 (Profit of $1073.59 in one day - not bad)

Both strategies seemed to work OK to make some dividend/interest type of income.

 

[adiggs]

Key learning of the day - IV crush after earnings is a real, and amazing, thing. Seems like option prices today are 1/2 to 1/3rd of what they were yesterday before earnings.

Sold (open) May 8 700 strike puts for 4.29
Sold (open) May 8 1200 strike calls for 1.06


Those premiums yesterday would have been .. a lot more. For next earnings call, I might combine my risk avoidance with the high premiums. Time things so that I sell puts/calls the day before earnings (or 2 days) and go particularly far OTM. Might also investigate the options 2-5 weeks further out to see if they're affected as well by the huge IV (extra large premiums can go down even more from the IV collapse).

The intent would be to close the positions the day or 2 after earnings after IV collapses, and then open new positions - use the earnings to get in an extra cycle of sales.

 

[adiggs]

Sold (open) May 8 700 strike puts for 4.29

Closed these today at 12.76, a loss of ~8.50. I decided that I didn't want to get exercised at this strike (which means I shouldn't have sold it in the first place - got greedy). Current share price is well below max pain for next week, but next week is far enough out (and is a weekly) that max pain is not as useful of a concept.

EDIT. And then I read about Elon's tweet.

 

[adiggs]

Closed these today at 12.76, a loss of ~8.50. I decided that I didn't want to get exercised at this strike (which means I shouldn't have sold it in the first place - got greedy). Current share price is well below max pain for next week, but next week is far enough out (and is a weekly) that max pain is not as useful of a concept.

EDIT. And then I read about Elon's tweet.

To pile on, and to lock in the education of the day... I opened this position yesterday and I kind of knew then that it was a bad idea. But the stock was up, up, and away, and so that 700 strike was totally OTM (for 5/8 remember) and going to stay that way. The action over the rest of the day yesterday started me thinking that was a mistake, and the action this morning confirmed it. (And yay for lucky timing - I closed about 30 minutes before Elon's tweet. That's just luck)

What I realized is that I wasn't really ok with being assigned at 700. I kind of knew that yesterday too, and I went reaching for premium in the relatively low IV time yesterday anyway. End result - that position lost over $8 ($800 / contract).


SO:
1) don't sell options I don't want exercised.
2) don't reach for premium - either take what's available, at strikes I like, or just sit it out.


With those lessons in mind, I don't have any calls sold right now - I'm looking for a change in their IV and the share price next week that will make the call premiums more desirable at strikes I like (1000 recently). And if a desirable premium means coming down to a strike I will regret being exercised at, then I'll just keep sitting it out.


I did try something new today I've not done before. The 5/1 (today!) 660 put was selling for 1.30 about 1/2 way through trading today. So 3 hours of trading time - I thought that price was ludicrous. Sold those puts and watched them melt away over the balance of the day, and closed them out at .03. I'll keep my eye out for these sorts of last day deals, whether I'll do any more of them or not is a different question.

I closed out the 5/1 puts so I could sell the 5/8 puts again. This time the 5/8 520's sold for about 5.10 premium. More premium at a 180 lower strike. I knew I was reaching when I sold those 700's yesterday, and that got me my first losing trade. Good news - the education is valuable, and cheap at the price. Don't reach!

 

[adiggs]

Two other minor learnings today. My accounts are setup with the minimal options authorization for cash secured puts/ covered calls. Two apparent impacts:
1) I tried to roll out of the 700 strike puts to a later date and lower strike (entered as a multi-leg roll trade). I couldn't do that. I apparently can't do that sort of roll with cash secured puts.
2) I've attempted trades, accidentally, where I would need margin or some other authorization that failed because of the low options authorization. With a wider range of permissible trades (and probably margin), that trade would have gone through (keep the authorization as low as necessary, for the trading I'm doing)

 

[adiggs]

Once I get enough cash then I'll put a riskier put to get 100 shares and then sell one put and one call weekly.

This particular piece - selling both puts and calls - has helped me a lot. Having puts and calls on both sides makes me more neutral - less concerned with which way the stock trades. The real value is that I put less energy into getting the right setup before selling the option. (If the stock is up it's time to sell calls; if the stock is down, it's time to sell puts).


One idea that I've begun testing this week (so I don't have nearly enough data so far, though it is working this week) is that the shares trade upwards at the front end of the week, and trade down over the back half of the week. So sell calls in the front end of the week (while closing puts), and sell puts in the back end of the week (while closing calls).

I'm not relying on this - I still pass my option sales through my tail risk filter - do I really want to be assigned at the strike price or not (I tend to be selling options much further OTM than others).

I also keep an eye on max pain in the final week of trading to get a sense of where the share price is being pulled - mostly for early closes on established trades.


Another thing I tried for the first time last Friday - stock was around 700 or 710 that day, and with 4-5 trading hours to go, the 660 puts were selling for 1.10 or so. So I sold those puts and watched them melt away that day - closed them at .03 late in the day so I could open some new puts for this week. I might try that again this week if I find a similarly good setup.