Wiki Selling TSLA Options - Be the House

[ammulder]

if one thinks the lowest black swan sp is 650 and there is a broker cap of 750k (ie TD), 1,679-2,308 shares will take full advantage of 50% leverage given by shares. Shares 2,309-10,000 will be useless in generating recurring income unless they are used for CC (which is also trash prem) or stock daytrading.

View attachment 724029

Using only 50% of buying power at $3 prem/wk makes one a teslanaire (after tax) in one yr if one has 1,679 shares and assuming sp is constant.

View attachment 724033

View attachment 724035

Note:
- this is the perfect-world scenario and everyone makes the occasional weekly loss
- if there is no broker cap, then shares 2,309-10,000 also give leverage

computation found on original thread #8725

So this plan also appears to suffer from not-this-week syndrome. To get $3 on a $40 spread you’d have to be selling $810-850 spreads, which is way too high for my comfort for that spread size (especially for 93 of them).

My plan based on 10% out of the money also doesn’t look like it will work this week (for 10/29 expiry). I’m lucky I sold some yesterday or I’d not even be able to make my supposedly conservative goal.

I’m wondering whether to expect premiums to stay this low or recover in a week or two.

I guess I might also be more comfortable selling $850s if the stock price hangs out around $900 for a while and max pain regains it’s potency and all that. But I wouldn’t bet on “now just level for a while” either. Sigh. It seems crazy the IV has gone down so much when I still feel like the stock could jump substantially in any direction tomorrow or next week!

 

[MindOverMatcha]

So say you are making $500k in short term trades, you would pay 35% tax on most of it. If you did it in your IRA and only withdrew $100k for expenses you would pay ~22% on most of it plus the 10% penalty. So ~32% vs. ~35%. So it doesn't seem like a big difference, but hey, that is an extra 3% savings. (But you get to grow the other $400k tax-free until you withdraw it.)

But not everyone has the same amount of resources in their IRA as in their taxable accounts, and you can't just load them up all at once.

True points, the value of a IRA vs. taxable account would be very different. Appreciate the quick napkin math, that 3% difference makes it seem more similar, so better to let that $400k grow tax free. I'm early in my investing life so that helped level me out.

I don't follow this.

In a taxable account, your short-term gains are taxed at your income rate. Long-term gains are taxed at 15 or 20%. If you take the 10% penalty in your IRA, you're paying at your income rate plus another 10%.

A better way to get money out of your IRA would be to do a Roth conversion and wait 5 years. Or do a SEPP 72T plan if you can't wait 5 years.

One of the retirement threads may be a better place for this discussion.

Good point, I will float future retirement questions there to keep this thread less cluttered. Maybe I should've been more specific about the numbers I was playing with. Short-term capital gains tax in California on around $300k would be about 40% tax. Varies by state. So moving to a state with no capital gains tax would be beneficial.

Also worth considering a ladder Roth conversion. After each rollover sits 5 years the converted amount can be pulled penalty free. You do pay tax on the rollover though.
Also SEPP 72(t) are penalty free (but Roth earnings are taxed with it).

Ladder Roth conversion seems more up my ally. There may be a time when I can't make income through TSLA options and will convert some shares from Traditional to Roth when premiums are at their lowest.

I’d long thought the 10% was prohibitively high penalty, but it certainly seems like a decent way to run things. Particularly if you keep your expenses low so your marginal rate stays low. I could almost get away with retiring just pulling from my IRA, but I‘d have to withdraw and pay taxes on health insurance as well which would ruin it all.

True, nice to know you don't have to wait until the age limit set by the IRS to withdraw. I'm paying out-of-pocket for my own health insurance and see that AGI affects the amount of subsidies you get. Something I need to be careful of down the line.

 

[Ogre]

Ladder Roth conversion seems more up my ally. There may be a time when I can't make income through TSLA options and will convert some shares from Traditional to Roth when premiums are at their lowest.

A ladder conversion sounds right up my alley too. I’d never heard of such a thing, but I needed to do this like 3 years ago!!

 

[mongo]

Why 22%? If your tax rate is 35%, you'd pay 35% plus the 10% penalty.

Tax rates are graduated, you only pay the highest rate after the first $X of income. In the two examples, the fiest had 500k of income , then second only had 100k.

@MP3Mike , you also need to apply the marginal tax rate to the 10% penalty, so @ 22% tax, the 10% is really 13% extra that needs withdrawn. 0.13*(1-. 22)=0.1

Overall, to net X requires (X/(1-0.1))/(1-tax_rate)=X/0.9/.78=1.425X, or a withdrawal of 42.5% more than the net amount desired if taxes are 22% (ignoring state and local).

Also, due to standard deductions and the graduated tax rates, the effective tax rate increases more gradually than the maginal rate step makes it seem. Turns into a long formula in Excel though.

 

[MP3Mike]

Why 22%? If your tax rate is 35%, you'd pay 35% plus the 10% penalty.

Because you are only withdrawing/earning $100k, from the early withdrawals, instead of $500k, short-term in your taxable account, so you are in a lower tax bracket.

But really if you have the resources to earn that much in either an IRA or taxable account, why wouldn't you just do it in both? (I know people hate paying taxes, but I would rather have ~60% of a large sum than 100% of nothing.)

 

[kcveins]

Putting my moderator cap on: let's not post too much general stuff (Evergrande, Texas sales ban, Berlin/Austin production) in this thread. This is where option trading/strategies are being discussed. For general subjects we have the main thread.

I, for one, would like to know thoughts about making this a sticky thread since we keep referring to it as 'the other thread' when we are in the main one. Would make it much easier for others to find us (not to say easier for me to read my 3 most common threads together)...

 

[mongo]

Tax rates are graduated, you only pay the highest rate after the first $X of income. In the two examples, the fiest had 500k of income , then second only had 100k.

@MP3Mike , you also need to apply the marginal tax rate to the 10% penalty, so @ 22% tax, the 10% is really 13% extra that needs withdrawn. 0.13*(1-. 22)=0.1

Overall, to net X requires (X/(1-0.1))/(1-tax_rate)=X/0.9/.78=1.425X, or a withdrawal of 42.5% more than the net amount desired if taxes are 22% (ignoring state and local).

Also, due to standard deductions and the graduated tax rates, the effective tax rate increases more gradually than the maginal rate step makes it seem. Turns into a long formula in Excel though.

Edited that post to correct formula.
Effective tax rate is 1-(1/1.425)=30%
I think... it's late...

 

[mongo]

Edited that post to correct formula.
Effective tax rate is 1-(1/1.425)=30%
I think... it's late...

Ugg, yeah @MP3Mike was right on stacking the penalty, my error. Going from post tax to pre tax was a bad way to try to calculate it.

Full amount pre tax is penalized, adding the 10% to the tax rate as a reduction handles that.
If Y is withdrawn :
Y*0.1 =penalty
Y*(rate) = taxes withheld
Net=Y-Y*0.1-Y*rate
=Y*(1-rate-0.1)
=Y*(1-(rate+0.1))
So @22% tax, one pulls out 1/(1-(0.22+0.1))
=1/(.68)=1.47*(desired amount)
Effectively a 32% tax rate.

 

[adiggs]

I too have underwater CCs, 10/29 $835. I have been stubbornly rolling these poor sods since $705! Looks like I’ll be rolling them at least a couple more months out.

This is a good problem to have

Very OT: I made a lot of money today swing trading a ridiculous stock (or so I thought). DWAC. What a world we live in. Welp, I’ll be picking up TSLA with those proceeds.

In this situation I personally would probably keep rolling them as long as I can get a strike improvement every week or two. I'm getting a strike improvement each week, then I'm probably bettering my result when I do take assignment MORE than taking the assignment proactively and being to sell puts.

NOT-ADVICE of course

Wondering if anyone trading in their retirement accounts considered paying the 10% penalty on top of the taxes owed to withdraw their gains early.

Also SEPP 72(t) are penalty free (but Roth earnings are taxed with it).

Definitely a good topic for one of the retirement threads - this is all stuff that I've seen being covered there. The idea of trading in an IRA and then taking out living expenses as needed - this is what I've settled on for me and my family's situation. Something like this will be very specific to each person. There's a combination of what will actually work, along with optimizing the financial outcome.

In my case I have a large enough brokerage that I'm trading in away, earning pretty much all of the living expenses we have. We have an IRA that I'm also trading aggressively in, and using as my "I want a big pile of cash" such as for a down payment on a home. I'll get money out of the IRA for those situations when they arise, and otherwise leave the account to grow for the next several years before we are out of the penalty period.

In short - pay the 10% penalty when needed, so we're not locked into a plan that we don't really want anyway, and can get from the account what we need it to provide.

 

[Right_Said_Fred]

I, for one, would like to know thoughts about making this a sticky thread since we keep referring to it as 'the other thread' when we are in the main one. Would make it much easier for others to find us (not to say easier for me to read my 3 most common threads together)...

I’m not sure if that’s necessary. This thread is so active nowadays that its position is almost always at the top of the regular threads. The Wiki tag also makes it stick out from the crowd.

Moreover, making such an active thread a sticky would put it in direct competition for attention with the general thread, which I’m not sure is something that will go over well with the pure HODL’ers

 

[EV forever]

Yesterday before the ER, I closed out all my 10/22 BPS opened on Monday for about 40-50% profit. This was the second round for 10/22 expiration, since I closed out the ones opened last week on Monday. So overall did well on 10/22s

My original plan had been to open BPSs for 10/29 yesterday, prior to ER, since I expected a huge run-up after ER. Unfortunately, I changed my plan thinking with everyone saying that we were going to see 'sell the news' type of stock movement. I opened about half of the BPS options I wanted at +p695/-p795 @$5with spread of 100 to give some room to adjust in case there was a big drop after the ER. Left aside half of my buying power margin/cash to open more today after the 'sell the news' In the after-hours it appeared like this was a good strategy.

But today turned out to be a pleasant surprise. My overall $TSLA portfolio - stocks, call options, LEAPS are up hugely - so no complaints there! I just wish I had opened up the BPSs yesterday - the premiums were pathetic today, so didn't bother opening anything. But it better to take some time off rather than chase the strikes prices up to get a few extra in premium.

The BPSs that I did open are now at around 50% profit. So my strategy for tomorrow - if we see the run up in SP continue, I will close those out, will be happy with 70% profit. Then just sit on the sidelines till next week. If we see a drop, with reasonable premiums returning, may open the remaining BPSs but with $100 spread to give more flexibility in case things go badly next week. Still not opening any BCSs for next week.

 

[EV forever]

I really need to understand this idea (selling the spreads using the margin from owned shares) better.

The first thing I get - I want to own actual shares for this purpose - not long dated leaps. Which makes sense as well - the shares are the real 'tangible' asset that the broker will rely on to keep itself whole.

The second thing is that if I had $900k in the account then the account would be setup as 1000 shares and some rounding error cash (or a few more shares - whatever).

And then you get as much margin as that would provide. I think 50% is the number I've seen (is it 40% now?) applied to the cash value, would provide $450k worth of margin, with which I would be selling 45x$100 wide spreads each week.

Or wait - I don't want to use all of that margin by a long streak.


So questions - do I have the idea here right?

This is kind of the strategy I am using for my individual brokerage account - albeit it has only been about 2 months with the BPS strategy. Last year and early this year, was using it with naked puts - but used too much margin and overextended myself.

So this time around, I am strictly using at max 50% of margin. So my calculation is exactly how you described it above. For every 1000 shares in the account, Fidelity gives me 40% in margin. I am willing to use up to half of that - so effectively, I am using 20% of the value of my shares as margin to sell the BPS. My goals for weekly income are not high - I want to get a good 'dividend' on my shares - If I can get an overall income of 10% on the value of my shares for the full year, that is plenty.

My initial plan was to sell covered calls on these, but it turns out I am just too attached to them and will always close sold calls early and at a loss to avoid any risk to losing shares. The BPS strategy works better for me. Using margin allows me to keep the shares intact and make some safe income on the side.

And on the final point - how would you be managing an account worth ~$900k and holding just about all of it as shares?

Well, I am one of the HODLers from the main thread. So I hodl shares and use margin that Fidelity allows on their value to play with selling options. I am a firm believer in holding all three types of investments in TSLA - shares, calls/LEAPS and the sold options. On days like today, it is nice to wake up and find that your portfolio is up in value by several fold of your yearly income. Just following the selling options strategy is not for me - I need all three.

And as @BornToFly pointed out, it is important to calculate margin requirements if there is a black swan even and the SP goes down. Based on the Fidelity tool to calculate margin requirements, with the 20% value in margin I am using, there should be no house call till TSLA drops below 550. I cannot understand the SMA margin, but that doesn't seem to be a problem in my brokerage account. Its a different story in the IRAs.

Yes, that is the right idea. That's what I do. I was a buy and hold kind of person and then I found this thread and didnt have a lot of cash but I had a few shares. I wanted to get into the BPS/IC strategy and so I upgraded my account to Options level 3 and now trade with margin from my owned shares.

I think @Yoona did some math like 15-20 pages ago that explained that after holding 2,000 shares you don't get enough margin and it makes more sense to have cash but maybe that was just their brokerage. (Not that I have 2000 shares yet)

Edit: I think it was this post: Wiki - Selling TSLA Options - Be the House

I checked out @Yoona post about the 2000 shares giving you maximum margin. This would be true if there is an upper limit or cap on margin from your brokerage. With Fidelity, I have not seen an upper cap of $750K for margin on my account, so I think it is OK to be holding more than 2000 shares. You simply get more margin based on the value. However, Fidelity does not give any margin for the value in LEAPS or calls.

 

[Tslynk67]

I see quite a lot of people have joined the Slack channel, is it the idea to move the more sensitive discussions over there - like trade/profit/loss/portfolio specifics, then keep this thread more for experience/advice?

I have to admit I find the Slack interface difficult to deal with, things seem all over the place. Maybe I'm just old

 

[jeewee3000]

Huh?

The 400 Puts are cheap, costing around $0.10. So for your 5) puts you got $2,600 but tied up $405k in cash. You could sell 6) 400/810 BPS to bring in $3,060 while only tying up $246k of your cash. (One extra contract, 18% more return, 40% less cash at risk.)

Or you could sell 10) 400/810 BPS and bring in $5,100 while only tying up an extra $5k in cash. So essentially doubling your income with the same risk.

Many brokers reduce margin requirements gradually for strikes far far OTM. Therefore say a $400 wide spread (-800p/+400p) would lock the same amount of margin as a naked 800 short put. The algorithm calculating the margin pretty much discards margin requirements for strikes that have 0.001% chance of ever getting ITM.

So if @Right_Said_Fred 's broker software is similar to mine a few 100 kilomters away, selling puts or wide spreads takes up the same margin requirement. In other words: you can't simply sell twice as many $400 wide BPSes as naked $800 puts.

Therefore I understand where Fred is coming from. And he also has a point regarding Black Swan protection.

 

[jeewee3000]

Wait we have a slack channel? I haven’t been active in this thread for a week or so. Thanks

Yeah I feel old too. Don't understand what goes where on there. And I get a gazillion e-mails from that site since I've logged on there.

EDIT: @Lycanthrope : like you I'd prefer to keep discussion centered here. Way easier to identify who is who, and to keep track what you've already read or haven't, etc.

 

[Right_Said_Fred]

It would be sad to see the option selling discussion move away from TMC. I personally like to read about people's trades and experiences. It's a important learning tool. Getting feedback is also very helpful. And I cannot imagine that there are negative impacts by disclosing positions and trades. We're just small fish in a big pond and I cannot see market makers taking the time to find out what price someone is trying to get for 50 spreads. If that fear does exist you could limit yourself to telegraphing trades after the fact.

 

[MABMAB]

I see quite a lot of people have joined the Slack channel, is it the idea to move the more sensitive discussions over there - like trade/profit/loss/portfolio specifics, then keep this thread more for experience/advice?

I have to admit I find the Slack interface difficult to deal with, things seem all over the place. Maybe I'm just old

Link?

 

[jeewee3000]

It would be sad to see the option selling discussion move away from TMC. I personally like to read about people's trades and experiences. It's a important learning tool. Getting feedback is also very helpful. And I cannot imagine that there are negative impacts by disclosing positions and trades. We're just small fish in a big pond and I cannot see market makers taking the time to find out what price someone is trying to get for 50 spreads. If that fears does exist you could limit yourself to telegraphing trades after the fact.

Fully agree.

The only thing I personally don't share is how many contracts I write/buy, for multiple reasons. First of all it's not important, we're all just drops in the ocean so 1x , 10x, 100x or 1000x contracts make little difference (OK, 1000 might lol). Second I'm just careful with online privacy in general. Not for other TMC members but mainly others that might look me up online (government, work-related people, etc). No one needs to know I hold TSLA and its derivatives. That's between us .

 

[charlesgres]

If still too much value in the long leg, why not go to a 150 or 200 point spread? Or even a super wide 400 point spread would allow you to sell twice as many contracts as the naked puts for almost the same premium.

In my case my broker calculates $15k margin for one naked-put contract, so as if it was a $150-wide spread, which is way cheaper than a $400-wide spread..
Yet with a BPS the margin requirement stays fixed, whereas I would imagine my broker might decide to increase margin requirement for a naked put in case the SP dives..
So I would consider naked puts way more risky, unless you only sell as many as your cash covers when exercised.. Which is way less contracts than you can do BPS's, so a lot less profitable..

 

[traxila]

Please don’t all leave. I am just starting to figure this stuff out.

Sleep a lot better than the naked options I have been playing in both directions past few years. Not that I am unhappy with the results .

Really should have taken more time to figure this stuff out. So busy all the time…. Now it is like I discovered a secret club of money printers….

No complaints! Thanks to all here and all the best!