Wiki Selling TSLA Options - Be the House

[adiggs]

I did have my first losing trade last Thursday / Friday. I sold the 700 strike 5/8 put for $4 on Thursday. I knew when I sold it that I was chasing premium with a strike that was too high for where I was willing to be exercised.

Friday morning, the put was trading against me and up to $12 with the shares going down. I closed the the put at that point for an $8 loss ($800 / contract). About 30 minutes later, Elon tweeted and I watch that 700 strike put trade up to $50 or so (I was out). I actually might have been able to sit it out and watch it expire worthless, but I'd be looking at earning $4 / contract IF it traded in my favor for a whole week.


Lesson - don't chase premium.

Lesson - don't sell a strike that I don't want to be assigned at.

On the plus side, though this individual trade cost me, overall I'll have covered that loss this week (I believe), and I continue to receive a cheap (profitable) education. I've never been paid to attend training before!

On the call side, right now I won't go below the $1000 strike; even though the premiums are pretty low on those right now.

On the put side I'm more aggressive, but still focus on puts in the $500's or I might go up into the low $600's.

(Because my focus is strongly on this as a dividend play, and that means far OTM options, and is evolving into shorter term options, both being risk mitigation -- avoid being assigned)

 

[pz1975]

Just wanted to provide a strategy I am doing, which is a variant of the wheel.

I sold some TSLA shares and a couple LEAPs (total was 25% of my position) at $700 Friday after the tweet and drop - risk reduction since I didn't know how the market would respond. I don't regret as I think it is a rational and logical decision, especially with the weekend coming up. Since the market essentially shrugged this off, I eventually want them back but don't want to pay higher than what I sold them for. My plan is below for how I will get those shares back and turn this losing decision into a profitable one.

I sold the equivalent amount (in shares+LEAPs I sold) of weekly $650 puts on Monday and just bought them back for a 90ish% profit. I then sold the same number of $675 puts for next week. I am going to continue this exercise (selling weekly puts at strike prices lower than what I sold the shares/LEAPs at) until I eventually get them all back at a lower price than I sold them for (allowing me to profit on the transaction). Every week the SP stays above those levels, I also collect the premiums on the sold puts as additional profit.

IMO, the odds of TSLA never getting back to $700 again in the 6-12 months is very low. If the SP starts getting too high, I will have to push out the expiration dates of my sold puts to make it worthwhile. In the end this will be win-win for me as I will get my shares back at a small discount and will have collected sold put premiums every week in the meantime. I only lose if the SP keeps going up and never gets back near/below $700. The longer it hovers around these levels, the more I will eventually profit.

 

[adiggs]

For those interested, here's a primer on Max Pain and some related concepts:
Stock Option Max Pain

One of the interesting related concepts is the idea of an Open Interest wall. This provides more of a range in which we'd expect the close at expiration to be in.


The other thing I like about the collection of these description is that they rely on the natural hedging and adjustments to hedges that market makers need to engage in as the stock price moves around. These hedges and adjustments will naturally keep the stock price above above the Put OI wall, and below the Call OI wall.

I like this description of the dynamic as it relies on standard and typical market dynamics, rather than a conspiracy and / or market manipulation description of what's going on (I'm insufficiently knowledgeable to have an opinion about manipulation of the share price).


I find that I'm incorporating max pain thinking into my larger thinking.

 

[adiggs]

I sold the equivalent amount (in shares+LEAPs I sold) of weekly $650 puts on Monday and just bought them back for a 90ish% profit. I then sold the same number of $675 puts for next week.

An idea I've begun thinking about and playing with that you might find helpful and profitable along these lines. It seems like I'm holding the options I sell for about 1/2 the time to expiration (some less, some more). If that's the case, then instead of selling the next week options (days to expiration say 3-8), I'm going to be looking at the next week options (say 8-13 days to expiration).

My hope is that the early strong move that wipes out a lot of the option vale (good for me as option seller) happens early in the option's life and I'll end up holding for the same period as I would the near week option, but the decay will happen to a more expensive option (so I get more absolute money, probably on a lower profit %). I'd rather make $7 on a $10 option that decays 70%, than 95% of a $5 option, given that holding times are the same or similar (I made up the numbers to illustrate the idea).


Since you want to get assigned at $700 or lower, if you've got the will to wait it out until your price returns, I think you're going to collect some big premiums between now and when Mr. Market is willing to sell to you at $700 . Not that it matters, but I agree with your notion that the market will be returning to $700 at some point. I expect that to happen this year, and if it happens this quarter, I won't be surprised.

 

[pz1975]

An idea I've begun thinking about and playing with that you might find helpful and profitable along these lines. It seems like I'm holding the options I sell for about 1/2 the time to expiration (some less, some more). If that's the case, then instead of selling the next week options (days to expiration say 3-8), I'm going to be looking at the next week options (say 8-13 days to expiration).

My hope is that the early strong move that wipes out a lot of the option vale (good for me as option seller) happens early in the option's life and I'll end up holding for the same period as I would the near week option, but the decay will happen to a more expensive option (so I get more absolute money, probably on a lower profit %). I'd rather make $7 on a $10 option that decays 70%, than 95% of a $5 option, given that holding times are the same or similar (I made up the numbers to illustrate the idea).


Since you want to get assigned at $700 or lower, if you've got the will to wait it out until your price returns, I think you're going to collect some big premiums between now and when Mr. Market is willing to sell to you at $700 . Not that it matters, but I agree with your notion that the market will be returning to $700 at some point. I expect that to happen this year, and if it happens this quarter, I won't be surprised.

I thought about this as well, but the biggest slope of decay is in the last week so I still think it will work best. I'll do some models and adjust based on what it shows. Thanks for the suggestion.

 

[adiggs]

I thought about this as well, but the biggest slope of decay is in the last week so I still think it will work best. I'll do some models and adjust based on what it shows. Thanks for the suggestion.

Please pass along what you find. My method to figure out which is better is to try and see what happens

Totally agree on the decay slope being steepest in that last week. Part of what got me started thinking about 2 week options was I kept finding myself holding an option worth $1 or so - decay might be .60 or .70, but moving along to the next weekly would enable a "slower" decay that was still higher.

We might also be trading options that are enough different in price (I rarely collect $10 in premium due to how far OTM and short I'm trading at), that the last week makes more sense for closer OTM options than it does for the farther OTM I'm doing.

 

[pz1975]

Please pass along what you find. My method to figure out which is better is to try and see what happens

Totally agree on the decay slope being steepest in that last week. Part of what got me started thinking about 2 week options was I kept finding myself holding an option worth $1 or so - decay might be .60 or .70, but moving along to the next weekly would enable a "slower" decay that was still higher.

We might also be trading options that are enough different in price (I rarely collect $10 in premium due to how far OTM and short I'm trading at), that the last week makes more sense for closer OTM options than it does for the farther OTM I'm doing.

Interestingly, they work out pretty close to the same. I calculated selling a put 16 days before expiration and then buying it back 2 days before vs. selling 9 days before and buying back 2 days before (but doing this 2 weeks in a row) and the difference in profit was less than $50. This was assuming no changes in underlying stock price over that time. I used SP $750, strike price $675 and volatility 80%.

 

[hershey101]

Anyone here have the guts to write naked calls on $TSLA? Jan '21 $1880 calls are $25! There is no way $TSLA reaches $1880 between now and Jan '21...

 

[adiggs]

Anyone here have the guts to write naked calls on $TSLA? Jan '21 $1880 calls are $25! There is no way $TSLA reaches $1880 between now and Jan '21...

Not me. But then again, my account also isn't setup for that level of options, so it's an academic exercise for me.

That'd be 7ish months of being on the hook to deliver shares at $1880 a share. That'd be too risky for me - if TSLA gets added to S&P 500, that's more buying pressure than I'd want to see coming after that price. Especially not for $2500 / contract

 

[adiggs]

Interestingly, they work out pretty close to the same. I calculated selling a put 16 days before expiration and then buying it back 2 days before vs. selling 9 days before and buying back 2 days before (but doing this 2 weeks in a row) and the difference in profit was less than $50. This was assuming no changes in underlying stock price over that time. I used SP $750, strike price $675 and volatility 80%.

I tend to write options much further OTM - between .05 and .15 delta - mostly the .05-.10 range. I think the behavior is different with options that far OTM - a decent move away from the option goes over some threshold, and the option price just collapses (which I like). The end result is that I hold for more like 1/2 the time - so 8 days on a 16 day option. 3 days on a 6 day option - that sort of thing.

I think that when the stock was down at 700ish at the end of last week, I was able to write the 520 strike for 1 week out and collect $5 - that's more my typical speed, rather than a 625 put with a 700 share price.


I've also been finding that as I go along, especially with the 1 week options, I am growing increasingly aggressive. Taking more chances of being assigned, and that I'm more concerned about risk to the upside (seeing my shares called away that I want to keep for years), than I am of risk tot he downside (get assigned - start selling close calls to convert these temporary shares back into cash, and then back to writing puts).

So maybe another week or 4, and I too will be writing weeklies that are less than $100 OTM.

 

[pz1975]

I tend to write options much further OTM - between .05 and .15 delta - mostly the .05-.10 range. I think the behavior is different with options that far OTM - a decent move away from the option goes over some threshold, and the option price just collapses (which I like). The end result is that I hold for more like 1/2 the time - so 8 days on a 16 day option. 3 days on a 6 day option - that sort of thing.

I think that when the stock was down at 700ish at the end of last week, I was able to write the 520 strike for 1 week out and collect $5 - that's more my typical speed, rather than a 625 put with a 700 share price.


I've also been finding that as I go along, especially with the 1 week options, I am growing increasingly aggressive. Taking more chances of being assigned, and that I'm more concerned about risk to the upside (seeing my shares called away that I want to keep for years), than I am of risk tot he downside (get assigned - start selling close calls to convert these temporary shares back into cash, and then back to writing puts).

So maybe another week or 4, and I too will be writing weeklies that are less than $100 OTM.

I usually sell puts much further out than what I described for regular income generation - similar to what you said.

In this particular situation I actually want to get my shares back eventually but want to skim profit off in the meantime and buy them back for less than I sold them for. I’m patient as I’m pretty confident the SP will revisit $700 again in the next 6-12 months.

 

[Davidzhao365]

Just wanted to provide a strategy I am doing, which is a variant of the wheel.

I sold some TSLA shares and a couple LEAPs (total was 25% of my position) at $700 Friday after the tweet and drop - risk reduction since I didn't know how the market would respond. I don't regret as I think it is a rational and logical decision, especially with the weekend coming up. Since the market essentially shrugged this off, I eventually want them back but don't want to pay higher than what I sold them for. My plan is below for how I will get those shares back and turn this losing decision into a profitable one.

I sold the equivalent amount (in shares+LEAPs I sold) of weekly $650 puts on Monday and just bought them back for a 90ish% profit. I then sold the same number of $675 puts for next week. I am going to continue this exercise (selling weekly puts at strike prices lower than what I sold the shares/LEAPs at) until I eventually get them all back at a lower price than I sold them for (allowing me to profit on the transaction). Every week the SP stays above those levels, I also collect the premiums on the sold puts as additional profit.

IMO, the odds of TSLA never getting back to $700 again in the 6-12 months is very low. If the SP starts getting too high, I will have to push out the expiration dates of my sold puts to make it worthwhile. In the end this will be win-win for me as I will get my shares back at a small discount and will have collected sold put premiums every week in the meantime. I only lose if the SP keeps going up and never gets back near/below $700. The longer it hovers around these levels, the more I will eventually profit.

There is a real chance that it can fly away and you won’t get in due to emotion and phycological issue. I would just bite the bullet and jump back in now. No reason to risk the profit you can get from SP growing from $800 to $3000 in next a few years.

 

[strago13]

I usually sell puts much further out than what I described for regular income generation - similar to what you said.

In this particular situation I actually want to get my shares back eventually but want to skim profit off in the meantime and buy them back for less than I sold them for. I’m patient as I’m pretty confident the SP will revisit $700 again in the next 6-12 months.

So far I have a core set of shares I wont touch, but want to add to over time. I want to use this approach to add more shares / generate income but it requires quite a large bank roll, no? For instance, let's say I sell 1x $700 Put expiring May 15 20. If it hits that strike price, I am on the hook for $70,000 to buy the shares with the return on that is $779.33 which would net me 1 additional share, with a boatload of risk. Example two, lets say I sell 1x $600 Put expiring May 15 20, If it hits that strike price, I am on the hook for $60,000 to buy the shares and the return is a paltry $159.33. What are you all doing to generate weekly income?

 

[pz1975]

So far I have a core set of shares I wont touch, but want to add to over time. I want to use this approach to add more shares / generate income but it requires quite a large bank roll, no? For instance, let's say I sell 1x $700 Put expiring May 15 20. If it hits that strike price, I am on the hook for $70,000 to buy the shares with the return on that is $779.33 which would net me 1 additional share, with a boatload of risk. Example two, lets say I sell 1x $600 Put expiring May 15 20, If it hits that strike price, I am on the hook for $60,000 to buy the shares and the return is a paltry $159.33. What are you all doing to generate weekly income?

Your numbers are correct. If you are willing to buy 100 more shares at the strike price you are selling the put for (and otherwise would be buying them at the current SP), I don’t see any “risk”. The only risk in that situation is the SP keeps going up and you end up not getting the extra shares you want. If you want/can only afford to buy less than 100 shares then this strategy should not be used of course. As for the part about extra income, if you were to do this technique every week for 1 year (selling a put for 10% lower than the SP) and it never dropped to that level (extremely unlikely of course), you would pocket around $35K for every contract sold. I’d call that pretty good income on a potential outlay of only $60,000-90,000 depending on the SP level.

 

[strago13]

Do you all dabble farther out than a month (I think ckessel does)? For instance, if I were to sell a put @ 700 ($110.55) for Nov 2020, the premiums are pretty nice on that right now. What are the downsides other than it being less risky and profitable than weeklies/monthlies at the same price point (depending on IV)? If I am understanding right, if the stock shot up, I would close that put out, and resell it a put a higher price and collect another nice premium. If it hits 700 or lower, I would have 100 new shares which I want anyways and the same risk still exists where it could be assigned at anytime.

 

[vikings123]

Do you all dabble farther out than a month (I think ckessel does)? For instance, if I were to sell a put @ 700 ($110.55) for Nov 2020, the premiums are pretty nice on that right now. What are the downsides other than it being less risky and profitable than weeklies/monthlies at the same price point (depending on IV)? If I am understanding right, if the stock shot up, I would close that put out, and resell it a put a higher price and collect another nice premium. If it hits 700 or lower, I would have 100 new shares which I want anyways and the same risk still exists where it could be assigned at anytime.

The main problem with this approach is your money or margin is essentially held up until Nov 2020 or until you close out your position. I think the weekly/monthly are more profitable in the long run as you can get in and get out as you like.

I have sold puts a couple of months out and closed that out for decent profits.

 

[strago13]

We should maybe do a comparison of trading long puts versus weeklies, could be interesting.

This is basically what I spent most of last night and this morning working on. At my current "tolerance" point these are the numbers I ran (assuming full expiration):

610 jun 26 2020 puts $1099 or $183 a week in premiums
610 july 17 2020 puts $2514 or $279 a week in premiums
610 august 21 2020 puts $4300 or $307 a week in premiums
610 oct 16 2020 put $6174 or $280 a week in premiums

So lots of variance between the different months, but August looks the best. If you did the same exercise with weeklies you would get this:

610 May 22 2020 put $121 or $121 a week in premiums
610 May 29 2020 put $310 or $155 a week in premiums
610 June 5 2020 put $590 or $196 a week in premiums
610 June 12 2020 put $860 or $215 a week in premiums

I havent done the math on higher strike prices, but I would imagine they would mostly scale linearly

 

[adiggs]

This is basically what I spent most of last night and this morning working on. At my current "tolerance" point these are the numbers I ran (assuming full expiration):

610 jun 26 2020 puts $1099 or $183 a week in premiums
610 july 17 2020 puts $2514 or $279 a week in premiums
610 august 21 2020 puts $4300 or $307 a week in premiums
610 oct 16 2020 put $6174 or $280 a week in premiums

So lots of variance between the different months, but August looks the best. If you did the same exercise with weeklies you would get this:

610 May 22 2020 put $121 or $121 a week in premiums
610 May 29 2020 put $310 or $155 a week in premiums
610 June 5 2020 put $590 or $196 a week in premiums
610 June 12 2020 put $860 or $215 a week in premiums

I havent done the math on higher strike prices, but I would imagine they would mostly scale linearly

Something I've begun trying to incorporate into my option selections is delta. It's a good approximation for the probability the option will be in-the-money at expiration. It's also a good approximation for the odds the strike price will be touched during the trade window (2x delta for prob touch). I don't know the math and theory behind that - just that it was talked about in some of the option training I've done.

What you'll notice is that delta is going up as constant strike options go out in time. That's one reason your premiums are going up - the further out options are more sensitive to price movements, as the market also prices them with an increased chance of being ITM at expiration. There's also more time value of course


One reason I like the weeklies or near month option duration is for the put sales, I want my cash to return to an unencumbered state frequently. That enables me to just not sell another option if I want or need to. That means more trades, more money to commissions, and more premium sensitivity to recent trading history (sometimes I get a good price; sometimes I don't).

I'll probably get more money over time selling desirable monthly options over selling whatever I can get week to week. But I won't always have the desirable monthly option entry, so I think about the monthly each week and I'll tend to take the monthly when I think it's desirable. This has meant weekly puts for me recently.


I also like the weeklies for the time decay dynamic that @Lycanthrope mentioned. The very best example I've experienced was a couple weeks back, I sold the 5/1 660 put for about $1.20 ON 5/1. That option had about 4 or 5 trading hours to expiration, and the time value melted away like crazy. If only there were options closing daily at such ridiculous prices

From what I've read, many trading systems focus on the 30-45 day options - I tend towards the weekly up to 30 day options (say 3-30 days). With a bias (now) towards the lower end of that range - say the 5-10 day options. The time decay is already in the rapid phase, so I get that benefit right away. At times, I think of what I'm doing as selling time decay (who would want to buy that!?!).

Whatever the particular time range, time decay starts picking up pretty noticeably in that 15-45 day window. It keeps accelerating all the way up to expiration (where it always reaches 0 - whether the option is ITM or OTM). Similarly, you'll find that time decay on that November '20 option is pretty low in absolute terms. It might still be $.60/day out there - just that it's also got a very long way to go and that theta doesn't accelerate (grow) very much as the days and weeks roll by. On the plus side, daily monitoring of the position probably isn't needed; and less time invested in this is it's own benefit.

 

[ggr]

A related question regarding US tax treatment. If I buy a call for $10, at whatever strike, and exercise the call, I have not had a taxable event; the cost basis of the 100 shares will be $(strike+10) when I eventually sell them.

What happens (tax wise) if I write a put and it gets exercised? I write the put at $10 for $strike. When it is exercised, the put disappears, which looks like a $1000 profit for the put, and I buy shares that have a cost basis of $strike. Do I owe tax on the $1000, or can I roll it into the cost basis, as if I bought the shares at $(strike-10)? That is how I think about it, but my accountants probably disagree, and I'm sure the IRS would like to take the tax earlier.

Anyone actually know the answer?

 

[adiggs]

A related question regarding US tax treatment. If I buy a call for $10, at whatever strike, and exercise the call, I have not had a taxable event; the cost basis of the 100 shares will be $(strike+10) when I eventually sell them.

What happens (tax wise) if I write a put and it gets exercised? I write the put at $10 for $strike. When it is exercised, the put disappears, which looks like a $1000 profit for the put, and I buy shares that have a cost basis of $strike. Do I owe tax on the $1000, or can I roll it into the cost basis, as if I bought the shares at $(strike-10)? That is how I think about it, but my accountants probably disagree, and I'm sure the IRS would like to take the tax earlier.

Anyone actually know the answer?

I don't know the answer, but I know that I DID pay the tax on the 1.70 premium I collected on $29 strike puts I sold back in 2012 (that expired in the money and were exercised).

I didn't know about the idea of rolling the option premium into the purchase price (or even if that was a thing). It didn't matter before, but I'm selling so many options now, it looks like something I need to learn. If you get an answer, please let us know!