Wiki Selling TSLA Options - Be the House

[bkp_duke]

i think more traders here use Bear Call Spread than Bull Call Spread

Yeah, because the huge rapid ups on TSLA seem to be more common than the rapid declines. Declines seem to be slower and more drawn out, when they happen.

I run all my trades through Options profit calculator and won't enter a position unless the odds are 90% or higher.

 

[InTheShadows]

i think more traders here use Bear Call Spread than Bull Call Spread

Yes it is a bear call spread. You are expecting the stock to stay flat or go down. Hence bearish outlook.

The bull Put spread is neutral or go up.

 

[MikeC]

For Oct 15 600/700 spreads @ SP 785:
Bull call spread: costs 97.23 per option, so max profit $2.77, ROI is 2.85%
Bull put spread: needs $97.40 capital per option, credits $2.60, ROI is 2.67%

Did not realize DITM call spreads are so close in cost and return to DOTM put spreads. And the goal is the same here, to keep the SP above 700. Compared to BPS, is there any difference with the mechanics of rolling or anything else?

 

[adiggs]

I see BCS and BPS mentioned often, which I assumed was bull call spread and bull put spread. There seems to be tons of discussion on that, so let me know if I'm missing something in my terminology.

In any case what piqued my interest was the recent post about making $100k a week off $2M capital.

My take on bull call spreads vs put spreads is to go with whichever has highest volatility, because that's the one that will have the highest return. In my experience that's usually calls, which is why I don't normally deal with puts. For example, taking numbers today off TD TOS (Saturday) with 5 trading days left:

For Oct 15 600/700 spreads @ SP 785:
Bull call spread: costs 97.23 per option, so max profit $2.77, ROI is 2.85%
Bull put spread: needs $97.40 capital per option, credits $2.60, ROI is 2.67%

There's 6% more profit with the calls than puts, at least on paper.

For fun, I backtested the performance of investing in weekly spreads for TSLA from 2016 to 2021, assuming a weekly investment (ie capital risk) of $1M. Returns would be substantially better if the weekly investment was compounded by increasing it to be proportional to total gains. However, the increase would depend on tax situation, etc so a fixed $1M weekly is a start.

Spread cost and strike values for past weeks were adjusted proportional to SP today. Max profit would be the (strike spread - option cost) for call spreads or the credit for put spreads.

Although the max profit is higher for higher strikes, the returns are better when not being as aggressive because they're subject to losses more often when the SP drops quickly.

View attachment 719570
Caveat: I make mistakes on spreadsheets all the time!

I think I'd like to hear more about these bull call spreads.

Using this 785 share price you would be buying the 600 call and selling the 700 call, correct? So you're paying a net debit of 97.40 by using the higher strike income to pay for some of the farther strike. How do you manage this position? What is a "win"?

If I'm understanding correctly you choose the strikes using the same method as you use selling a vertical put spread (BPS). What I'm not figuring out in my head is how the position generates a profit, what does 'winning' look like, and what does 'losing' look like. On the BPS all share prices above 700 represent a max profit.

With the call spread, at expiration with shares above 700, the purchased call ends with a value of $100 and the sold call ends with a value of $0. Actually they end up with a value of that + whatever amount above $700 the share price is at. Do you reverse the trade to close early when desired profit is achieved, or do you let these go to expiration (when above 700) - I assume in this case that assignment on the 2 options is offsetting and you are left with your max return of $100.


I've never looked at these before and I'm interested in learning more . This excludes the mechanics - what does management look like, entering the position, etc..

 

[adiggs]

Update on ability to edit - I signed up as a Supporting Member last night (this thread has easily provided me enough income to do at least that much). At the upper tier I've gained the ability to edit the first post on any thread that I start. I've confirmed that I now have the Edit option on the first post of this thread.

I also checked and I have an Edit button on the lead post in the FAQ / Glossary thread. Since I didn't have it previously, my best guess of the moment is that supporting members also gain access to the Edit function on "Wikiposts". There might be some incremental ability to further control who can update and who can't - I did see that I don't have an Edit button on later posts.


For that FAQ thread it'd be pretty sweet if we had an ability to delete posts. Then those without Edit on the first post could respond to the thread with a new item for the FAQ, and then any of the editors could sweep up that info, add it to the FAQ, and delete that post. The info would become immediately available to all of us, and any of the editors could integrate it, AND the thread wouldn't become cluttered with conversation.

But they key there would be the delete ability. The responses in the thread form a sort of queue of FAQ additions, and any of the Editors can process them (so the FAQ updates don't fall any one person's shoulders).


Somebody said that they have a pile of links they found valuable from reading through the thread from scratch. Please share those when you have a chance, ideally with a brief statement / question / paragraph about what it is and/or what you found valuable. That'll be good actual content to go into the outline of the FAQ as that gets built.

Of course anybody else with links, internal and external to the thread, should feel strongly encourage to share as well

 

[MikeC]

If I'm understanding correctly you choose the strikes using the same method as you use selling a vertical put spread (BPS). What I'm not figuring out in my head is how the position generates a profit, what does 'winning' look like, and what does 'losing' look like. On the BPS all share prices above 700 represent a max profit.

With the call spread, at expiration with shares above 700, the purchased call ends with a value of $100 and the sold call ends with a value of $0. Actually they end up with a value of that + whatever amount above $700 the share price is at. Do you reverse the trade to close early when desired profit is achieved, or do you let these go to expiration (when above 700) - I assume in this case that assignment on the 2 options is offsetting and you are left with your max return of $100.


I've never looked at these before and I'm interested in learning more . This excludes the mechanics - what does management look like, entering the position, etc..

I think the results are virtually the same as DOTM 700/600 BPS - risk $10k cash/margin in his example and if TSLA is above 700 at expiration, you keep the premium. I am wondering if there are any functional differences from a BPS. Otherwise, seems like a great way to get a bit more return with the identical risk.

 

[mrmage]

Yes it is a bear call spread. You are expecting the stock to stay flat or go down. Hence bearish outlook.

The bull Put spread is neutral or go up.

I didn't expect that because TSLA tends to go up over time. Thanks for the clarification.

Yeah, because the huge rapid ups on TSLA seem to be more common than the rapid declines. Declines seem to be slower and more drawn out, when they happen.

I run all my trades through Options profit calculator and won't enter a position unless the odds are 90% or higher.

Buying far OTM bear call spreads every single week seems riskier if TSLA goes up fast and declines slowly relative to the gain. Otoh, if you're initiating the position opportunistically (apparently the case because you're using a risk calculator) or closer to the money, that could be different?

Did not realize DITM call spreads are so close in cost and return to DOTM put spreads. And the goal is the same here, to keep the SP above 700. Compared to BPS, is there any difference with the mechanics of rolling or anything else?

I don't think there's much difference, except for edge cases. For example, early assignments could have different impacts between put and call spreads.

For typical transactions, I imagine they're similar. I don't roll spreads very often though, but personally would be inclined to have enough reserve to take the lumps and continue. It's easy to say that, but psychologically would be tough. If I got nailed with a $1M loss off my very first trade, risking another million the next week by continuing would take a lot of guts!

 

[mrmage]

I think I'd like to hear more about these bull call spreads.

Using this 785 share price you would be buying the 600 call and selling the 700 call, correct? So you're paying a net debit of 97.40 by using the higher strike income to pay for some of the farther strike. How do you manage this position? What is a "win"?

If I'm understanding correctly you choose the strikes using the same method as you use selling a vertical put spread (BPS). What I'm not figuring out in my head is how the position generates a profit, what does 'winning' look like, and what does 'losing' look like. On the BPS all share prices above 700 represent a max profit.

With the call spread, at expiration with shares above 700, the purchased call ends with a value of $100 and the sold call ends with a value of $0. Actually they end up with a value of that + whatever amount above $700 the share price is at. Do you reverse the trade to close early when desired profit is achieved, or do you let these go to expiration (when above 700) - I assume in this case that assignment on the 2 options is offsetting and you are left with your max return of $100.


I've never looked at these before and I'm interested in learning more . This excludes the mechanics - what does management look like, entering the position, etc..

Conceptually, call spreads are similar to put spreads. The credit from a put spread is basically the time value of the spread paid up front. At expiration, you keep that if the SP is above the strikes. The reduction in buying power (ie investment for writing a put spread) reflects the worst case risk, where SP drops below the low strike.

Compare that with ITM call spreads with the same strikes, where someone pays for the strike spreads up front less the time value. At expiration, the time value becomes zero, so you collect the full amount of the spread.

In both cases, a successful trade is collecting the time value of the spread without losing anything from the SP dropping below the high strike.
The two approaches are usually close because the time value of puts is usually just a bit less than the time value of calls.

I have only done longer term ITM call spreads before, and I always close those early. I haven't tried weeklies so I don't really know how close I can cut it. Holding until expiration always makes me nervous, even though Ameritrade assures me they'll take care of it. I'll probably make smaller quantity trades first to make sure the mechanics work before anything substantial.

I'll let you know how it goes. I'd hate to lose $1M off the bat because I did something stupid!

 

[MikeC]

Conceptually, call spreads are similar to put spreads. The credit from a put spread is basically the time value of the spread paid up front. At expiration, you keep that if the SP is above the strikes. The reduction in buying power (ie investment for writing a put spread) reflects the worst case risk, where SP drops below the low strike.

Compare that with ITM call spreads with the same strikes, where someone pays for the strike spreads up front less the time value. At expiration, the time value becomes zero, so you collect the full amount of the spread.

In both cases, a successful trade is collecting the time value of the spread without losing anything from the SP dropping below the high strike.
The two approaches are usually close because the time value of puts is usually just a bit less than the time value of calls.

I have only done longer term ITM call spreads before, and I always close those early. I haven't tried weeklies so I don't really know how close I can cut it. Holding until expiration always makes me nervous, even though Ameritrade assures me they'll take care of it. I'll probably make smaller quantity trades first to make sure the mechanics work before anything substantial.

I'll let you know how it goes. I'd hate to lose $1M off the bat because I did something stupid!

Do the wider bid-ask spreads for DITM calls affect the comparison? Seems like more chance for variability if one were to do a market order compared to DOTM BPS and this could offset the ~10% difference.

 

[pz1975]

I think the results are virtually the same as DOTM 700/600 BPS - risk $10k cash/margin in his example and if TSLA is above 700 at expiration, you keep the premium. I am wondering if there are any functional differences from a BPS. Otherwise, seems like a great way to get a bit more return with the identical risk.

This is a good explanation of the differences:

In-the-Money (ITM) vs. Out-of-the-Money (OTM) Vertical Spreads - Ticker Tape

Choosing between in-the-money (ITM) vs. out-of-the-money (OTM) vertical spreads? Learn how to factor in liquidity and price to make an informed decision.

tickertape.tdameritrade.com

Basically the advantages of the OTM bull put spreads vs ITM bull call spreads are 1) liquidity (more options are traded OTM than ITM so bid/ask spreads will be tighter and the positions easier to close), 2) the risk of possible early assignment on the sold call portion of the bull call spread (you would have to watch for this and then exercise the bought ITM call), and 3) fees associated with having the 2 calls exercised against each other since they would both end up ITM if the trade was profitable.

 

[bkp_duke]

Buying far OTM bear call spreads every single week seems riskier if TSLA goes up fast and declines slowly relative to the gain. Otoh, if you're initiating the position opportunistically (apparently the case because you're using a risk calculator) or closer to the money, that could be different?

Been focusing on OTM bull put spreads. Because the premiums have been low lately, and because of TSLA's history for large single day ups, I have mostly avoided call spreads.

 

[adiggs]

Somewhere back there I recall saying something like "let's keep the thread title about selling options, rather than BPS as a specific technique" because, you know, in a year the BPS might be so last year.

I wasn't actually thinking that in a few days, BPS might be so yesterday


God I love this thread and the different ideas and insights that come along. I don't know about the DITM call debit spreads yet, but I've learned enough in a few posts that I'm going to try a test position out this week. This is my own decision and I'll experience my own consequence

I've got some other put credit spreads that I am hoping to enter. If I do get my entry on those then I'll just take some of the money that would have been directed into a put reserve (retirement account) and use it to make the purchase in the call spread. I am particularly interested to see what the position looks like in the position view. Is it equally easy to see progress towards max profit?

Are there difference in how margin gets handled?

My guess is that the purchase dynamic means that there is no comparable 'free' (margin) position on the other side of the share price as there is with an Iron Condor. Then again I don't make use of that very often (actually once, ever, so far) so losing access to the 'free' call credit spread isn't exactly crimping my style.


My first pass guess at which is better is to look at IV. I'd guess that whichever IV is higher is the better side to be buying / selling, with a bias towards the put side if one is also pairing it up with the call spread.


A random thought that's occurred to me is that with these having such similar behavior, I wonder if there's an arbitrage opportunity here. I.e. aggressive selling of put credit spreads pushes down their IV relative to the calls, enabling the deep pocket and high speed traders to buy the call side at a premium to the put side.

I wonder if the market makers have been perfectly content with their current pocket picking setup

I could easily be reading more into this than I think, and I'm currently in that early flush of OMG-what-a-cool idea like I had back when I started to grok the power of the put credit spread.


We might need new shorthand terminology, because DITM call debit spread, or maybe bCS vs. BCS / BPS vs bPS or something will be needed. *sigh*

 

[ammulder]

So wait, if you sell an ITM call spread, and both calls are in the money the whole time... what's the actual chance the sold one gets exercised? If it did, I assume you'd need to manually exercise the bought one ASAP -- but there would be some share turnover in any case -- e.g. you'd have to pay taxes on gains on the 100 shares that were called away?

 

[pz1975]

Read the article I posted last page. ITM bull call spreads are not as good as the OTM bull put spreads we are all using.

 

[Yoona]

The power of compounding is amazing but have anyone thought about using the extra money each week to buy lower and lower strike but maintain the same weekly income goal? It’s almost certain one future week our BPS will be wrecked badly. If you are able to be so far out of money your BPS will 99.9% expired worthless. I fear panic and margin calls will be what stops my BPS / IC gravy train.

if one has 2000 shares
and is broker-capped at 750k margin
and starts with $0 cash on hand
and sells $3 put prem per contract
and BTC every time at 80% profit
and opens $50 spreads
and uses only 60% of buying power
and doesn't withdraw cash

... the annual income will be a staggering US$2.5 MILLION on the 1st year due to compounding margin (that allows for more contracts to sell)

Add just a $1 prem call income per week, and income increases to US$4.5M

eventually, everyone here becomes a hedge fund

 

[InTheShadows]

if one has 2000 shares
and is broker-capped at 750k margin
and starts with $0 cash on hand
and sells $3 put prem per contract
and BTC every time at 80% profit
and opens $50 spreads
and uses only 60% of buying power
and doesn't withdraw cash

... the annual income will be a staggering US$2.5 MILLION on the 1st year due to compounding margin (that allows for more contracts to sell)

View attachment 719630
View attachment 719631
View attachment 719632

Add just a $1 prem call income per week, and income increases to US$4.5M
View attachment 719633

eventually, everyone here becomes a hedge fund

Ooh. Is that a spreadsheet you made? If so, could you link to it, or link to it if it’s not one you made?

 

[ammulder]

if one has 2000 shares
and is broker-capped at 750k margin
and starts with $0 cash on hand
and sells $3 put prem per contract
and BTC every time at 80% profit
and opens $50 spreads
and uses only 60% of buying power
and doesn't withdraw cash

... the annual income will be a staggering US$2.5 MILLION on the 1st year due to compounding margin (that allows for more contracts to sell)

View attachment 719630
View attachment 719631
View attachment 719632

Add just a $1 prem call income per week, and income increases to US$4.5M
View attachment 719633

eventually, everyone here becomes a hedge fund

Though it seems small, I’m not convinced call spread premium equal to 1/3 put spread premium is realistic based on recent prices and stock price movements.

Also, spreadsheets like that assume perfect performance, no setbacks, etc. Didn’t we just have Evergrande to prove that isn’t true? Just on the numbers, $3 for a $50 spread today would be $670-720, right? What’s the statistical chance a $720 goes into the money? I’m guessing the numbers don‘t suggest you could make that trade 200 times without it going against you.

I’m not saying it isn’t good to plan, but these things “demonstrating” how to 5x-10x your backing cash/margin every year with weekly trades going like clockwork I think don’t give a helpful or accurate message. I don’t know where the line is, but I feel that’s crossed it. (In terms of what someone who follows this thread should expect to accomplish.)

 

[corduroy]

if one has 2000 shares
and is broker-capped at 750k margin
and starts with $0 cash on hand
and sells $3 put prem per contract
and BTC every time at 80% profit
and opens $50 spreads
and uses only 60% of buying power
and doesn't withdraw cash

... the annual income will be a staggering US$2.5 MILLION on the 1st year due to compounding margin (that allows for more contracts to sell)

View attachment 719630
View attachment 719631
View attachment 719632

Add just a $1 prem call income per week, and income increases to US$4.5M
View attachment 719633

eventually, everyone here becomes a hedge fund

Great analysis. I just wish I had 2,000 shares to start with!

Is this assuming a tax deferred account? Otherwise you would probably need to set aside about $1m (in USA) to pay taxes on that $2.5M which would reduce the compounding effect by 40% or so?

 

[pz1975]

if one has 2000 shares
and is broker-capped at 750k margin
and starts with $0 cash on hand
and sells $3 put prem per contract
and BTC every time at 80% profit
and opens $50 spreads
and uses only 60% of buying power
and doesn't withdraw cash

... the annual income will be a staggering US$2.5 MILLION on the 1st year due to compounding margin (that allows for more contracts to sell)

View attachment 719630
View attachment 719631
View attachment 719632

Add just a $1 prem call income per week, and income increases to US$4.5M
View attachment 719633

eventually, everyone here becomes a hedge fund

This is exactly the type of calculations I have been working on but I go more conservatively so I am much less likely to have losing trades or ones I need to roll. I want to try and do this for 10+ years if possible so aiming for lower but safer profits each week gives me a much bigger safety margin. I am looking more at $2 profit spreads $100 apart and using 25-33% of margin each week. I then compound profits (minus taxes) back into margin as cash. My calculation gives me a 7x in my portfolio value in 12 years.

This is just one example - I am still playing with the numbers to find my comfort zone.

 

[UnknownSoldier]

What's the advantage of doing BPS instead of just selling cash or margin secured puts if you have the cash or margin to cover the puts?