Wiki Selling TSLA Options - Be the House

[bxr140]

Lastly - I also believe that they key to getting rolls right consistently is to wait for the time value to be close to 0. That mostly means waiting until the day before or day of expiration before executing the roll.

I'd augment this advice to include analyzing current vs prospective theta. If the theta of the new position is higher than the current position (which naturally happens the closer you get to 0 time value) then it probably makes sense to roll. This is typically the right way to go with higher volatility, and the practical timeframe of this occurring is typically week-of.

One should be more considerate with lower volatility, as the roll out puts one's new contract at higher risk of being negatively impacted by volatility than the current, ostensibly safer contract. Waiting a few days on the current contract could see an increase in underlying volatility, which would increase the value of the farther expiration far more than the current contract, which of course is a win if the game is selling contracts. That's not to say its a rule of thumb, but its definitely a factor.

 

[st_lopes]

FWIW, most (and maybe all?) American IRAs don't allow higher levels of margin and options trading, so anyone doing The Wheel in that kind of account is doing so by selling cash covered puts.

My crappy assumption then! I assumed most here would be leveraging portfolio margin, which IBKR offers. Some Canadian brokers allow you to open a Margin account with our Roth IRA equivalents (TFSA) as collateral for buying power. Can't do the same on our IRA/401k equivalent.

 

[bxr140]

Now this is a dynamic I find interesting. And I expect is the opposite of how most of us are thinking.

Heck - I probably suffer from being TOO attached to my shares, but I see what you mean about ITM covered calls providing downside protection - their gain in value offsets losses in the share price.

How deeply ITM do you go?

How deep depends on the play that I'm making. It usually comes down to one of two things: 1) Capturing high volatility in a retirement account or margined account, and 2) leveraging otherwise unused capital in a retirement account.

1) I played the last ZM earnings (Nov) with ITM CCs. I entered $360 covered calls with underlying at $400, ~2 weeks out from earnings (with an expiration the following week--so a ~3 week play), with a time value of ~$18. $360 was good support at the time, and while the price rose up to ~$486 before earnings, it crashed to ~$394 after earnings. Total non issue for me, I walked away with $1800 x a bunch of contracts (I don't know how many off the top of my head, they were spread around a bunch of accounts) at something like ~1.5%/week return on capital. Annualize 1.5%/week on pretty safe positions and that's a good deal...

2) Last week I realized that I wasn't oversubscribed on capital and also wasn't planning on making any big trades (that was after buying 50 TSLA calls...which BTW are up 75% in less than a week) so I entered 15x $550 covered calls for 1/8. $550 was/is pretty decent support and, while that might have been seemingly far away (underlying was around $650 or so), the whole idea was to minimize risk while exposing my otherwise unused capital. I think I might have sold at something like $1.80 or $1.75 extrinsic value, so my profit is something like $2600-2800 over a week and a half. That's pretty terrible from a return on capital perspective--something like 0.1%/week assuming my remedial math checks out--but also (I figure, anyway) good to cover a ~month of retirement.

 

[MP3Mike]

My crappy assumption then! I assumed most here would be leveraging portfolio margin, which IBKR offers. Some Canadian brokers allow you to open a Margin account with our Roth IRA equivalents (TFSA) as collateral for buying power. Can't do the same on our IRA/401k equivalent.

Yeah, the IRS frowns on that: Can a Roth IRA Be Used as Collateral?

Tax Consequences

The moment you pledge all or a portion of your Roth IRA as collateral, the IRS says you have taken a distribution from your account. If your account has been open at least five years and you are 59 1/2, you do not owe taxes on the amount; however, you miss out on possible tax-free earnings that portion of your distribution may have earned. If you are not yet 59 1/2, or you are but your account has not yet been open five years, you owe a 10 percent penalty on amounts you withdraw that exceed your total Roth IRA contributions.

So technically you can, but just by pledging it you have essentially withdrawn it from the Roth IRA.

 

[st_lopes]

Yeah, the IRS frowns on that: Can a Roth IRA Be Used as Collateral?

So technically you can, but just by pledging it you have essentially withdrawn it from the Roth IRA.

Interesting! Don’t have that dynamic in Canada.

 

[adiggs]

1) I played the last ZM earnings (Nov) with ITM CCs. I entered $360 covered calls with underlying at $400, ~2 weeks out from earnings (with an expiration the following week--so a ~3 week play), with a time value of ~$18. $360 was good support at the time, and while the price rose up to ~$486 before earnings, it crashed to ~$394 after earnings. Total non issue for me, I walked away with $1800 x a bunch of contracts (I don't know how many off the top of my head, they were spread around a bunch of accounts) at something like ~1.5%/week return on capital. Annualize 1.5%/week on pretty safe positions and that's a good deal...

Using this example, if the shares had stayed at $486 instead of crashing back to $394, how would that trade have evolved? You'd have collected the $58 premium up front, but you'd have ended with a premium of ~$126, so you'd be behind at that point by a fair bit.

 

[vwman111]

For anyone that cares, I did this today. I had sold on 12/21 Covered Calls for $700, which had gone from OTM to ITM. Today I rolled them out to Feb 5, and at a higher price of $765 for some additional premium. I used the proceeds to add to the core TSLA position today. The goal is to get another 100 shares in play for more covered calls, but I'm not there yet.

How are you "feeling" with the after hours move, with your new strike getting close to being ATM. Will you just keep repeating what you did today until you can get ahead of the share price?

 

[bkp_duke]

How are you "feeling" with the after hours move, with your new strike getting close to being ATM. Will you just keep repeating what you did today until you can get ahead of the share price?

Yep, no regrets because the proceeds were used to add to my TSLA position,and those shares appreciated nearly instantly.

And yes, I'll keep rinsing and repeating. The goal is to keep adding to my position faster than I would be able to otherwise.

 

[adiggs]

Yep, no regrets because the proceeds were used to add to my TSLA position,and those shares appreciated nearly instantly.

And yes, I'll keep rinsing and repeating. The goal is to keep adding to my position faster than I would be able to otherwise.

And I suppose that the end result of a particular sequence of these trades is incremental shares, plus a premium on a position that expires worthless (or gets closed early).

The two risks that I can see - shares going up, and shares going down.

If the shares go up too far, too fast, then you end up with the shares you bought with the CC proceeds but you aren't able to roll the covered calls far and fast enough to maintain the position. As an extreme example, you wake up on Friday with a $1300 share price. Those $765 calls will be so deeply ITM that there will be very little time value to use for rolling up your 765 strike. Then again, you only need to roll 1 strike to delay the inevitable and provide time for that 1300 spike to come back to something closer (where you can roll for more than 1 strike at a time).

If you "can't" roll to delay the inevitable, then you sell the shares at the CC strike. This is the real risk. Then again, there is always a LITTLE bit of time value on a roll, so you can just keep the strike the same and keep rolling week to week, month to month. If you can't catch up with the share price, you'll always have the liability hanging over the shares and you won't have free and easy access to them. You would either buy out of the position by also selling the shares, or you'd most likely allow them to go to expiration at some point to erase the liability and convert the covered shares into cash at their strike.


If the shares go down, then you have the shares plus the premium / liability expires worthless, and you just end up with more shares. Since you want to hold more shares for the long term, more shares and a $350 share price is the same as more shares and a $700 share price, or more shares plus a $1500 share price (which is to say, more shares).


I'm just writing that down / talking out loud, to make sure that I understand the larger approach and risks / the way you're thinking about this. Did I miss anything?

(And I like it - more ideas to be thinking about)

 

[bxr140]

Using this example, if the shares had stayed at $486 instead of crashing back to $394, how would that trade have evolved? You'd have collected the $58 premium up front, but you'd have ended with a premium of ~$126, so you'd be behind at that point by a fair bit.

Short story, at expiration, any close above $360 would have earned me $18/share, full stop.

In the $486 example, at expiration you're right that the -C would have been ($126 = $40 + $86). The first $40 was what I initially collected in intrinsic value ($58 = $40in+ $18ex), and so that $40 of the $126 at expiration is net-zero canceled out by the initial $40 of the $58 I collected. Similarly the $86 increase in intrinsic value would have been exactly offset by the 100 shares that were worth $86 more than when I bought them, which again would have a net-zero impact to me.

The only math left over is the initial $18 in extrinsic value, which is mine to keep.

At expiration the call obligates me to issue someone 100 shares at (in this case) at $360, but the shares are still worth $486 to me. So that extra $126 is mine, just as if I bought shares outright at $360 and sold at $486. I just happen to simultaneously owe $126 on the -C...so the two just cancel out.

From a completely different perspective, I effectively paid $342 for shares that I knew I would sell at $360 [as long as underlying stayed above $360].

This was 100% a volatility play, with a (to me) conservative break even. I typically don't like playing earnings directional games, since we see all the time companies crushing earnings and tanking during the call (not to mention IV crush can be a bear), but I do love to capitalize on high volatility around earnings. A pretty safe window of price action on top of super high volatility works really well with the notion of selling high volatility and buying low volatility.

 

[bkp_duke]

And I suppose that the end result of a particular sequence of these trades is incremental shares, plus a premium on a position that expires worthless (or gets closed early).

The two risks that I can see - shares going up, and shares going down.

If the shares go up too far, too fast, then you end up with the shares you bought with the CC proceeds but you aren't able to roll the covered calls far and fast enough to maintain the position. As an extreme example, you wake up on Friday with a $1300 share price. Those $765 calls will be so deeply ITM that there will be very little time value to use for rolling up your 765 strike. Then again, you only need to roll 1 strike to delay the inevitable and provide time for that 1300 spike to come back to something closer (where you can roll for more than 1 strike at a time).

If you "can't" roll to delay the inevitable, then you sell the shares at the CC strike. This is the real risk. Then again, there is always a LITTLE bit of time value on a roll, so you can just keep the strike the same and keep rolling week to week, month to month. If you can't catch up with the share price, you'll always have the liability hanging over the shares and you won't have free and easy access to them. You would either buy out of the position by also selling the shares, or you'd most likely allow them to go to expiration at some point to erase the liability and convert the covered shares into cash at their strike.


If the shares go down, then you have the shares plus the premium / liability expires worthless, and you just end up with more shares. Since you want to hold more shares for the long term, more shares and a $350 share price is the same as more shares and a $700 share price, or more shares plus a $1500 share price (which is to say, more shares).


I'm just writing that down / talking out loud, to make sure that I understand the larger approach and risks / the way you're thinking about this. Did I miss anything?

(And I like it - more ideas to be thinking about)

This is correct. And to be frank, I watch both the share price and my options prices in near real time (separate screen while I work). So it's not uncommon for me to go in and out of the same position once or twice a week to make a little extra coin.

Your rapid appreciation scenario is exactly why I didn't sell any CC's after S&P inclusion was announced. And I get twitchy doing what I did today: selling a call that expires after quarterly earnings (but the pricing was too attractive to pass up). I'll take that risk this time, but not always.

 

[juanmedina]

Short story, at expiration, any close above $360 would have earned me $18/share, full stop.

In the $486 example, at expiration you're right that the -C would have been ($126 = $40 + $86). The first $40 was what I initially collected in intrinsic value ($58 = $40in+ $18ex), and so that $40 of the $126 at expiration is net-zero canceled out by the initial $40 of the $58 I collected. Similarly the $86 increase in intrinsic value would have been exactly offset by the 100 shares that were worth $86 more than when I bought them, which again would have a net-zero impact to me.

The only math left over is the initial $18 in extrinsic value, which is mine to keep.

At expiration the call obligates me to issue someone 100 shares at (in this case) at $360, but the shares are still worth $486 to me. So that extra $126 is mine, just as if I bought shares outright at $360 and sold at $486. I just happen to simultaneously owe $126 on the -C...so the two just cancel out.

From a completely different perspective, I effectively paid $342 for shares that I knew I would sell at $360 [as long as underlying stayed above $360].

This was 100% a volatility play, with a (to me) conservative break even. I typically don't like playing earnings directional games, since we see all the time companies crushing earnings and tanking during the call (not to mention IV crush can be a bear), but I do love to capitalize on high volatility around earnings. A pretty safe window of price action on top of super high volatility works really well with the notion of selling high volatility and buying low volatility.

Interesting. So this works for capital that you having sitting around or recently purchased shares because of taxes? or are you selling those against cheap call options? I am somewhat confused. The shares that I have in my after tax account I had them for years so taxes would be a problem.

 

[ReddyLeaf]

How deep depends on the play that I'm making. It usually comes down to one of two things: 1) Capturing high volatility in a retirement account or margined account, and 2) leveraging otherwise unused capital in a retirement account.

1) I played the last ZM earnings (Nov) with ITM CCs. I entered $360 covered calls with underlying at $400, ~2 weeks out from earnings (with an expiration the following week--so a ~3 week play), with a time value of ~$18. $360 was good support at the time, and while the price rose up to ~$486 before earnings, it crashed to ~$394 after earnings. Total non issue for me, I walked away with $1800 x a bunch of contracts (I don't know how many off the top of my head, they were spread around a bunch of accounts) at something like ~1.5%/week return on capital. Annualize 1.5%/week on pretty safe positions and that's a good deal...

2) Last week I realized that I wasn't oversubscribed on capital and also wasn't planning on making any big trades (that was after buying 50 TSLA calls...which BTW are up 75% in less than a week) so I entered 15x $550 covered calls for 1/8. $550 was/is pretty decent support and, while that might have been seemingly far away (underlying was around $650 or so), the whole idea was to minimize risk while exposing my otherwise unused capital. I think I might have sold at something like $1.80 or $1.75 extrinsic value, so my profit is something like $2600-2800 over a week and a half. That's pretty terrible from a return on capital perspective--something like 0.1%/week assuming my remedial math checks out--but also (I figure, anyway) good to cover a ~month of retirement.

Thanks for explaining this further. You are definitely at another level. I feel fortunate to get close to ATM and/or trade more than one contract. My most risky trade was buying 50x OTM calls before the S&P inclusion, which fortunately worked because I was able to dump most of them for a small profit before they expired OTM and worthless on 12/18. I read all of your posts and try to learn something, even though I probably won’t trade anything like you.

All: Thanks to all for the interesting learning today. Big SP jump after hours. I’m definitely worried for those sold 850c. Looks like I’ll be buying those back soon and/or rolling forward. Thankfully it will be good for those bought 720c and sold 585p. Fun stuff. I just need to stop selling CCs, even $100+ OTM.

 

[st_lopes]

This week's position:
660p 01/08 - CLOSED at 70% gain (STO $9.9, BTC $2.9)
780cc 01/08 - STO $4.25

Next week's position:
670p 01/15 - STO 10.05
cc TBD; likely 800-850 depending on where we end this week

For those following along...

This week's position:

50x 660p 01/08 - CLOSED at 70% gain (STO 12/31 $9.9, BTC 01/04 $2.9)
29x 780cc 01/08 - CLOSED at 100% loss (STO 12/31 $4.25, BTC 01/06 $9)

Uncomfortable mental games on the 780cc. I was going to clip them just shy of 70% of sold premium yesterday, but my day job got in the way of that. With the gap-up overnight it opened near my stop limit. Fortunately, it came down quickly... now to see how the next three trading days play out!

UPDATE: And that last rally hit my stop loss (100% loss). Rolled up and out to next week for a net add'l premium. Time will tell when I can go back to selling $100+ OTM to re-align to my desired risk profile.

Next week's position:

50x 670p 01/15 - CLOSED at 70% gain (STO 01/04 $10.05, BTC 01/06 $3)
10x 660p 01/15 - CLOSED at 70% gain (STO $11.2 01/05, BTC 01/06 $3.3)
10x 715p 01/15 - STO 01/06 $10.55
40x 720p 01/015 - STO 01/06 $8.90
34x 810c 01/15 - STO 01/06 $10.70 ... Out of comfort zone on the 810.

Net gain this week $63k.

Edit: Updated for clips and rolls on last rally. I wouldn't mind if today's rally stopped now...

 

[juanmedina]

For those following along...

This week's position:

50x 660p 01/08 - CLOSED at 70% gain (STO 12/31 $9.9, BTC 01/04 $2.9)
29x 780cc 01/08 - STO 12/31 $4.25

Uncomfortable mental games on the 780cc. I was going to clip them just shy of 70% of sold premium yesterday, but my day job got in the way of that. With the gap-up overnight it opened near my stop limit. Fortunately, it came down quickly... now to see how the next three trading days play out!

Next week's position:

50x 670p 01/15 - STO 01/04 $10.05
*NEW* 10x 660p 01/15 - CLOSED at 70% gain (STO $11.2 01/05, BTC 01/06 $3.3)
*NEW* 10x 715p 01/15 - STO 01/06 $10.55
cc TBD; likely 850+ depending on where we end this week

so you have a portfolio margin account? I never use my margin but sold 1x 660p 01/08 on margin and just closed it. I can only sell about 7 puts on regular margin. So you are selling puts with a 0.3 delta or 70% probability of winning? do you set any stops?

I just closed a 680p 01/08 and I am closing 2x 610 01/15 but they are cash covered. My 4x 01/29 800c covered call are not looking good .

 

[st_lopes]

Thanks for explaining this further. You are definitely at another level. I feel fortunate to get close to ATM and/or trade more than one contract. My most risky trade was buying 50x OTM calls before the S&P inclusion, which fortunately worked because I was able to dump most of them for a small profit before they expired OTM and worthless on 12/18. I read all of your posts and try to learn something, even though I probably won’t trade anything like you.

All: Thanks to all for the interesting learning today. Big SP jump after hours. I’m definitely worried for those sold 850c. Looks like I’ll be buying those back soon and/or rolling forward. Thankfully it will be good for those bought 720c and sold 585p. Fun stuff. I just need to stop selling CCs, even $100+ OTM.

I am still wrapping my head around @bxr140 ZM earnings play. I get that you're basically JUST focused on theta decay on the extrinsic value. I just struggle to understand the logic on the overall position. I could understand it better as a naked call, but as a covered call seems like you have essentially hedged volatility against your underlying position. You're giving upside and setting your downside floor below natural resistance points?

 

[st_lopes]

so you have a portfolio margin account? I never use my margin but sold 1x 660p 01/08 on margin and just closed it. I can only sell about 7 puts on regular margin. So you are selling puts with a 0.3 delta or 70% probability of winning? do you set any stops?

I just closed a 680p 01/08 and I am closing 2x 610 01/15 but they are cash covered. My 4x 01/29 800c covered call are not looking good .

Yep, portfolio margin account. We don't have the same tax consequences in Canada of collateralizing a non-taxable account for margin.

I usually aim for 0.3 delta, though sometimes lower. Generally looking for a $10 per contract on puts, and $5 on calls.

I set stop loss on my cc, but generally don't on the puts.

Edit: clarify target premiums

 

[adiggs]

I purchased 1 lot worth of shares at $730 and then wrote a ~.30 delta straddle against those shares at 760c and 710p expiring this Friday for about a $20 premium between the 2 options.

I rolled my farther OTM 675 puts out to Jan 15 for a $7 and $7.50 credit. The Jan 8 legs closed at <$.065 (free commission!).

This straddle position is looking like I'm going to get to execute a roll. The 760c has about $9 worth of time value remaining (option around $19, and $10 in the money). So I'm waiting on the roll until tomorrow at least for more of that time value to dissipate. With this much time value, I'll probably be waiting into Friday earlier in the trading session to roll (I would like the time value to be $1 or less when I roll this particular position).

 

[LN1_Casey]

I've rolled this week's put twice so far this week. From 650 to 695 to 725, each time earning about $200. Helpful, as I may have to roll my covered call at 800 if the SP keep raising so much.

According to maximum pain, however, the call volume at 750 has only gone up. Now it sits at 325.8k from yesterday's 24.9k.

(Also, side note, when you google "maximum pain" to get the website, TSLA stock options is an automatic sub group that appears on the google search too. Google knows what's up)

 

[WattsHappening]

And I suppose that the end result of a particular sequence of these trades is incremental shares, plus a premium on a position that expires worthless (or gets closed early).

The two risks that I can see - shares going up, and shares going down.

If the shares go up too far, too fast, then you end up with the shares you bought with the CC proceeds but you aren't able to roll the covered calls far and fast enough to maintain the position. As an extreme example, you wake up on Friday with a $1300 share price. Those $765 calls will be so deeply ITM that there will be very little time value to use for rolling up your 765 strike. Then again, you only need to roll 1 strike to delay the inevitable and provide time for that 1300 spike to come back to something closer (where you can roll for more than 1 strike at a time).

If you "can't" roll to delay the inevitable, then you sell the shares at the CC strike. This is the real risk. Then again, there is always a LITTLE bit of time value on a roll, so you can just keep the strike the same and keep rolling week to week, month to month. If you can't catch up with the share price, you'll always have the liability hanging over the shares and you won't have free and easy access to them. You would either buy out of the position by also selling the shares, or you'd most likely allow them to go to expiration at some point to erase the liability and convert the covered shares into cash at their strike.


If the shares go down, then you have the shares plus the premium / liability expires worthless, and you just end up with more shares. Since you want to hold more shares for the long term, more shares and a $350 share price is the same as more shares and a $700 share price, or more shares plus a $1500 share price (which is to say, more shares).


I'm just writing that down / talking out loud, to make sure that I understand the larger approach and risks / the way you're thinking about this. Did I miss anything?

(And I like it - more ideas to be thinking about)

Very helpful. I must be dense or missing something. I don't understand how this strategy works in real life. If the SP keeps increasing, It seems to me that you would always be closing out the CC at a loss. If you are using the premiums collected to purchase additional shares, where does the cash come from to buy back the CC?