Wiki Selling TSLA Options - Be the House

[ammulder]

I don't know the answers but I think these are exactly the right questions to be asking and seeking your answers to. These are the questions that transition this activity into something you can depend on.

Hmm... focusing on put spreads I'm wondering, what if I set my margin fraction so with unused margin I could "pull the ripcord" and buy back all short legs at, say, double their current price with margin as it would be if the stock price was $75 lower. Or maybe triple and $100 lower. Something like that where I could be pretty confident of getting out of a position that's turning bad.

Unfortunately this isn't that easy to capture in a single calculation, though it should be fine in a spreadsheet.

But it does highlight the leverage dangers of e.g. shrinking $100 spreads to $50 spreads in order to open more $50 spreads -- because that doubles the number of short legs and makes the ripcord a lot more expensive. That expansion in total # of positions definitely starts to look like something that should only be done during really positive stretches. Last week I did well with that, but now I'm thinking I better see how the week opens before trying it again.

Finally, on a side note, I've been tracking my margin and the "SMA" it's based on, and I think I've figured out that (at E*Trade) today's SMA is simply half my total share value as of yesterday's close. I've not been able to get it to match exactly for a lot of days in a row, but it's been within half a percent or less. If that's correct, I don't know why they can't be bothered to just say so, instead of only saying "today's SMA is based on yesterday's SMA altered by x, y, and z". That's the value I'd use to calculate the decrease in usable margin as the stock price goes down, since as far as I can tell the E*Trade margin calculator only lets you see the effect of proposed trades, not the effect of changing share price of existing holdings.

Edit: and SMA updates once a day, at some point after close.

 

[MaxPain]

I have 4x 11/26 1075CCs that were a roll. These are in my 401k so deciding what to do. Several options I can take similar to what others have posted. Here is what I'm considering.

1) Buy them back ($40k loss)
2) Roll roll roll and hope SP stabilizes
3) Hedge a continued run by buying 4x LEAPs

Right now I'm considering #3 to buy 4x LEAPs to hedge against a continued run up and continue rolling the CCs. I won't be able to buy the equivalent 400 delta with my cash available but I'm liking this approach. If things work out in my favor I could end up keeping my shares and also having the additional 4x LEAPs.

 

[adiggs]

I think we are already in a bit of euphoria right now lol. Ok, maybe not the market in general, but Tesla for sure. Everybody in the main investor thread is celebrating. Twitter people are saying TSLA will go to $2,500 in 6 months. WSB are buying calls. Even CNBC was pumping us. I guess I am just the type of player that likes to play in a hostile away game more than a cheering home game lol.

When the euphoria becomes too strong and too widespread, I consider that (at least historically) to be a contrarian indicator. The more that people are prepositions for a big rise, the less and less buyers there are in the market to keep pushing the share price higher. If you'd like - the buyers have already bought and now they're ready to take advantage of teh big price rise.

Makes me even more concerned and plan more carefully for a big drop (where some of those buyers find themselves OTM / losing money, and getting worse, so they join in the general selling frenzy, accelerating that drop. Sort of the reverse of what we're getting right now.

 

[samppa]

I've been trying to brainstorm all of the ways to deal with my problem BCSs next week. I wanted to get everything written down in one place mainly to help me organize my thoughts, perhaps this might help others in the same boat. Here are all the possibilities (good, bad and ugly) that I could think of:

#1: Close whole position for loss (before max loss)
#2: The ripcord - close the short call for a loss, let the long call run. (Possibly end up better than #1 if stock continues up, worse if it goes down)
#3: Roll/convert the short call out to an ITM short put, keep the long call. Both make money if stock goes up. (Both lose if it goes down)
#4: Convert to debit spread (More loss initially, better if SP rises fast)
#5: Split roll - half the spread, double the contracts - more time and strike improvement (hoping for a pullback in SP)
#6: Keep the spread open, sell the long call at what you think is top (for profit). At that point have a naked ITM call to manage (presumably easier to roll and manage than spread, but giving up defined risk)
#7 Convert to temporary inverse diagonal, then naked call? Roll short call for credit/strike improvement next week, keep the current long call open to run. Sell long call (for profit), then continue to manage ITM short call.
#8 Roll spread for debit to buy more time.
#9 Do nothing and wait, possibly hit max loss or no loss.

Which strategies have I missed and/or am wrong about?

If we have a "gamma squeeze" Monday, 2-4 could do well and resolve the positions quickly. 5-7 buy more time and could eventually end up with no losses if SP comes back to earth.

Assuming we do rise more and come back to earth, #7 is interesting to me, but I need to think on that more. A lot depends on how we are looking in the premarket. If I am feeling bold I might try #2, but #1 is definitely on the table.

I haven't really followed so I'm not sure how deep itm your bull call spread is.. but one possible strategy is a flip-roll to itm bull put spread.

 

[adiggs]

Thanks @adiggs.
1) Will Fidelity give me Margin from Leaps, like they do with shares, to sell separate BPS in addition to selling the lcc?

2) I'm still a little confused about what happens if the lcc is in the money and the owner exercises the contract early (because the SP is at 1300). Using the 10 contract example I used earlier (Buying 10 600 strike LEAPS and selling 10 1200 strike lcc). Since I'm buying the "short leg" (the 600 strike LEAP) in the beginning, and selling the "long leg" (the 1200 lcc), I don't actually need to have the cash sitting in my account ($600k for ten contracts) to bridge the difference of the two strikes, correct? Instead Fidelity will immediately sell the shares I called up by exercising my LEAPS (which I don't actually have the money for), and I will be left with $600,000 in my account?

Might have already been answered (I'm still catching up).
1) No margin from the leaps. The leverage in that position is the leap itself, rather than the potential to borrow that the shares provide.
2) On an early assignment it might be time to party (the owner of the call just gave you all of the time value - this is actual free money, and why early exercise is so rare)! But the mechanics - your broker will sell 1000 shares (that you don't own) to cover those 10 contracts that were exercised.

So here's what we get:
- Whatever option premium you have in those $1200 contracts is cleared. Those options now have a premium of $0, which as the seller is awesome. You keep whatever you collected up front.
- You sell 1000 shares at $1200/share (the broker does this on your behalf, such nice people) to satisfy your commitment to have your shares called away. That is a STO 1000 shares and nets you $1.2M.
- But you also have a liability now of -1000 shares at $1300/share or $1.3M (a net loss of $100k, but it isn't yet realized as you haven't paid for the $1300/share shares.
- You also own 10x600 strike calls. Those will be worth ~$700 each. We'll pretend that the time value that deep ITM is effectively 0. You can STC those 10 contracts and acquire $700/share or $700k (the difference between the share price and the strike).
- Take the $1.2M, add the $700k, and subtract the $1.3M when you BTC those short shares, and you have a realized P/L of $600k on the assignment.

The only outstanding item is what you paid for those $600 strike calls. If you paid $400 for those up front then your actual P/L of the whole position is more like $200k ($600k from the assignment minus $400k to buy the original 10x600 strike calls).


In your terminology you've got the long and short backwards. You purchased the 600 strike call up front making it a long call, and are selling or shorting the 1200 call. So the 600 call is long and the 1200 call is short.

EDIT: adding to the FAQ

 

[adiggs]

I've been trying to brainstorm all of the ways to deal with my problem BCSs next week. I wanted to get everything written down in one place mainly to help me organize my thoughts, perhaps this might help others in the same boat. Here are all the possibilities (good, bad and ugly) that I could think of:

#1: Close whole position for loss (before max loss)
#2: The ripcord - close the short call for a loss, let the long call run. (Possibly end up better than #1 if stock continues up, worse if it goes down)
#3: Roll/convert the short call out to an ITM short put, keep the long call. Both make money if stock goes up. (Both lose if it goes down)
#4: Convert to debit spread (More loss initially, better if SP rises fast)
#5: Split roll - half the spread, double the contracts - more time and strike improvement (hoping for a pullback in SP)
#6: Keep the spread open, sell the long call at what you think is top (for profit). At that point have a naked ITM call to manage (presumably easier to roll and manage than spread, but giving up defined risk)
#7 Convert to temporary inverse diagonal, then naked call? Roll short call for credit/strike improvement next week, keep the current long call open to run. Sell long call (for profit), then continue to manage ITM short call.
#8 Roll spread for debit to buy more time.
#9 Do nothing and wait, possibly hit max loss or no loss.

Which strategies have I missed and/or am wrong about?

If we have a "gamma squeeze" Monday, 2-4 could do well and resolve the positions quickly. 5-7 buy more time and could eventually end up with no losses if SP comes back to earth.

Assuming we do rise more and come back to earth, #7 is interesting to me, but I need to think on that more. A lot depends on how we are looking in the premarket. If I am feeling bold I might try #2, but #1 is definitely on the table.

Which is best - I have no opinion on. Direction and magnitude of the share price is the critical element to all of these.

I just want to point out that the split roll (flip / split-flip roll) and some of the others represent an increase in leverage. The objective in increasing leverage would be for a big strike improvement as well as an increase in the rate of improvement when you're right about the share price move. In short you earn back the loss more quickly.

The downside is that you're adding leverage to a badly performing position, increasing your rate of loss, and helping the position arrive at max loss more quickly.

Just something to keep in mind. Good luck!

 

[adiggs]

I'm intrigued about #3. I don't see an option to flip the call to a put in one 'ticket' on Fidelity for me but could buy to close/sell to open the same value manually. At least then i'd feel like I was aligned directionally with my long position and the rampant bullish sentiment. I also feel better about rolling down and out of short puts than up and out for cc's. Might try this for one or two of my DITM CC's and try a combination of #5 #8 #9 for the others.

Would this be considered a flip split? Or am I missing the split part?

I've executed a flip and a split-flip roll on Fidelity. You'll need the Custom trade ticket to perform this gyration - there aren't any trade tickets with this logic baked in.

A flip roll is converting a put contract into a call contract (or vice versa).

A split roll is converting 1 put contract into more put contracts. A common example is converting a put spread that is $100 wide into 2 put spreads that are $50 wide (in order to maintain the same amount of $ at risk).

A split-flip combines the two. One might convert a single put spread into 2 call spreads of 1/2 the size. Using the example right above - a single $100 wide put spread is converted into 2 $50 wide call spreads.


All of these would use the Custom ticket. One of the problems I've encountered is that when I go to 3 or 4 legs on the ticket, it gets harder and harder to get a fill. The default ticket price is the worst of the bid/ask on all 3 legs, and that can add up fast. The bid/ask slippage can be significant - probably enough to incorporate into your analysis.

 

[MXWing]

Wiki has your answer: Wiki - Options & "the Wheel" Glossary and FAQ

My brain has less grooves and ridges than most of you here so I was confused with

BPS and BCS.

Checking my Dr. Seuss book as a reference, doesn't a Bear and a Bull start with the letter B?

Put spread and call spread is intuitive with no other possibilities.

 

[mongo]

I have 4x 11/26 1075CCs that were a roll. These are in my 401k so deciding what to do. Several options I can take similar to what others have posted. Here is what I'm considering.

1) Buy them back ($40k loss)
2) Roll roll roll and hope SP stabilizes
3) Hedge a continued run by buying 4x LEAPs

Right now I'm considering #3 to buy 4x LEAPs to hedge against a continued run up and continue rolling the CCs. I won't be able to buy the equivalent 400 delta with my cash available but I'm liking this approach. If things work out in my favor I could end up keeping my shares and also having the additional 4x LEAPs.

Regarding 1) the loss already happened and your balance should reflect that . What comes next is a decision to buy back the calls which decreases cash because you basically end up sell the shares at 1075 and buying them at the current price (plus time value minus original premium).

 

[mongo]

My brain has less grooves and ridges than most of you here so I was confused with

BPS and BCS.

Checking my Dr. Seuss book as a reference, doesn't a Bear and a Bull start with the letter B?

Put spread and call spread is intuitive with no other possibilities.

This thread is all about credit spreads that pay up front (and prefer less stock movement). So bull put and bear credit .

 

[TheTalkingMule]

Which is best - I have no opinion on. Direction and magnitude of the share price is the critical element to all of these.

I just want to point out that the split roll (flip / split-flip roll) and some of the others represent an increase in leverage. The objective in increasing leverage would be for a big strike improvement as well as an increase in the rate of improvement when you're right about the share price move. In short you earn back the loss more quickly.

The downside is that you're adding leverage to a badly performing position, increasing your rate of loss, and helping the position arrive at max loss more quickly.

Just something to keep in mind. Good luck!

Since we have no real way if knowing when this run-up will end, a fundamentally sound case can still be made in either direction, I'm using the opposite of human nature as my guide. MM's probably make more money letting this thing keep rolling.

Options traders and folks with looming margin calls tend to double down and try to avoid loss rather than just limit the hit and start over. The house cares far more about creating pain than they do "holding Tesla back". The most pain lives north of $1200, at least for now, so that's where I think we're going.

 

[Ogre]

Seems like a pullback due to the EV incentives is coming one way or another.

I think we are already in a bit of euphoria right now lol. Ok, maybe not the market in general, but Tesla for sure. Everybody in the main investor thread is celebrating. Twitter people are saying TSLA will go to $2,500 in 6 months. WSB are buying calls. Even CNBC was pumping us. I guess I am just the type of player that likes to play in a hostile away game more than a cheering home game lol.

I have to confess to some FOMO buying myself.

Trying to figure out how to best play this because this whole move has made me realize I want more of my base holdings to include TSLA, but buying at the ATH is never a great investing thesis. In some ways I’m just thinking Buffet’s comment about paying too much money for a good stock is better than getting a bargain on a mediocre one.

I’ve been considering selling “safe” calls agains that position but that almost feels like defeating the point.

 

[bballshinobi]

I don’t think we will see 900 again, however I feel that there is a lot of no mans land between 900 and 1100.

It will be interesting to see how low TSLA corrects this time. My own rule now is to wait for the 2nd correction: both to get shares and options because the IV will be lower.

 

[bballshinobi]

Seems like a pullback due to the EV incentives is coming one way or another.

I have to confess to some FOMO buying myself.

I think EVERYBODY has fomo right now. I remember a few weeks ago I was thinking that I should add more if it comes back to $700. Now I am thinking $850 is a bargain lol...

 

[vwman111]

I've executed a flip and a split-flip roll on Fidelity. You'll need the Custom trade ticket to perform this gyration - there aren't any trade tickets with this logic baked in.

A flip roll is converting a put contract into a call contract (or vice versa).

A split roll is converting 1 put contract into more put contracts. A common example is converting a put spread that is $100 wide into 2 put spreads that are $50 wide (in order to maintain the same amount of $ at risk).

A split-flip combines the two. One might convert a single put spread into 2 call spreads of 1/2 the size. Using the example right above - a single $100 wide put spread is converted into 2 $50 wide call spreads.


All of these would use the Custom ticket. One of the problems I've encountered is that when I go to 3 or 4 legs on the ticket, it gets harder and harder to get a fill. The default ticket price is the worst of the bid/ask on all 3 legs, and that can add up fast. The bid/ask slippage can be significant - probably enough to incorporate into your analysis.

Does anyone have a link to a resource that explains a Flip Roll in greater detail. Outlining execution, risks, margin impact, etc.

TIA

 

[MXWing]

ATH is never a great investing thesis.

It can be.

Buy high, sell HIGHER

I use any rise in net liquidity to keep my margin power high but if I was still wanting to increase my tsla exposure, one can average 1 share purchase per week/month no matter what the price is.

That's why I do with these lotto plays like DOGE, SHIBA, etc.

 

[MXWing]

This thread is all about credit spreads that pay up front (and prefer less stock movement). So bull put and bear credit .

Ahh. You could have just said "Were Theta Gang."

I'm a Theta Gangster myself but clearly should have switched sides and gone bullish vertical spreads. Or better yet, naked longs.

 

[adiggs]

I think EVERYBODY has fomo right now. I remember a few weeks ago I was thinking that I should add more if it comes back to $700. Now I am thinking $850 is a bargain lol...

Or maybe $1k...

 

[adiggs]

Does anyone have a link to a resource that explains a Flip Roll in greater detail. Outlining execution, risks, margin impact, etc.

TIA

I don't have a link unfortunately. Maybe you'll find one for us!

But since I've done a flip roll from DITM puts to DITM calls, where the shares promptly turned around and traded up, up, and away from my DITM calls -- I can tell you that is an obvious risk! I turned a big loss into a bigger loss - probably doubled the loss before I finally just realized it and put it to bed.

Fortunately that was only half of the DITM puts, and the other half resolved down to a ~$0 loss when I did I converted those puts into 4x $200 wide put spreads each. So I guess I'm batting 50/50 on these split, flip, and split-flip rolls.

 

[EV forever]

If SP is above 1250 by Friday, why not roll for credit instead of closing for loss?

Yep, that is a possibility, will decide as we get closer to the date. I just wanted to be out of CCs for now, but maybe in 2 weeks situation may be different. This is $TSLA after all, trends could change in an instant!