Wiki Selling TSLA Options - Be the House

[Right_Said_Fred]

I've been thinking about converting a substantial part of my TSLA shares to cash in order to generate capital by weekly/biweekly OTP BPS selling.

In a perfect world where you could time everything perfectly, you'd make this switch after a huge SP rally, hoping to sell at a local top.

The main consideration is "can you get a safe minimum weekly return that outperforms the stock in the long run?".
In the short term the stock can rally hard and no amount of safe spread selling will net you similar results. On weeks where TSLA is down, even by a large amount but not insanely large, the cash based approach will win out hugely.

After running some numbers, I'd like to present them here in order to get some feedback.

Currently a 2% weekly return seems doable with safe spreads. Safe in my mind is either very wide (+650p/-1050p-) or far OTM (+750p/-900p). Both of these will net me more than 2% return. Combining the safety nets of width and distance OTM is more difficult. After all, once you get too far OTM (below 850 for example) the premiums are basically the same in $ value, even if you go $100 further OTM. So a super safe +500p/-900p will not get you the desired weekly returns to outperform the stock in the long run.

By the way, the reason I have 2% minimum in the back of my mind is because, starting from $1068 SP today this would mean the stock would have to reach over $2900 by end of 2022 in order for the cash route to be less profitable.

At 1% weekly returns HODLING seems safer: the SP only needs to go to around $1800 by year end and that is within the possibilities IMO. ($2900 is also 'possible' but way more unlikely if you ask me).

Also, if you get minimum 2% per week you might go over some other weeks. There are relatively safe spread to be found with 3% weekly returns as well, and if you can get some of these in from time to time (depending on the current position of the SP withing the trading channel) it truly seems difficult for the stock to outperform cash.

Of course, if I were to do this, I'd have very strict rules in order to preserve capital, way stricter than I'm currently trading options. To scratch the "trading itch" I think I would use (for example) 2/3 of my cash for safe income generation and the other 1/3 could act as a seperate options trading (virtual) account like I'm doing now. (Right now my balance is: 3/4 TSLA HODL , 1/4 cash which I grow with options).

Another benefit of going cash is recession. IF there were a recession and the markets all give back 30%, I could buy back more TSLA than I sold. Of course this is A) timing the market which I don't believe anyone is capable of and B) a non-argument since the opposite can happen as well: a 2 year bull market after you convert to cash in which your stock returns would've been higher than "safe" options selling. So this argument seems to only matter if you convert TSLA to cash on ATH.

Pardon my ramblings, I'm just sharing my internal reasoning. I've been dipping my toes into this thread and option selling since May 2021 and checking my returns (+5% per week on average) I notice they are much higher than I expect the stock to gain (in the long term, short term anything can happen for example if FSD were to release or something). I am aware of the fact that this is only true for TSLA option selling. I've dipped my toes into selling options for other underlying, but these returns are abysmal compared to TSLA. Volatility and volume are king.

I started out very small in May (only $15k cash or so). After some learning I (on purpose) let a cc expire and I've been using that cash for option selling also.

Now I'm wondering if I should convert some more shares but I keep thinking there must be a catch. As we always say: If the risk is unclear, it's because you didn't look hard enough.

Therefore I would appreciate some feedback regarding my thought process and mainly:
- is 2% per week truly possible on consistent basis? Or higher, lower?
- what risks am I not seeing?
- will the TSLA options market dry up in a couple of years when TSLA stabilizes? WDYT?

Good day to all.

A consistent return of 2% per week is difficult to achieve without running a risk. I consider weekly positions that are 25% OTM to be risk free, maybe 20% in less volatile times. But premiums on those positions will not give you a 2% return per week. I think 1% to 1.5% is more realistic, especially if you account for a losing position once in a while.

 

[Right_Said_Fred]

Let's not get bogged down again in the quagmire of (US and European) taxes. There's a dedicated thread.

 

[FS_FRA]

A consistent return of 2% per week is difficult to achieve without running a risk. I consider weekly positions that are 25% OTM to be risk free, maybe 20% in less volatile times. But premiums on those positions will not give you a 2% return per week. I think 1% to 1.5% is more realistic, especially if you account for a losing position once in a while.

2% return on what?

 

[Right_Said_Fred]

2% return on what?

As a base to calculate the return I use the amount of cash and/or the value of the shares in the account. So I exclude margin. Using margin is a trading strategy, just like choosing a certain strike, choosing a certain expiration date, closing a position, rolling a position, etc. are trading strategies. All these strategies determine what return can be achieved.

 

[ChefBoyardee]

I've been thinking about converting a substantial part of my TSLA shares to cash in order to generate capital by weekly/biweekly OTP BPS selling.

In a perfect world where you could time everything perfectly, you'd make this switch after a huge SP rally, hoping to sell at a local top.

The main consideration is "can you get a safe minimum weekly return that outperforms the stock in the long run?".
In the short term the stock can rally hard and no amount of safe spread selling will net you similar results. On weeks where TSLA is down, even by a large amount but not insanely large, the cash based approach will win out hugely.

After running some numbers, I'd like to present them here in order to get some feedback.

Currently a 2% weekly return seems doable with safe spreads. Safe in my mind is either very wide (+650p/-1050p-) or far OTM (+750p/-900p). Both of these will net me more than 2% return. Combining the safety nets of width and distance OTM is more difficult. After all, once you get too far OTM (below 850 for example) the premiums are basically the same in $ value, even if you go $100 further OTM. So a super safe +500p/-900p will not get you the desired weekly returns to outperform the stock in the long run.

By the way, the reason I have 2% minimum in the back of my mind is because, starting from $1068 SP today this would mean the stock would have to reach over $2900 by end of 2022 in order for the cash route to be less profitable.

At 1% weekly returns HODLING seems safer: the SP only needs to go to around $1800 by year end and that is within the possibilities IMO. ($2900 is also 'possible' but way more unlikely if you ask me).

Also, if you get minimum 2% per week you might go over some other weeks. There are relatively safe spread to be found with 3% weekly returns as well, and if you can get some of these in from time to time (depending on the current position of the SP withing the trading channel) it truly seems difficult for the stock to outperform cash.

Of course, if I were to do this, I'd have very strict rules in order to preserve capital, way stricter than I'm currently trading options. To scratch the "trading itch" I think I would use (for example) 2/3 of my cash for safe income generation and the other 1/3 could act as a seperate options trading (virtual) account like I'm doing now. (Right now my balance is: 3/4 TSLA HODL , 1/4 cash which I grow with options).

Another benefit of going cash is recession. IF there were a recession and the markets all give back 30%, I could buy back more TSLA than I sold. Of course this is A) timing the market which I don't believe anyone is capable of and B) a non-argument since the opposite can happen as well: a 2 year bull market after you convert to cash in which your stock returns would've been higher than "safe" options selling. So this argument seems to only matter if you convert TSLA to cash on ATH.

Pardon my ramblings, I'm just sharing my internal reasoning. I've been dipping my toes into this thread and option selling since May 2021 and checking my returns (+5% per week on average) I notice they are much higher than I expect the stock to gain (in the long term, short term anything can happen for example if FSD were to release or something). I am aware of the fact that this is only true for TSLA option selling. I've dipped my toes into selling options for other underlying, but these returns are abysmal compared to TSLA. Volatility and volume are king.

I started out very small in May (only $15k cash or so). After some learning I (on purpose) let a cc expire and I've been using that cash for option selling also.

Now I'm wondering if I should convert some more shares but I keep thinking there must be a catch. As we always say: If the risk is unclear, it's because you didn't look hard enough.

Therefore I would appreciate some feedback regarding my thought process and mainly:
- is 2% per week truly possible on consistent basis? Or higher, lower?
- what risks am I not seeing?
- will the TSLA options market dry up in a couple of years when TSLA stabilizes? WDYT?

Good day to all.

If everything goes well you could make more by going to cash, but that means you’re required to trade every week or you start falling behind. That adds a lot of pressure which could lead to bad decisions. And one big mistake can wipe you out or delay your gains / recovery for a long time (ask me how I know )

My advice would be 1/3 stock, 1/3 otm leaps or leaps spreads, 1/3 cash with very safe bps selling. If the stock goes on a big run the otm leaps win. If flat or down, as long as your strikes are safe enough the BPS win. That way you can celebrate any type of move that happens with the SP and everything gets a lot more fun.

 

[ABC2D]

BTC my 990p/790p at $0.94 for this week at 91% profit. While the stock action is looking good, decided not to chase remaining 9%

 

[OrthoSurg]

So glad my broker didn’t touch to my underwater put positions when I was margin called. Today everything is +70% on those positions I rolled. God bless lousy brokers.

 

[wooter]

Ah yes, that moment where my rolled over Jan21 1100/980bps are OTM and my 5x Jan21 1200/1300bcs are getting in the way of the rising SP.

 

[CrunchyJello]

A consistent return of 2% per week is difficult to achieve without running a risk. I consider weekly positions that are 25% OTM to be risk free, maybe 20% in less volatile times. But premiums on those positions will not give you a 2% return per week. I think 1% to 1.5% is more realistic, especially if you account for a losing position once in a while.

Request for clarification: 25% OTM
Is this 75% of the current price?
or more like a Delta 25?

 

[InTheShadows]

Thanks for all the thoughtful replies.


- to @InTheShadows : wow, thank you for sharing. May I ask what % of cash you sell options against and what kind of trades you make? (BPS, puts?) I'll follow your specific trades more closely from now on to get a sense.

Mostly BPS big and wide. I posted some of my rules yesterday (specifically the ones I violated after P&D came out), those are how I decide most of my trades. I also set GTC orders to close 25% gains same day, move it to 50% the next day if they didn't close, then 80% the next day. I have most of this weeks though set at 90-95% because most of my positions this week are rolls from last week and because I sold for massive premiums when the short leg was ATM, my normal percentage is out of whack. If we close above 1060 this week, where I have my orders placed right now I will see a 3.51% trading portfolio gain this week. Last week was 1.77%. When I roll, I keep the open date as the original date so I don't skew the % calculations for each trade series. I also close the original position for the amount I sold it minus .01 or .02 cents to cover the fees I paid for that position and also turning that trade into a 0% gain.

This is my current balance right now. Most of my HODL shares are opposite of what others do and are in taxable accounts. I have it this way because I'd rather pay long term on those than short term gains. I also don't sell calls against leaps in taxable accounts because I want those to be long term as well. (I'm currently not selling calls at all.) I use up to 50% of my margin on a regular basis. Oh yea, that was another rule I violated last Monday.

 

[Yoona]

BTC my 990p/790p at $0.94 for this week at 91% profit. While the stock action is looking good, decided not to chase remaining 9%

i also exited 1/14 at 82%
no replacement position yet and that's ok

edit: got lucky and accidentally timed the BPS BTC at the peak

 

[stealthyc]

Request for clarification: 25% OTM
Is this 75% of the current price?
or more like a Delta 25?

it would be 75% of current price

 

[samppa]

I have a non-advice:

Please do not focus on whether you can or cannot beat stock appreciation by selling options.

Focus on what is your goal and what income you are looking for from option selling.

 

[Right_Said_Fred]

Request for clarification: 25% OTM
Is this 75% of the current price?
or more like a Delta 25?

With the stock at 1100 that would be puts at 825 and calls at 1375. Too far away to achieve a 2% return per week. But that was the desired practically zero risk scenario.

I think a steady weekly 2% return is possible with strikes that are 15% OTM (or 20% OTM if you keep reinvesting the premiums), but those are not risk free.

 

[FS_FRA]

Do I or don't I: My 1/21 -970/+770 BPS is showing 85% profit, theta is around 1.... close or keep running? I know others have asked this previously, and I've always said I'd take the money and re-position....but:

I have little understanding of what macros are going to do on the CPI numbers for the next days. is 7.0 vs. 7.1 expected a beat?

 

[wooter]

Do I or don't I: My 1/21 -970/+770 BPS is showing 85% profit, theta is around 1.... close or keep running? I know others have asked this previously, and I've always said I'd take the money and re-position....but:

I have little understanding of what macros are going to do on the CPI numbers for the next days. is 7.0 vs. 7.1 expected a beat?

What is there left to win, vs what is there left to lose?

 

[ChefBoyardee]

I have a non-advice:

Please do not focus on whether you can or cannot beat stock appreciation by selling options.

Focus on what is your goal and what income you are looking for from option selling.

What if my goal is to beat stock appreciation with options selling (Jokes aside, I think that's great advice)

 

[corduroy]

BTC my BPS -980/780s at 84% profit. Crazy that these were at -900% just 2 days ago on Monday morning. I'm happy the do-nothing strategy worked out this time.

 

[ReddyLeaf]

With the stock at 1100 that would be puts at 825 and calls at 1375. Too far away to achieve a 2% return per week. But that was the practically zero risk scenario.

I think a steady weekly 2% return is possible with strikes that are 15% OTM (or 20% OTM if you keep reinvesting the premiums), but those are not risk free.

I’m trying to understand the calculations and cannot get to 2% without being closer to ATM. For example, right now for Jan 21st using -900p/+800p: MaxPain premiums are $2.50-$0.71=$1.79 (ignoring the bid/ask spread which will further reduce premiums). A single spread risks $10,000-$179=$9981 (e.g., 100x(900-800)-100x$1.79). Return is then $179/$9981=0.0179 or 1.79% for one week plus two extra days, at about 82% (900/1093) of SP. Making this trade on Friday will probably result in an even lower premium, so I don’t see how 2%/wk is possible without greater risk. Timing the trade during a local SP drop will certainly increase the premiums received, but only because the trade is actually closer to ATM at the time.

FYI, I’m unable to trade spreads, and my returns on cash-secured puts, near ATM, are usually 0.5-1.5%/wk (factoring in all the rolling and bad timing). In a perfect trade, Jan. 21st -p1090s are paying $38 or 38/1090=3.49% or 2.5%/wk. This trade works perfectly when the SP rises exactly 2.5%/wk, since the premiums received are available to increase the strike price perfectly. Unfortunately, TSLA doesn’t seem to follow this dream world.

 

[adiggs]

It's probably cause I want all trades to "win", and my capital to keep growing. Even if it means I receive next to no income from options for weeks. I still have a day job and can wait out any dip. But that makes me a pretty lousy options trader I guess.

I figure if you're making money, then you're a good options trader. And if you're learning stuff at the same time that is also improving your results, then you're not only a good options trader, you are an evolving and improving options trader.

Great larger post by the way - the conversation you've kicked off is (MHO) GREAT!

I have a few simple rules, but I've really enjoyed reading others...

TL;DR -

• Start super simple, super conservative, ask simple questions, read every new post on this thread, refer to the options glossary
• learn slowly as you never know if you got lucky or are smart.

Extended path which has been very successful for me over the past 2 years...

• Start super conservative and super simple. Example: BTO (Buy to Open) a call ITM (In the Money) for at least a month out when we hit the 50MA. Watch it like a hawk until you can see how IV works and theta burn.
• STC (Sell to Close) it when it hits a target that you feel you can live with. Doesn't matter if it goes up or down; you'll learn something about the options market, TSLA and yourself.
• Now do the opposite by STO a DOTM (Deep out of the Money) covered call. Example: STO a call when SP hits and ATH like 30% higher. Repeat hawkish watching, BTC (Buy to Close) when you feel like you can live with it.
• Learn
• Do that many times getting just a bit more aggressive until you get a bad feeling in your stomach.
• Don't do that again! But learn about rolling to ease the gut pain...
• Get assigned and learn
• Give the harder stuff a try with the same methodologies...
• Try puts and try "The Wheel"
• Try BCS
• Try BPS
• TRY ICs

I really like this!

Looks like a good roadmap for new people to consider following as they get started (clearly of the NOT-ADVICE sort). This looks Options Glossary thread quality material - I'm going to add it (or ping me if you'd rather it not be there).

Therefore I would appreciate some feedback regarding my thought process and mainly:
- is 2% per week truly possible on consistent basis? Or higher, lower?
- what risks am I not seeing?
- will the TSLA options market dry up in a couple of years when TSLA stabilizes? WDYT?

My experience has mostly been in agreement with the idea that 2% weekly returns are reasonable. The risks and stuff I would add:
- While 2%/week might be reasonable / doable, I would NOT incorporate that 2% weekly result into decision making regarding strikes and positions. The strikes and positions are whatever they are based on how you choose those strikes, and the %/week is a side effect. There will be times in the market where the strikes you like yield >2%, and there will be times when they are <1%.
- Therefore if the 2%/week IS a criteria for strike selection, I would put that into the additional risk category
- To hit 2%/week, my own math is to be opening 3% positions and closing them at 2/3rds. If I'm opening 2% positions and closing at 2/3rds then I'm really only earning 1.3%/week (oh no).

The question about the options market drying up is a really good one. I do believe that it is inevitable, though whether that is 2025, 2030, or 2050 is opaque to me . Something I did awhile back is to go find another highly liquid options market (I chose Apple; QQQ or SPY are good other candidates) and setup some test trades that you like and see what they look like.

This works especially well with an individual company that you know well and that has a big options market. I don't know Apple but its the active market I could try out quickly. I figure that as long as there is a safe 0.5% return available (25%/year) then this is working really well.

don't forget compounding; week 2 will have $80 more capital for investment, week 3 will have $160+ more capital for investment, etc

Compounding is indeed available. Whether to include it or not gets into portfolio makeup and management. Thus my own approach - I don't include compounding in calculating my possible annual results, nor do I incorporate compounding into my week to week trades.

A made up example that is pretty consistent with my own trading pattern, and NOT-ADVICE.

Given $1M in cash to back put spreads with (lets assume a retirement account with no margin), then I can use that to back 50x $200 wide spreads. Which is in fact what I would do (or 33x $300 wide spreads). As the gains accumulate I start adding additional spreads with each week results, making those get bigger over time. But now I'm also exposed to "blow-up-the-account" risk when the shares move sharply against me (we've got multiple examples the last couple of months). As a % I have a position open right now that was (equivalent) $160 ITM on that made up $200 wide spread. Were I to close at that point and take the loss, then my $1M account is suddenly worth $200k.

The problem with compounding results is that this 80% loss is going to hit the original cash plus any additional earnings. Thus I don't include compounding in my results.


And I plan ahead for that 80% loss. I haven't eaten one yet, but since this is my retirement I'm risking and I think I'm nearly unemployable now, I want to prepare for the possibility

This is my current balance right now. Most of my HODL shares are opposite of what others do and are in taxable accounts. I have it this way because I'd rather pay long term on those than short term gains. I also don't sell calls against leaps in taxable accounts because I want those to be long term as well. (I'm currently not selling calls at all.) I use up to 50% of my margin on a regular basis. Oh yea, that was another rule I violated last Monday.

This is pretty close to my own distribution. I don't have it in a neat pie chart like this, but I'm around 1/5th overall in shares with most of those in a taxable account with a really low cost basis (tax considerations will matter deeply to change those into something else). Sidebar - the remaining shares are in an account where they could be liquidated, but I keep them for sentimental reasons, and to occasionally look at a position that is ahead 19,909% (cost basis 5.47 from 2012).

Ignoring the shares my portfolio is targeted to be 1/3rd cash for selling put spreads and 2/3rds share replacement leaps (dominant position are June 750s) that I use to sell covered calls -- at least when I can sell strikes at the break even or above. The intent is that if disaster strikes on the put spreads then I can sell off half of the calls and still have enough cash to continue selling put spreads at the same level as before the disaster.

Using your pie chart that would be the cash+ options slices for me.

Anyway the rest is "cash" which I've got divvied up 1/3rd in cash


Love this conversation Love, love, love it.

Doable or not I also am aiming for that 2-3% range. My experience thus far is that hasn't been unreasonable for me. As an important cautionary note, that others have also identified (for anybody reading this for the first time), it wasn't doable for me when I started a couple of years ago. Its taken most of that time to get where I'm at now.

I also think of it, over the long haul, as open at 3-5%, and close at 2/3rds, keeping 2-3%.