My partner and I have too agreed that we will pay down debt and focus not on building our account value further, but preserving and taking advantage of what we earn.
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Wiki Selling TSLA Options - Be the House
- Thread starter adiggs
- Start date
If the stock increases more than 25% next week I will happily close all my puts with a slight profit and buy back my CCs. I wish we have that kind of move on the near term but I will keep your experience in mind and stay 30% OTM and sell into strength on green day
Excuse my ignorance here but I am trying to understand the financial mechanics fundamentals at play here. The mortgage subprime crisis was based on a faulty system reassembling worst than grade C mortgages into subprimes offered on the market of multiple times refinanced mortgages due to non payment and then subsequent defaulting big banks that were overextended.not-advice
and not a prediction or expectation of mine, but something I am also thinking about.
2008 market crash
This has some high level details about the 2008 crash, as well as a (very) brief comparison to the market crash in '29. The short summary - 50% drop over 18 months in 2008 vs. 90% drop over 4 years starting in '29.
The question I ask myself - is the current macro situation bad enough, not as I decide using logic and my own opinion, but in the point of view of enough investors in the market to behave as if the current macro is that bad.
There is talk about a war in Europe. I mostly discount that happening, but I also don't live in Europe and haven't been following it nearly closely enough to have all that much of an opinion. I think that this is more of a red herring.
What I'm spending more time thinking about is the pandemic more broadly, the disconnect between the real economy and the stock market, and the "end to easy money". And more importantly - not what I think about it, but what I think the broader investor community think about it. When the pandemic got started and the shutdowns started happening I started seeing at minimum a 2008 type of crash, if not the ground work for a 1929 type of crash. The economy was shutting down at a very large scale with the biggest impact hitting the parts of society that could least afford it. I even bought some SPY puts (something I haven't done before or since) that, of course, proved how very wrong I was about that.
At least on the stock market side. That was also when the Fed started rolling out easy money (bond buying every month, low interest rates though that had been around for awhile) and the US Govt stepped in with a lot of money to expand unemployment benefits. My understanding is that similar actions were taken elsewhere in the world but I live in the US and don't follow the rest of the globe as much. I should probably change that, but I should probably eat better and exercise more (there are lots of really important things for all of us to do, but we rarely do ALL of them).
What I've begun asking myself is whether I was right back then, but 2 years early. The expanded unemployment benefits have been withdrawn and the bond buying is tapering down rapidly and will stop in a month (March, though it isn't clear to me if its the beginning or the end of the month). We're also all expecting a .25 increase in the interest rate as the era of easy money comes to a close.
The logical side of me is thinking "even 4 of these rate increases only gets us to 1%, still a historically low interest rate". But my logical side isn't what the market is thinking or behaving as (as if it ever were). How will investors react? So far it looks to me like the answer is "cash is king".
The real economy still isn't fully recovered - travel is coming back for some reasons and not for others. Restaurants and other businesses dependent on in-person gathering of people aren't doing great, even if the mandated restrictions on what people can and can't do have been lifted. There will be a subset of people that are going to continue behaving as if the restrictions are in place (such as my wife and I). Unless the remainder offset all of us and then some that portion of the economy will be doing better than disastrous, but nothing resembling great.
Back to the starting point - if the market goes down 50% from its high and Tesla tracks that exactly then that sounds like a $600 share price to me. If that happens over 18 months, given that it is reasonably well distributed, then trading down with the stock price using puts or put spreads should be reasonably straightforward. Heck my currently open put spread is a 700 strike, so I'm nearly there!
If the market goes down 90% then we'd be looking at a $120 share price though that was over 4 years before. It seems unachievable and yet the economy didn't shut down in 2008 the way it did in 1930. The economy also hasn't shut down today as it did in 1930 (the most visible employment metric says things are peachy; it wasn't in 1930 by a long shot). This also ignores the fact that the S&P 500 / DOW / Nasdaq are aggregate measures of the market - there will individual companies that do better and that do worse. For a variety of reasons I see Tesla as the safest thing I can invest in, period full stop.
That doesn't mean that the wider investment community agrees with me.
What I do remember really clearly from 2008 - I found a company to invest in Oneok Partners. The company was on sale for a 50% discount to something I considered reasonable (split adjusted $20- looks like I caught the bottom!). At the purchase price I bought in at the company was providing a 10.8% dividend with a history of increasing the dividend quarterly going back multiple years. And with good reason - as a natural gas pipeline company a large fraction of quarterly revenue was contracted out for years in advance. You could almost fill out the annual financial results at the beginning of the year.
I bought in and it worked exactly as I hoped it would.
The relevant learning from that is that when a strong enough market downdraft occurs everything goes down with it. If nothing else those with too much leverage will be forced to sell stuff on margin calls, and if they get bad enough they'll have to sell anything and everything as needed. Do you sell the stuff that's taken the biggest hit (yes). But that might also not be enough / good enough, and you also need to sell the good stuff. Thus everything comes down.
If the market goes down 50% and Tesla goes down 40%, that looks like an unreasonably low share price from today's point of view. It would also be market outperformance.
I really, really don't have an idea of what is coming. I am seeing people writing about the Fed raising rates as if the Fed will also begin selling off the bonds they've been buying. I haven't seen the Fed say that, and I really really don't see that happening. What I do expect will happen is that the purchased bonds will sit on the balance sheet until they reach expiration and expire (paid off) naturally. That will provide a taper to the --bond holding-- and avoid dumping 10's of billions of bonds into the bond market, month after month. I expect that is a good thing for the market, but the market needs to see it that way - not me.
I also have seen an article talking about Tesla results that seems pretty dramatically confused about what was said. "No new products" in 2022 is a bad thing, when what Elon said was "bringing new products to market will distract from scaling which will lead to a smaller number of total units delivered". WHich is totally par for the course when following Tesla for 5+ years. We've also been through a many-year period in which company financials and results kept getting better and better, a break through to a new ATH was any day now, and then the shares broke down 50% (380s down to 180s), even though Model 3 was shipping and scaling.
All of which is a very long winded way of saying (closest to advice I have) - separate events / news as one thing from how the market will react. The two are not the same, can be very very different, and its the latter that matters in the short term.
In the long term (buy and hold shares, no margin) this is just short term noise. Whether that means 6 months or 6 years, the Q1 call details won't matter, and quarter after quarter of rapidly growing cash and profit will be overwhelming. Our option sales though are shorter term than that, and the market reaction in the short term is important to what we're doing.
The root of the correction here is a rotation out of tech sector due to the adjusted discount rate from future raising rates and P/E ratio readjustments due to these rise. Is it a more global problem from people at risk to lose their jobs, their homes and default on their payments from a more complex consequence of inflation significantly reducing buying power in the next years. What is the projection of the extent of the impact of raising rates and inflation on possible payment defaulting and subsequent big banks defaulting?
Is this more a superficial sector rotation out of growth tech stocks to MasterCard, Visa which are +10% last Friday or a more complex global financial crisis emerging from raising inflation? Is this the uncertainty the markets do not like which caused a correction or is there something deeper coming to cause a further 50% collapse? I keep hearing from my bank economists webinars saying unemployment in Canada is getting to an all time low, available jobs are everywhere, the economic growth is positive, I would like to understand what would have to be the domino effects for a market sell off to reach the -90%. These could affect LEAPs and options rolled far away so having a probability of occurrence for that kind of scenario would be interesting.
bkp_duke
Well-Known Member
I don't have a LOT of data to support this, but I believe there is a little bit more going on than just what you have listed here with a sector rotation, to which I fully agree on.
There is a significant portion of the population which left the workforce and has refused to come back. While a lot of these people are unskilled labor, and will have to come back when free money (enhanced unemployment, stimulus checks, etc.) end, there was also a significant portion of skilled labor that left the workforce. We've seen many accounts here of people that made a LOT of money in the market during the past 2-3 years and decided to retire early. If those people didn't protect those assets that they built up, many of them have probably found themselves with less money for the rest of their lives than they are comfortable with, and at least in part are looking to re-enter the work force. It may not be in full time positions, and for some it maybe completely different careers, or starting a new business. I believe we are going to see this tease out as a slow up-tick in the labor participation rate (b/c they are not counted in the unemployment numbers), if the pain continues, deepens, or becomes prolonged, and if inflation continues to rise.
Heck, I know I've stopped aggressively paying down my mortgage just from the pain that has happened this month. Some large purchases were put on hold as well.
Well, last week was stressful for me too. I had about 8 BPS positions open, most 200 pt spreads and 10 or 20 contracts, for 1/28 and 2/4. I've been generally trying to stay 15-20% OTM when opening these, and using less than 50% margin. But I spent the whole week staring at my screen and rolling things down anytime there was a stock drop to near my short positions. A few times I accidentally rolled some positions twice in the same day and got those day-trader warnings. Luckily, I was able to roll everything either down and out from 1 to 6 weeks for at least a small credit. I wasn't thinking much except trying to keep from losing anything, but at the end of the week I added up my roll credits and was surprised I made $46K! But overall not a fun week and I'm going to try to re-adjust strategies to avoid something like this in the future.
But now I've got a few positions for 3/18, highest a 650/900, and I want to keep rolling down. I'd like to keep rolling everything down to a 750 or less level if possible in case we keep dropping the next few weeks. Next Fed meeting is 3/16 when they will probably spook the market again, so I don't think 3/18 is a good date to have something open for. Will probably roll all my 3/18 positions out to 4/14 (about 2 weeks after Q1 P/D numbers come out), especially if there is a SP rebound this week.
But now I've got a few positions for 3/18, highest a 650/900, and I want to keep rolling down. I'd like to keep rolling everything down to a 750 or less level if possible in case we keep dropping the next few weeks. Next Fed meeting is 3/16 when they will probably spook the market again, so I don't think 3/18 is a good date to have something open for. Will probably roll all my 3/18 positions out to 4/14 (about 2 weeks after Q1 P/D numbers come out), especially if there is a SP rebound this week.
ChefBoyardee
Member
I’ve been thinking about safe strategies for put spreads, and I’m starting to realize further OTM weeklies isn’t the answer. Once you’re so far OTM that your return is less than 5%, you’re still making more money than stock, but with massive risk (95%) in a big downturn. And with such low RoC it’s too tempting to overdo it on margin usage.
I think the answer is not cash-secured. If you have a ton of cash, use 50% margin, and make 4% RoC, that’s only 2% per week, or about 2x per year (2.8x compounded). That’s good but you could easily make more than that with leaps, leaps spreads, or maybe even stock… with much less risk and stress. The other thing is holding cash means you need to always have options positions open or you fall behind. This pressure leads to bad decisions during environments like we’re in now.
Ok so I think I’m sold on doing mostly shares and leaps with low margin usage… but how can I reduce risk further? Smart hedging and letting Tesla’s rising stock price work for me. Anything can happen in a week, but over time Tesla grows.
One strategy I’m looking at is 30DTE put spreads for 20% RoC, paired with put calendar spreads (the hedge) halfway between the spreads and the current share price. The short leg of the calendar is 1 week away, and the long leg is the same expiration as the spreads. Put calendar debit equal to 5% of the spreads max loss.
If the stock is flat/up, continue letting the calendar’s short leg expire and selling one for the next week until the short and long legs are in the same expiration (where it becomes a put spread). This will make back at least half of the cost of the hedge, leading to around 18% gains for the month.
If the SP drops to your put calendar’s strike, close it for roughly 100% gains on the hedge. Being closer to the money, this should happen a lot more than your put spreads being tested.
If the stock then rebounds, you make 25% that month. If it keeps dropping and tests the short leg of your put spreads, roll out an additional month for a credit.
If it’s above that strike by the next expiration, you’ve made 12.5% each month over the 2 months plus the credit from the roll. If it’s still ITM, roll again. Since you started with 25% margin, you can easily manage it.
Over time this should average out to around 18% per month or 2.2x per year, with only 12.5% of your total portfolio (50% margin req, and using 25% of that) at risk at any given time. This is an extra 27.5% gain for your total account per year, with no cash tied up.
There will be opportunities to increase your margin usage to take advantage of extreme situations, since you should have plenty of margin leftover after a big downturn. But that would be only for absolutely bulletproof trades and should still be under 50% total margin usage.
This strategy is slower theta decay than weeklies (slightly less return), the hedge cuts some potential profit, and isn’t able to sidestep a slow multi-week decline as easily. But it reduces short term risk, lowers stress, requires less babysitting, and pays less brokerage fees. And the hedge, being weekly, still keeps you engaged with the market.
Given that TSLA has wild short term swings but grows over time and has massive melt-ups, I think this will be a better strategy to avoid the bad and capitalize on the good.
Since this is using margin from shares, selling CC’s may be a good addition to increase theta decay and help hedge.
On a side note, I hope everyone’s hanging in there. If you have no need to pull out money right now, time is your friend. My account is looking pretty brutal too, but I have hope for next week. Many many long term trend lines across the tech sector were tested and bounced off of for the 2nd time last week.
I think the answer is not cash-secured. If you have a ton of cash, use 50% margin, and make 4% RoC, that’s only 2% per week, or about 2x per year (2.8x compounded). That’s good but you could easily make more than that with leaps, leaps spreads, or maybe even stock… with much less risk and stress. The other thing is holding cash means you need to always have options positions open or you fall behind. This pressure leads to bad decisions during environments like we’re in now.
Ok so I think I’m sold on doing mostly shares and leaps with low margin usage… but how can I reduce risk further? Smart hedging and letting Tesla’s rising stock price work for me. Anything can happen in a week, but over time Tesla grows.
One strategy I’m looking at is 30DTE put spreads for 20% RoC, paired with put calendar spreads (the hedge) halfway between the spreads and the current share price. The short leg of the calendar is 1 week away, and the long leg is the same expiration as the spreads. Put calendar debit equal to 5% of the spreads max loss.
If the stock is flat/up, continue letting the calendar’s short leg expire and selling one for the next week until the short and long legs are in the same expiration (where it becomes a put spread). This will make back at least half of the cost of the hedge, leading to around 18% gains for the month.
If the SP drops to your put calendar’s strike, close it for roughly 100% gains on the hedge. Being closer to the money, this should happen a lot more than your put spreads being tested.
If the stock then rebounds, you make 25% that month. If it keeps dropping and tests the short leg of your put spreads, roll out an additional month for a credit.
If it’s above that strike by the next expiration, you’ve made 12.5% each month over the 2 months plus the credit from the roll. If it’s still ITM, roll again. Since you started with 25% margin, you can easily manage it.
Over time this should average out to around 18% per month or 2.2x per year, with only 12.5% of your total portfolio (50% margin req, and using 25% of that) at risk at any given time. This is an extra 27.5% gain for your total account per year, with no cash tied up.
There will be opportunities to increase your margin usage to take advantage of extreme situations, since you should have plenty of margin leftover after a big downturn. But that would be only for absolutely bulletproof trades and should still be under 50% total margin usage.
This strategy is slower theta decay than weeklies (slightly less return), the hedge cuts some potential profit, and isn’t able to sidestep a slow multi-week decline as easily. But it reduces short term risk, lowers stress, requires less babysitting, and pays less brokerage fees. And the hedge, being weekly, still keeps you engaged with the market.
Given that TSLA has wild short term swings but grows over time and has massive melt-ups, I think this will be a better strategy to avoid the bad and capitalize on the good.
Since this is using margin from shares, selling CC’s may be a good addition to increase theta decay and help hedge.
On a side note, I hope everyone’s hanging in there. If you have no need to pull out money right now, time is your friend. My account is looking pretty brutal too, but I have hope for next week. Many many long term trend lines across the tech sector were tested and bounced off of for the 2nd time last week.
do you have an example of the 4 positions so i can visualize it?
TIA!
ChefBoyardee
Member
Yep! The credit spread would be something like this: TSLA Put Spread calculator
Paired with a calendar spread hedge like this: TSLA Calendar Spread calculator
ChefBoyardee
Member
Yeah, I would close both legs it if it hits the calendar’s strike price, otherwise I’d let the short leg expire and keep opening a new short leg each week. So if the SP stays above, you get 4 weeks of short puts backed by the long leg. It probably won’t fully pay for the long leg, especially if the SP shoots far above them, but it will help
Hi there, a question regarding the part in bold underline above please. I too was able to move out of the way but did so when the price was going up. It seemed that I was getting a little better pricing on both the BTC and STO. Was I doing it wrong? I STO BCS into strength, i.e., on the dip when entering a position.
I'd like to get it right... because for 2/4 I have 3x 960/850 and 3x 950/810 to roll out of that I didn't have time to do Friday while busy at work; they were each with both legs in at one point. I'm not seeing reasonable roll down opportunity next couple months and am not feeling warm and fuzzy about short term after reading some of the posts the past few hours. Rolling out months ties up cash, margin, and makes each spread incredibly expensive to buy back. Hoping we see 1200 by December to expire worthless what I rolled there from the past two weeks. Although I don't want to close them and take a sizable loss, it may be the best move to reset and give back some of the gains from last quarter. Any non-advice of optimal BPS roll window (into weakness, into strength) other than ASAP would be greatly appreciated. I'd aim to do that first.
Hi gang. Sorry I've been absent. I've been traveling and doing family stuff, which should have been really fun had it not been weighed down by the increasing losses. I need help understanding why a strategy I have come up with for rolling without a debit isn't working on my Margin Calculator (with a loss in non-margin buying power).
Imagine 100X BPS that are 850/1050 for Friday (Feb 4th). So basically at a $2M max loss. Since it is basically at max loss, I want to roll another week and see if more time saves it. But, it costs money to roll to Feb 11 at the same strikes (I do NOT want to increase the strikes). I was to sell BCS to pay for the roll. To do that, I have to do -950/+1150 calls. By doing this, I'm taking a $2M loss below 850 (which means I keep rolling), and turning it into a guaranteed $1M loss when the SP recovers to between 950 and 1050.
Plan is to keep rolling until stock is over 950. At the point, I have a $1M loss on the BPS. As the SP rises more, the BPS loses less value but the BCS starts to lose the same amount, until I get to 1050, as which point the loss starts to increase from $1M back to $2M at 1150.
But the margin calculator at Fidelity shows that my non-margin power goes from over $1M to 0. I don't know why as my Margin requirement should stay at $2M (in my opinion).
Thoughts?
P.S. - I will have to write a summary on everything I've learned through this horrible experience when I have a minute regarding BPS in general, margin requirements, etc).
Thanks everyone.
Imagine 100X BPS that are 850/1050 for Friday (Feb 4th). So basically at a $2M max loss. Since it is basically at max loss, I want to roll another week and see if more time saves it. But, it costs money to roll to Feb 11 at the same strikes (I do NOT want to increase the strikes). I was to sell BCS to pay for the roll. To do that, I have to do -950/+1150 calls. By doing this, I'm taking a $2M loss below 850 (which means I keep rolling), and turning it into a guaranteed $1M loss when the SP recovers to between 950 and 1050.
Plan is to keep rolling until stock is over 950. At the point, I have a $1M loss on the BPS. As the SP rises more, the BPS loses less value but the BCS starts to lose the same amount, until I get to 1050, as which point the loss starts to increase from $1M back to $2M at 1150.
But the margin calculator at Fidelity shows that my non-margin power goes from over $1M to 0. I don't know why as my Margin requirement should stay at $2M (in my opinion).
Thoughts?
P.S. - I will have to write a summary on everything I've learned through this horrible experience when I have a minute regarding BPS in general, margin requirements, etc).
Thanks everyone.
I’m not the OP, but you are right that the best time to roll is when the share price is far away from your spread. But sometimes people choose to roll when the share price is approaching the short leg as a safety measure. Better to do the roll before it goes ITM.
I think it’s also better to roll a position when it’s close to expiration if it’s safe to do so. Safe being you think the share price won’t move substantially against you while you wait.
I’m sorry I can’t answer your question, but have you considered closing 1/2 of the positions and rolling the remaining ones with double the spread widths?
2/4 1050/850 = $171 Friday close
4/14 1000/600 = $179
If the share price is above $800 by 4/14 you could still roll for credit. Might even recover to $1,000 by then. Of course this would tie up your margin for 2 months.
So let me summarize: after seeing TSLA drop $400 in January, you’re willing to go with 50x $70 spreads, $130 OTM and 30DTE. Wow. That takes some serious chutzpah and confidence that we won’t continue down until June. Not for me, but good luck.
I will always roll before the SP gets to the mid-point of the spread. I do not rely on "hope" that it will come back up again. So generally I'm forced to roll when the stock is dropping, which is not ideal, unless I've been smart and rolled before things got that bad. Never yet had a case where both legs were ITM.
But if it's below 800 is will cost me to roll again, and below 600 I now have a $4M loss on top of the debit to close half the positions, so I increased my loss by almost 50%. Can't risk it.
ChefBoyardee
Member
Nah I’m not making this trade right now haha, all of my buying power is tied up in rolled spreads. But I’m thinking for the future, doing something like this on 12.5% of my total account rather than like weeklies on 50%+ will be a lot safer for the long term. I don’t mind rolling, but where I get myself into trouble is when I start too big or add margin to the trade for better rolls, or both.
But if I didn’t get caught up in this sell off, yeah I’d probably open this trade right now, I think the sell off is overblown
Only $2m loss since you closed half of them. 50x400wide. But you gave yourself 2 months to fight without going inverted and locking yourself into a loss.
Are you saying close half (50) the positions, with a possible max loss of $1M (50X$200)?
Then, there are two months to possibly save the 4/14 1000/600 if the stock price recovers >$1000 or by getting a better roll if SP is greater than the midpoint ($800).
I guess that is realizing a possible $1M loss on the close, plus risking another $2M loss (50x $400 spread) if the SP goes under $600 ?
Also, where does the 2/4 = $171 Friday close and the 4/14 = $179 numbers come from, I assume they are the current costs of the spreads ?
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