Wiki Selling TSLA Options - Be the House

[corduroy]

Up until last week I had been doing the wheel trades only in my taxable trading account, but I upgraded to the next tier of options in my TD Ameritrade IRA account. Now I can sell CCs against my LEAPs in that account - a bull call vertical spread. I sold a couple Jan 15th $900s on Friday.

 

[bxr140]

I agree, selling CC have a poor risk/reward ratio now, CC is a bearish bet. :-/

Just to make sure people don't get confused, in most cases Covered Calls are BULLISH positions--"most" being applied to the statement because most covered calls are entered OTM. An OTM covered call maximizes profit if underlying goes up, therefore it is BULLISH.

Also just to make sure people don't get confused, covers calls can have quite favorable risk/reward ratios. They are explicitly less risk than just holding shares; the reward is a function of where the strike is set.

I find it hard to believe anyone made 700% with the wheel that could have been made just holding shares.

Nobody is trying to make 700% annually on the wheel (and given the capital requirements especially in a non-margined account, nor could they). It is a low return strategy that is best applied to 'unused' capital, once a cumulative portfolio [across all accounts] is otherwise saturated with risk--if one is long TSLA, ostensibly that means saturated with B&H shares and long calls.

 

[MP3Mike]

Just to make sure people don't get confused, in most cases Covered Calls are BULLISH positions--"most" being applied to the statement because most covered calls are entered OTM. An OTM covered call maximizes profit if underlying goes up, therefore it is BULLISH.

What am I missing? Isn't the profit the same regardless of price under the strike? if you sell a 900 CC now, the profit is exactly the same regardless of the stock price being 0 or 899.99. It doesn't increase with the stock price. Once the stock price goes past 900 you start losing money. You are betting that the stock price is not going to exceed your strike, which is BEARISH.

 

[bxr140]

Up until last week I had been doing the wheel trades only in my taxable trading account, but I upgraded to the next tier of options in my TD Ameritrade IRA account. Now I can sell CCs against my LEAPs in that account - a bull call vertical spread. I sold a couple Jan 15th $900s on Friday.

Bit of the pedantic police here, but vertical spreads are when expirations are the same. If you have a Jan 15 -C against a LEAP +C that's a calendar spread, either horizontal (if they're the same strike) or diagonal (if they're different strikes).

Otherwise, selling ~short(ish) expiration calls against leaps is a great idea! I find them very useful for damping out the negative impact of decreasing IV and time decay. Similar to any other sold contract position (like the Wheel), selling a call against a long +C isn't going to return huge profits, so I usually err on the side of conservative with the -C strike, to ensure the profit potential of the +C is at minimal risk.

FWIW, I recommend you consider your way-upside exit strategy--the P/L on a calendar spread typically peaks at some point and then if underlying keeps going up your position will decrease in value. Where that peak lands on the chart as well as the rate at which position value will decrease depends on the two strikes/expirys, so its one of those things that's hyper specific to the position (as opposed to following a rule of thumb). Rolling is typically my first go-to for this situation, bailing out of the -C is usually my second, and closing the whole position is usually my third, but...as with anything it kinda all depends and thus doesn't really follow basic rules of thumb.

 

[bxr140]

What am I missing? Isn't the profit the same regardless of price under the strike? if you sell a 900 CC now, the profit is exactly the same regardless of the stock price being 0 or 899.99. It doesn't increase with the stock price. Once the stock price goes past 900 you start losing money. You are betting that the stock price is not going to exceed your strike, which is BEARISH.

What you are missing is the fundamental definition of a "covered call". In pretty much any trading discussion, "covered call" refers to the specific instance of [100 long shares] + [one sold call], and "CC" explicitly refers to "covered call".

If you enter a $900 covered call today, you maximize profit if price is at (or above) $900. Since price is below $900 right now you want price to go up to $900, thus the position is bullish.

If you sell an uncovered $900 call today then I agree you don't want the price to go up, and I agree the position is bearish.

 

[Runarbt]

Just to make sure people don't get confused, in most cases Covered Calls are BULLISH positions--"most" being applied to the statement because most covered calls are entered OTM. An OTM covered call maximizes profit if underlying goes up, therefore it is BULLISH.

Also just to make sure people don't get confused, covers calls can have quite favorable risk/reward ratios. They are explicitly less risk than just holding shares; the reward is a function of where the strike is set.



Nobody is trying to make 700% annually on the wheel (and given the capital requirements especially in a non-margined account, nor could they). It is a low return strategy that is best applied to 'unused' capital, once a cumulative portfolio [across all accounts] is otherwise saturated with risk--if one is long TSLA, ostensibly that means saturated with B&H shares and long calls.

A CC is always bearish.

it is "covered" because you own shares to let go. In opposite to naked, when you dont own the underlaying shares.

You bet on, and get paid if stock doesnt go high than you CC, and when SP go down.

If stock goes higher than you CC, you cap your gains..

Selling puts and buying calls are bullish.
Selling calls and buying puts are bearish.

Esit: Selling CC is bullish bear..?;-)

 

[mongo]

What am I missing? Isn't the profit the same regardless of price under the strike? if you sell a 900 CC now, the profit is exactly the same regardless of the stock price being 0 or 899.99. It doesn't increase with the stock price. Once the stock price goes past 900 you start losing money. You are betting that the stock price is not going to exceed your strike, which is BEARISH.

Overall position profit is maximized if the stock exactly hits the stike at expiration. All the stock gain + option premium. Worst cases are either a spike above the strike (loss on appreciation grearer than the premium) or the stock craters (only the premium).

A CC is always bearish.

You bet the stock wont rise (too high), and cap your gains if it does.

It may be bearish relative to an uber-bullish outlook, but can still be bullish. Setting a strike at double the stock price 6 months out is only bearish compared to the idea that the stock will outperform that.

What you are missing is the fundamental definition of a "covered call", which refers to a sold call for the purposes of covering some of the potential losses of a long leg. In pretty much any trading discussion, "covered call" refers to the specific instance of [100 long shares] + [one sold call], and "CC" explicitly refers to "covered call".

Is it? I thought it meant the call was covered by the held shares (fixed exposure), as opposed to naked (very exposed).
Covered Call Definition

 

[bxr140]

A CC is always bearish.
You bet the stock wont rise (too high), and cap your gains if it does.

Again, an OTM covered call maximizes profit when underlying goes up. If you want underlying to go up, you're bullish. Trading doesn't get any more fundamental than that.

I thought it meant the call was covered by the held shares (fixed exposure), as opposed to naked (very exposed).Covered Call Definition

Yeah, fair point.

 

[Runarbt]

CC is for a bullish Bear Then?

Go up some, but not sky high?

Or bearish bull?

I get your point. ;-)

 

[MP3Mike]

Again, an OTM covered call maximizes profit when underlying goes up. If you want underlying to go up, you're bullish. Trading doesn't get any more fundamental than that.

Only if you always sell the shares at the option date regardless of the share price. The profit on the CC itself is the same regardless of the stock price, as long as it stays under the strike.

 

[Runarbt]

Again, an OTM covered call maximizes profit when underlying goes up. If you want underlying to go up, you're bullish. Trading doesn't get any more fundamental than that.



Yeah, fair point.

If you want to maximize gain when sp rise, a OTM naked put (margin covered) is better than CC.

Pure bullish, no capping. More premium, you even get the stock gain without selling the stock.

ex. Stock is $700, options 2 months out:

CC $1000 - premium $50
Naked put $1000 - premium $300 +30


SP end $1100, you will then make:

CC = $1050
Naked put = $330 and you keep stock worth $1100


(number pulled from my *ss, but to show difference)


Risk is SP only rise to $1000. ;-)

The you pocket $50 on the CC

naked put, it will cost $50 to close it on expiry. You have 330-50= $280

For the CC to be better, SP has to go no higher than $720.

Thats kinda weak weak bullish.. $20 up in two months, from $700?


Edit: number may for sure be way off.. but still show CC is very bearish compared to naked puts.

 

[bxr140]

CC is for a bullish Bear Then?

Being bullish or bearish is not binary, there's a spectrum. Bullish does not only mean TO THE MOON and bearish does not only mean #TSLAQ. The degree to which a covered call is bullish or bearish depends on the strike; If you entered a $2000 Jan 21 covered call on Monday there's no practical difference in how bullish you are versus just buying 100 shares.

Only if you always sell the shares at the option date regardless of the share price. The profit on the CC itself is the same regardless of the stock price, as long as it stays under the strike.

You're confusing the -C with the position.

 

[mongo]

CC is for a bullish Bear Then?

Go up some, but not sky high?

Or bearish bull?

I get your point. ;-)

Another way to think of it, selling a covered call is just as bearish as not buying that same call is.

Only if you always sell the shares at the option date regardless of the share price. The profit on the CC itself is the same regardless of the stock price, as long as it stays under the strike.

AH, I think I see the wording issue.

Again, an OTM covered call maximizes profit when underlying goes up.

The option specific profit is maximum (fixed) as long as the stock does not exceed the strike. However, I think @bxr140 is saying "in the case where the underlying stock goes up, and you already are holding stock, selling an OTM call (that expires barely worthless) maximizes your return (versus not selling one, or selling at a different strike) without needing additional capital or margin"
Bonus returns if you buy more shares with the premiums.

 

[MP3Mike]

You're confusing the -C with the position.

Again, an OTM covered call maximizes profit when underlying goes up

Can you explain how that works? If you sell a 800 CC for $100 now, and at the option date the stock price is $799.99 your profit is $10,000. If the stock price is $1, your profit on the CC is still $10,000. The profit on the CC is exactly the same. You already owned the shares, so their change in value isn't because of the CC purchase.

 

[bxr140]

If you want to maximize gain when sp rise, a OTM naked put (margin covered) is better than CC.

First, beating the horse, if one is looking to capitalize on underling movement one should be buying options, not selling them, (where 'buying' may be more nuanced than just a single leg +C, as discussed ad nauseam in previous posts).

That out of the way, the major benefit of the naked -P vs a covered call (100 shares + -C) is the capital requirement. Depending on one's margin requirements there may be an opportunity to open multiple -P's for the same capital as one covered call position. In that case yes, a capital-normalized position of -P's may well return more than a CC, though it very much depends on the CC's strike price (A DOTM CC has the upside potential to far exceed the return of even many -P's.). In this comparison the risk is generally going to be higher on the multiple -P's, but its not a straight apples-to-apples risk overlay as it is very dependent on strikes and expirys.

If we're not normalizing capital and are instead just comparing one OTM -P to one CC, the covered call will typically return more than the -P if the strike of the CC is ~equal or above the strike of the -P and if underlying moves up (in other words, that's starting with an ITM CC). That additional return of course comes with additional downside risk on the CC (for any strike above the -P), so again proper analysis is of course necessary.

 

[Runarbt]

First, beating the horse, if one is looking to capitalize on underling movement one should be buying options, not selling them, (where 'buying' may be more nuanced than just a single leg +C, as discussed ad nauseam in previous posts).

That out of the way, the major benefit of the naked -P vs a covered call (100 shares + -C) is the capital requirement. Depending on one's margin requirements there may be an opportunity to open multiple -P's for the same capital as one covered call position. In that case yes, a capital-normalized position of -P's may well return more than a CC, though it very much depends on the CC's strike price (A DOTM CC has the upside potential to far exceed the return of even many -P's.). In this comparison the risk is generally going to be higher on the multiple -P's, but its not a straight apples-to-apples risk overlay as it is very dependent on strikes and expirys.

If we're not normalizing capital and are instead just comparing one OTM -P to one CC, the covered call will always return more than the -P if the strike of the CC is ~equal or above the strike of the -P (in other words, that's starting with an ITM CC). That additional return of course comes with additional downside risk on the CC (for any strike above the -P), so again proper analysis is of course necessary.

buying options, you need luck with timing.

Selling option, time doesnt matter as long as you get the direction correct.

 

[bxr140]

Can you explain how that works? If you sell a 800 CC for $100 now, and at the option date the stock price is $799.99 your profit is $10,000. If the stock price is $1, your profit on the CC is still $10,000. The profit on the CC is exactly the same. You already owned the shares, so their change in value isn't because of the CC purchase.

A covered call is a position, not a contract. In context, it is a position made up of [100 shares] + [one sold call]. Regardless if one owns shares or not prior to selling the [OTM] call, the value of the position goes up as underlying goes up.

 

[sub]

Just to make sure people don't get confused, in most cases Covered Calls are BULLISH positions--"most" being applied to the statement because most covered calls are entered OTM. An OTM covered call maximizes profit if underlying goes up, therefore it is BULLISH.

Also just to make sure people don't get confused, covers calls can have quite favorable risk/reward ratios. They are explicitly less risk than just holding shares; the reward is a function of where the strike is set.



Nobody is trying to make 700% annually on the wheel (and given the capital requirements especially in a non-margined account, nor could they). It is a low return strategy that is best applied to 'unused' capital, once a cumulative portfolio [across all accounts] is otherwise saturated with risk--if one is long TSLA, ostensibly that means saturated with B&H shares and long calls.

Covered Call is considered a Bearish position. It doesn't mean that someone selling a CC is bearish, two different things.

I understand nobody is trying to make 700% on a CC position, but you missed my point on this. They COULD have made 700% just staying invested in TSLA with the cash they are using for the "wheel". That is why I don't want to do a CC strategy that has any risk of limiting my upside. If I were to do it, the calls would be so far OTM they wouldn't make much money, but still better than nothing I guess.

I've been working on synthetic stock positions that will not limit upside but will allow me to generate extra returns. Haven't locked anything down yet but I feel like I'm really close, just need to do some triple checking of the math to make sure I'm not missing something.

 

[bxr140]

buying options, you need luck with timing.
Selling option, time doesnt matter as long as you get the direction correct.

We can agree that is a perspective.

 

[bxr140]

Covered Call is considered a Bearish position.

See the just upthread conversation. When one maximizes position value (and account balance) with increasing underlying, one is considered bullish.

Trading does not get any more fundamental than that.

I understand nobody is trying to make 700% on a CC position, but you missed my point on this. They COULD have made 700% just staying invested in TSLA with the cash they are using for the "wheel".

Lol, if your initial point was solely "shoulda coulda woulda", I apologize for the misunderstanding and wholeheartedly agree that we should have all been 100% long on TSLA all year.

Otherwise, my point was that The Wheel is risk diversification, and it is short sighted to allow hindsight to marginalize risk diversification.

I've been working on synthetic stock positions that will not limit upside but will allow me to generate extra returns. Haven't locked anything down yet but I feel like I'm really close, just need to do some triple checking of the math to make sure I'm not missing something.

There are plenty of options strategies out there to fit all manner of preferences. Combos ('synthetic stock') are a great way to maximize potential return on capital (in their most basic form they're more or less equivalent to shares), though definitely mind margin requirements so you don't end up in trouble if there's an unexpected drop. I suspect everyone is identifying TSLA as hard-to-borrow, and that may double (or more) the margin requirements...and if they're NOT identifying TSLA has hard-to-borrow that's almost a worse situation, as TSLA (at least with my brokerage) goes in and out of HB and that can really screw you over if you're basing your margin calculations on regular rates and then volatility kicks TSLA into HB and you get a margin call.

The fun thing with combos (and all multi leg positions, really) is you can also work strike and expiry to fine tune risk/reward management and maximize volatility related gains. Depending on how you build it up you can also sell a low-risk naked call way OTM for "free" margin that's already being eaten up by the -P.