Wiki Selling TSLA Options - Be the House

[adiggs]

In the main thread I read a post by @TheTalkingMule suggesting that we might experience a bit of a sell off on Friday / Monday, and then a strong rebound Tuesday. This would be my "next time" moment... IV is creeping up slowly too...

I closed my this-week 550 calls this morning. I'm thinking in terms of a sell off on Friday or Monday as well, and am mentally working out what calls I buy with those profits at that time. I could be wrong about the sell off of course.

If I'm right, then I'm pretty much certain to use any dip to buy a new call position - probably in the 12/18 timeframe (mostly because my own collection of strikes and expirations seems a bit thin in that window ). And if I'm wrong, then I might still decide that the inclusion window is still open and open a new position anyway.

I might also decide that I really do have enough exposure to this opportunity, and just put this down to the first inclusion profits I'll salt away.


When I was looking at IV this morning, it was still looking low to me for what I think the current situation warrants. What I see in the current situation warrants more like a 100 or 120 IV. I keep seeing more like low 80s IV, which is admittedly higher than the high 60s/70s I was seeing a week ago, but still I think too low for the situation. And thus, between the IV and potential share increase I see, I keep seeing opportunities to add onto my inclusion trade.

 

[FS_FRA]

I kept an equal amount of dry powder to my 15JAN'21 720c buy for just such an event like a mid-inclusion-rally-dip. I like the idea of late DEC calls. But depending on the size of the dip, might also go for a LEAP OTM. It'll be a gut feeling kinda thing...

 

[corduroy]

I was thinking of ways to play the inclusion with an aggressive bullish cash secured put, instead of calls. I realize if things pan out like many of us are predicting, buying calls would be more profitable - so I recognize that opportunity cost. But I like the risk/reward of puts.

My thinking was to sell a 12/31 $550 put (which was ATM when I was researching this in the morning). I consider this aggressive because normally I would sell puts with an 80-90% probability of expiring OTM, and this trade was at 49%. The premium was $5,200 if held to expiration for annualized return of 150%, not too shabby. If I got assigned, the cost basis on my shares would be $498.

I didn't place this order in time due to an unexpected meeting and my day job getting in the way, but I am thinking there may be another chance on Friday to hit this same entry point (even with 2 days lost theta).

I'd be curious to hear other's opinions on using puts bullish-ly during events like this?

 

[adiggs]

I was thinking of ways to play the inclusion with an aggressive bullish cash secured put, instead of calls. I realize if things pan out like many of us are predicting, buying calls would be more profitable - so I recognize that opportunity cost. But I like the risk/reward of puts.

My thinking was to sell a 12/31 $550 put (which was ATM when I was researching this in the morning). I consider this aggressive because normally I would sell puts with an 80-90% probability of expiring OTM, and this trade was at 49%. The premium was $5,200 if held to expiration for annualized return of 150%, not too shabby. If I got assigned, the cost basis on my shares would be $498.

I didn't place this order in time due to an unexpected meeting and my day job getting in the way, but I am thinking there may be another chance on Friday to hit this same entry point (even with 2 days lost theta).

I'd be curious to hear other's opinions on using puts bullish-ly during events like this?

I can't speak to this specific situation / setup, but I've done something similar. I sold the Sep '21 600 put back in Sep '20. Shares were around $400 back then? Maybe higher - but the point was that at that time, I figured 600+ by Sept '21 would be easy mode, and I wanted to collect as much cash up front for that position as I could (thus I went ITM for that put sale). Ask me what that looks like in 9 months . One of my objectives was to cut back to much less frequent review and management of these positions, and that 1 year put has been completely successful in that regard - I really don't care what happens relative to that put until say July of next year - there will be too much time value before then to consider an early close, and I monitor my positions way more often than 2x/year

From a cash flow point of view, it's been great. Something like a $130 premium, or $10/month, and I've been able to use that cash to write more puts or (right now) buy calls. As it's cash secured, I have $60k sequestered for each of those contracts should I be assigned some day. In the meantime, I get cash now (good cash flow), and I can (to some degree) pick the year for when the taxes come due (here - I got cash this year, but any taxes won't happen until early close / expiration in '21).

I think of this as locking in a particularly desirable selling point in the share price / IV cycle, and collecting that premium over some longer window where the entries aren't as desirable.


The position you're looking at is shorter term, but similar. Collect as much premium as you can up front, so that as the shares rise in price, that premium will melt away as aggressively as possible.

Working against you right now is that IV looks like it is still growing. Assuming that is true / continues, then those Vega changes will offset the Delta changes to some degree -- maybe completely depending on just how much the IV and share price changes. That's happening to me as well and I'm still selling puts anyway - I don't expect the IV increase to be enough to meaningfully offset the delta related changes.

 

[ammulder]

From a cash flow point of view, it's been great. Something like a $130 premium, or $10/month, and I've been able to use that cash to write more puts or (right now) buy calls. As it's cash secured, I have $60k sequestered for each of those contracts should I be assigned some day.

This is where you lost me. Wouldn't you have done better buying shares or calls with the $60K instead of holding it in reserve for each contract? I mean, $60K of shares bought around $400 would have earned $24K or so by now. I can see puts doing better if the stock traded sideways for a long time, but even ignoring S&P that seems unlikely over the course of a year with all the delivery growth and factory expansion going on right now.

(FWIW I thought the recommended way to sell puts was to cover them with unused margin not actual cash.)

 

[Criscmt]

I closed my this-week 550 calls this morning. I'm thinking in terms of a sell off on Friday or Monday as well, and am mentally working out what calls I buy with those profits at that time. I could be wrong about the sell off of course.

If I'm right, then I'm pretty much certain to use any dip to buy a new call position - probably in the 12/18 timeframe (mostly because my own collection of strikes and expirations seems a bit thin in that window ). And if I'm wrong, then I might still decide that the inclusion window is still open and open a new position anyway.

I might also decide that I really do have enough exposure to this opportunity, and just put this down to the first inclusion profits I'll salt away.


When I was looking at IV this morning, it was still looking low to me for what I think the current situation warrants. What I see in the current situation warrants more like a 100 or 120 IV. I keep seeing more like low 80s IV, which is admittedly higher than the high 60s/70s I was seeing a week ago, but still I think too low for the situation. And thus, between the IV and potential share increase I see, I keep seeing opportunities to add onto my inclusion trade.

Do you happen to have more information to share on expected IV front, like comparison to the time it took to grow to peaks post split announcement. Could it be different, be on the lower side than in August?
When do you expect the IV to peak?

 

[Chenkers]

Do you happen to have more information to share on expected IV front, like comparison to the time it took to grow to peaks post split announcement. Could it be different, be on the lower side than in August?
When do you expect the IV to peak?

Best guide I've found is to compare historical SP changes with IV changes for recent events: Market Chameleon
You can see that IV generally peaks a day or two after the share price and based on similar periods it could start to take off soon. But the rate of increase in IV will be related to how extreme the up/down volatility will be in coming weks. A steady climb into inclusion wouldn't increase IV as much as some more violent swings.

 

[adiggs]

Do you happen to have more information to share on expected IV front, like comparison to the time it took to grow to peaks post split announcement. Could it be different, be on the lower side than in August?
When do you expect the IV to peak?

I don't unfortunately, more of a feel thing for me. What I see in the market is bad, bad news for call sellers right now. If call options were priced correctly, then I think they would be a lot more expensive than they are right now. Which is one reason I keep finding new excuses to buy more

That feel thing is probably a big part of why I don't buy options very often (this month might be my first and last venture into doing this). And that makes me a good internet stranger to not listen to on this topic


The link from @Chenkers puts some of this feel of mine into math.

 

[adiggs]

This is where you lost me. Wouldn't you have done better buying shares or calls with the $60K instead of holding it in reserve for each contract? I mean, $60K of shares bought around $400 would have earned $24K or so by now. I can see puts doing better if the stock traded sideways for a long time, but even ignoring S&P that seems unlikely over the course of a year with all the delivery growth and factory expansion going on right now.

(FWIW I thought the recommended way to sell puts was to cover them with unused margin not actual cash.)

Your observation is absolutely spot on - the cash secured put has far lower profit potential in general, and right now in particular. There are some markets where they perform particularly well, and this isn't one of them.

The reason for this trade goes back to the assumptions and other context that is specific to my situation that I talked about on page 1. The key idea is that for me, I have enough shares and am / have shifted from a growth focus (in which I WOULD have bought more shares), to a growth plus income perspective. For me, the risk is shifting away from missing out on future growth (of which I expect a lot, and own lots of shares to capture that with), to the risk of no growth that doesn't yield income for living expenses.

The put sales generate cash for living on, whether the shares go up or not.


For a cash secured put, margin isn't an acceptable source of backing. It does make these very capital intensive.

 

[PokerFJÆS]

Now that the value of call options are ballooning ahead of SP inclusion and this might go on for a while, what happens if this ends up bankrupting those who wrote the calls? Could that compromise the value of calls we hold or is that not a real risk?

 

[Tachyon6]

Now that the value of call options are ballooning ahead of SP inclusion and this might go on for a while, what happens if this ends up bankrupting those who wrote the calls? Could that compromise the value of calls we hold or is that not a real risk?

options writers are usually hedged, either by owning shares or with a long call option.
if the short call strike is breached, shares get called away, or the long leg can be exercised for a profit.

 

[corduroy]

This is where you lost me. Wouldn't you have done better buying shares or calls with the $60K instead of holding it in reserve for each contract? I mean, $60K of shares bought around $400 would have earned $24K or so by now. I can see puts doing better if the stock traded sideways for a long time, but even ignoring S&P that seems unlikely over the course of a year with all the delivery growth and factory expansion going on right now.

(FWIW I thought the recommended way to sell puts was to cover them with unused margin not actual cash.)

Your observation is absolutely spot on - the cash secured put has far lower profit potential in general, and right now in particular. There are some markets where they perform particularly well, and this isn't one of them.

The reason for this trade goes back to the assumptions and other context that is specific to my situation that I talked about on page 1. The key idea is that for me, I have enough shares and am / have shifted from a growth focus (in which I WOULD have bought more shares), to a growth plus income perspective. For me, the risk is shifting away from missing out on future growth (of which I expect a lot, and own lots of shares to capture that with), to the risk of no growth that doesn't yield income for living expenses.

The put sales generate cash for living on, whether the shares go up or not.

For a cash secured put, margin isn't an acceptable source of backing. It does make these very capital intensive.

For a little more context on my motivation:

Everyone has their own comfort level with risk. For me, I am not comfortable going all in with 100% with my cash reserves, so I'm allocating a particular pool of cash to use as collateral for selling puts.

Therefore my comparison isn't what that $50k could return buying calls or stock, but rather comparing a 150% return selling puts vs 0.8% that it was getting in a money market last year. Framed that way, it's a good decision for me.

 

[EnzoXYZ]

What is wrong with this logic:
I’m nearly out of cash but do have margin. Never like to go into margin but this time is different. Would like to stay under 1/3 of margin. Trying to think of a way to capitalize the above criteria with option play.
I buy 1000 shares of TSLA on margin.
Open to sell calls weekly Cover Calls on the 1000 shares I just bought. Very close to in the money for high premiums and chance to get called away. Repeat if stocks don’t get called away.

 

[ammulder]

Everyone has their own comfort level with risk. For me, I am not comfortable going all in with 100% with my cash reserves, so I'm allocating a particular pool of cash to use as collateral for selling puts.

Therefore my comparison isn't what that $50k could return buying calls or stock, but rather comparing a 150% return selling puts vs 0.8% that it was getting in a money market last year. Framed that way, it's a good decision for me.

Dang, let me just say that a 150% return selling puts is quite impressive! Somehow I was underestimating the proceeds of that strategy.

And, I definitely don't want to suggest anyone else is "mistaken" -- it's surely true that everyone's situations and decision are unique. I'm more trying to figure out whether the strategies presented here apply to me.

I feel like if I wanted to be conservative, cash-secured puts don't seem that much safer than shares. I assume there are two points to being conservative -- TSLA might crash for some reason and I don't want that to be catastrophic, and also I might have a sudden need for cash for some reason -- unexpected medical bills or disaster striking my primary residence or whatever.

OK, so... let's say I went with cash-secured puts and TSLA suddenly crashed. Then I assume the puts would execute and all that cash would disappear in order to inadvertently buy shares that are now worthless. So I wouldn't have avoided disaster due to a TSLA crash, and I also wouldn't have that cash buffer against sudden need any more.

On the other hand, if I had cash-secured puts and I had a sudden need for cash, I guess I'd have to buy back the puts in order to release the remainder of the cash reserves. I assume that's no quicker or easier than selling regular shares if I had bought shares with the money instead. In either case, I could get caught needing to buy puts/sell shares at a disadvantageous price due to the non-flexible timing, and I am guessing (but am not sure) that either way there could be a delay of a few days for the transaction to clear before the cash is available.

For me, if I felt conservative, I'd buy ARKW or FAANG or something. I know -- more stocks, not really conservative. But at least that money wouldn't be tied up in TSLA, just in case Elon has a heart attack or whatever. But really, I feel like if TSLA plummeted, it's hard to imagine a situation where I couldn't cash out before it lost more than 3/4 of its value... leaving me still ahead of what I put in (thanks to this amazing year of gains).

Though, part of *my* unique situation is that I have a house and a long-running 401K that I can't invest in TSLA in any meaningful way (at least, until such a time as I leave my job and can roll it over to an IRA). So I'm really not risking total loss even by putting all the cash I can scrap together into TSLA.

Finally, I feel like the third reason to be conservative is in case TSLA could be expected to trade sideways for a year or more. In that case, selling puts (or investing in something else) would potentially come out way ahead of TSLA calls or shares. It's just that with all the expected factory/delivery growth over the next couple years, and analysts perpetually underestimating deliveries, I don't see a long period of trading sideways as very likely. (That could always change, though.)

 

[bxr140]

But I like the risk/reward of puts.

I'd be curious to hear other's opinions on using puts bullish-ly during events like this?

I’ll be a little more forward with this response: the risk/reward of selling puts is VERY unfavorable.

Selling ITM puts is a terrible idea. If you have conviction selling options is just about the worst thing you can do, and an ITM put takes that to the extreme because 1) ∆ decreases as underlying moves in your direction and 2) theta decreases away from the money so if price DOES'T move, you're not making much on time value. , and 3) price movements typically result in higher volatility, so the contract value moves slower and slower as underlying goes favorable.

Selling options are non-directional positions and are what you do when you run out of conviction. Unless you're a foolish trader, up until the point where you run out of conviction, buy buy buy.

I realize the point of this whole thread is selling options for income, but folks need to understand that theta is the least influential element of an option and thus is least effective when things go the wrong way. The entire idea of selling for easy money income is, to be quite blunt, a farce. It is significantly easier to make in one weeks long (and possibly days long) trade purchasing options than what one can return selling options for a year, WITH SIGNIFICANTLY LESS RISK and SIGNIFICANTLY LESS CAPITAL.

That’s not to say selling options [as the primary leg of a position] is a very bad thing, but its a position that has a time and a place, just like every other position one might take as time moves on.

 

[bxr140]

Dang, let me just say that a 150% return selling puts is quite impressive! Somehow I was underestimating the proceeds of that strategy.

Selling puts at 150% return is equivalent to perpetual motion. It doesn't exist.

I feel like if I wanted to be conservative, cash-secured puts don't seem that much safer than shares.

Uggh. CASH SECURED PUTS ARE NOT SAFER THAN SHARES. Puts have a terrible risk/reward ratio and no good outs.

For the record, I am not yelling at you because I want to pick on you. I'm trying to be more overt with my statements here, as it is clear that a significant number of folks here don't seem to actually understand how options work and how to properly assess risk/reward, and their statements to the contrary are doing a significant disservice to folks like you who are just here looking to expand your knowledge base.

OK, so... let's say I went with cash-secured puts and TSLA suddenly crashed. Then I assume the puts would execute and all that cash would disappear in order to inadvertently buy shares that are now worthless.

Yes, if TSLA crashes and you have cash secured puts, your account balance will implode and you will have a single recovery strategy of hoping real hard that price recovers.

Though, part of *my* unique situation is that I have a house and a long-running 401K that I can't invest in TSLA in any meaningful way (at least, until such a time as I leave my job and can roll it over to an IRA).

Why can't you invest in TSLA in your 401k? Who provides your 401k? Maybe there's outliers but all the big ones allow you to move your assets to a self-directed account within your 401k where you can trade on the open market. Sure you can't trade options, but that's ok.

FWIW, at times I've been near all-in on TSLA in my 401k (which has since rolled to an IRA) and I know folks that are currently all-in on TSLA in their 401k.

(I don't offer that as a strategy, just as evidence that it can be a thing.)

 

[ammulder]

Why can't you invest in TSLA in your 401k? Who provides your 401k? Maybe there's outliers but all the big ones allow you to move your assets to a self-directed account within your 401k where you can trade on the open market. Sure you can't trade options, but that's ok.

I access my 401k through ADP. I'm not sure whether they administer the plan or are just a front end for someone else. I haven't found any indication through the screens I have access to that there's any option other than the selection of 20 or so funds I'm offered, but I guess I ought to ask more directly.

 

[bxr140]

I access my 401k through ADP. I'm not sure whether they administer the plan or are just a front end for someone else. I haven't found any indication through the screens I have access to that there's any option other than the selection of 20 or so funds I'm offered, but I guess I ought to ask more directly.

I’ve never used ADP for 401k (they were the payroll portal at my old company for a while) but there are a few Googs hits that suggest they have a self directed brokerage option in their 401k plan.

Might be worth hitting up their chat or, worst case, calling them.

 

[redan]

Why can't you invest in TSLA in your 401k? Who provides your 401k? Maybe there's outliers but all the big ones allow you to move your assets to a self-directed account within your 401k where you can trade on the open market.

It's not a service provider issue, it's a plan sponsor issue. A lot of employers/plan sponsors take a paternalistic approach and limit the investment options to pre-selected mutual funds. Less risk of uneducated plan participants making the wrong call betting the farm on individual stocks (other than TSLA!). I'm limited to pre-selected mutual funds in my employer-sponsored retirement plans, but that just means I go all-in on TSLA outside of the plan. The retirement plan is my diversification.

 

[Stretch2727]

I’ve never used ADP for 401k (they were the payroll portal at my old company for a while) but there are a few Googs hits that suggest they have a self directed brokerage option in their 401k plan.

Might be worth hitting up their chat or, worst case, calling them.

Offering a way to buy individual stocks is up to the plan sponsor (your employer) if the administrator of the plan offers this option. This is all laid out in a plan document by the plan sponsor which unfortunately is not easily changed. You can check with the administrator, if it is not offered you need to go back to HR in your company.