Wiki Selling TSLA Options - Be the House

[ammulder]

I bet last year's TSLA run will rip either of these strategies to pieces

For my part, the large gain in TSLA and insight here has resulted in me having access to enough margin to sell puts. I can sell puts for income without tapping much of that margin. I'm not really interested in using lots of margin to buy shares instead. So it's not a matter of "how can I create the maximum increase in net worth" but "how can I do something productive with this margin that I don't particular want to use much of", and income is productive. Heck, I can use it to buy more shares.

So the ability to make money on this strategy would then be dependent on your ability to make short term stock move predictions.

I thought the original concept was to make money during times when the stock was relatively flat. In a world where it's not just "up every day", puts and calls outside the standing zone are a way to do something other than watch your balance not really change. All the discussions about rolling seem to be the emergency actions you take when the stock is more volatile than that (in either direction).

I am new to this but I expect I'm making more money selling puts when the stock keeps rising than I would if it was pretty level, because I keep selling them early for a profit and selling higher-strike ones. (And then sometimes buying them back when the stock dives later in the day.) That works out well enough on the put side, but on the call side, it's roll, roll, roll when the price keeps jumping up. Or else, go back to a proper wheel where you let the shares get called and switch to puts.

 

[WattsHappening]

Schwab. To roll my 6x naked puts a week - this is how to do it. Will get paid an additional $3150.


View attachment 625250

Thanks @Runarbt!
This is perfect. I do see that screen you posted as I have level 2 trading.

 

[adiggs]

For example, if I were selling calls against my stock since 2014 and then when it started going up I'd got the message and just held, that would be very profitable. If, on the other hand, I wouldn't get the message and tried to recover by moving out and up, I'd have huge losses that would not recover.

I agree with just about everything. The one bit that I think you're losing track of here is in the "huge losses that would not recover".

Relative to simply owning shares, then "huge losses" would be earning less than you'd have earned simply holding the shares. Your account is still growing in value. The position on it's own will be positive - it might just be less positive. And for your context, simply owning stock may be your best approach. It certainly was for me through summer of this year (since fall 2012).


Details from the example I'm working right now. I purchased shares at $735 on Monday (was it really that short of a time ago!?!) and sold the 760 call expiring on Friday. With the shares at $800 that call has a $41.50 premium ($40 ITM and $1.50 time value, roughly). Sold the option for $9, buy to close at $41.50 - loss of $32.50 right? Not actually - as one choice I have available is to allow this call to go to expiration (don't bother trying to roll). At expiration and a share price of $800 I -could- have earned $65 by simply holding the shares.

But I sold the 760 call, so my earnings are the original $9 premium plus $25 in the strike to strike improvement (buy 735, sell 760). I net $34 ("loss" of $31) but the account shows $3400 more cash after than before.

But this isn't what the shares WERE going to do - it was 1 out of a universe of things that could have happened (including flat at 735, or down to 650, etc..).

This dynamic is why covered calls can be viewed as risk mitigation. I've lost access to upside past $760, but I also received $9 which mitigates moves to the downside - that takes some risk out of the position. For my context, this is a good trade (lower potential profit, while still being more than adequate, that lowers my overall risk).


In the case of the perpetual roll, the unrecoverable losses aren't piling up. But the gains are piling up more slowly. In my present example, I'll be looking at how to roll that 760 call to a closer strike. If I get to the 770 strike with a $5 net credit, then I'm setting myself up to earn $15 over the roll period ($10 for a better sale price, plus the $5 net credit). I'd have earned $25 sale profit + $9 premium from week 1.

It turns out that this is nearly exactly the trade that is available to me right this moment. I can roll straight out (760 to 760) with a 1 week longer expiration for a $11 net credit. Going up at the same time (765 strike) is an $7 net credit. Going up to the 770 strike is a $5 net credit. Heck - I kinda think I'm going to do this, but I'll post about that separately . In my universe, $15 for a covered call in 1 week is mind blowingly good; even if it's less than what could have been earned through buy and hold, it's also lower risk than buy and hold.


AND, to be clear - this is still something I'm figuring the details and dynamics on; that's why I'm doing this with a single position right now. So far these results look outstanding to me, including the roll I'm contemplating, but I also lack experience with it - how does the position evolve when shares are going down for instance? I'm getting a quick lesson (good!) in what it looks like when the shares go up a lot in one week.

 

[adiggs]

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

Roll Thursday has arrived (Thursday before expiration) and the 760 call is ITM. With shares at $800.30 the call is trading at $42.40. So I'm $40 ITM with a $2.10 time value remaining.

That is a bit more time value than I would like to have at roll time, so I'm probably going to wait until later today or tomorrow based on what I know right now.

However, if I were rolling right now, some different choices that are in the right ballpark:
- roll out 1 week to the 760 strike for $54.30 premium. That'll be a net credit of $12 or so.
- roll out 1 week to the 765 strike for a $50.50 premium, with a net credit of about $8.
- roll out 1 week to the 770 strike for a $47.30 premium; net credit about $5
- roll out 1 week to the 775 strike for a $44 premium; net credit about $2
- roll out 1 week to the 780 strike for a $41 premium; net debit about $1 (NOPE)

- roll out 2 weeks to the 760 strike for a $63 premium; net credit about $21 (h'mmm...)
- roll out 2 weeks to the 770 strike for a $57.30 premium; net credit about $15
- roll out 2 weeks to the 780 strike for a $51.40 premium; net credit about $9 (roughly $5 per week, and that's my mental target; $5/week/contract)
- roll out 2 weeks to the 790 strike for a $46 premium; net credit about $ 4

Looks like I can get a small net credit all the way up to the 795 strike.


Out of these available positions, the two that look most appealing to me are:
- the 1 week roll to 770 for a $5 net credit
- the 2 week roll to 780 for a $9 net credit

Net profitability, assuming share price is ITM and these positions go to assignment:
#1. $35 profit on the shares (770 - 735). +$9 for the first week premium plus $5 for the second week premium. That's $49 over 2 weeks on 1 covered call (of which $34 were earned in week 1, and $15 were earned in week 2). And of course, I'll have a similar decision to make in 1 week (roll or let it be assigned).

#2 $45 profit on the shares (780 - 735). +$9 first week premium plus $9 week 2&3 premium for $63 overall profit over 3 weeks for 1 covered call. If we distribute the incremental profit evenly over week 2 and 3 (it was 1 position after all), then we earned $34 of that in week 1 and $29 over the last 2 weeks or about $15 per week.

Decision: Do nothing yet - wait for the time value on the current position to decay further. That 'later' might be later today.


But - were I to act now, the 2 good positions look about the same to me. The benefit of the 1 week roll is that I get feedback and an opportunity to adjust the strike sooner. That might be particularly valuable in this rapidly rising share environment.

The benefit of the 2 week roll is that it locks in that $15/week profit. All of these numbers have been assuming that the call continues to be ITM.

If I 'catch up' and it finishes OTM in week 1 or 2, then the net profit is $14 for the first position (the original premium plus the net credit) over 2 weeks. For the second roll option that finishes OTM the profit is $18 over 3 weeks.

This math tells me that I have multiple good choices available right now (good). It also tells me that I want to aim for that $5-6 credit per week as much as possible. Reality is that more like $5-6 in 1 week of each month is good enough for me, but earning it weekly will create a buffer against those weeks that don't perform this well.

 

[adiggs]

Roll Thursday has arrived (Thursday before expiration) and the 760 call is ITM. With shares at $800.30 the call is trading at $42.40. So I'm $40 ITM with a $2.10 time value remaining.

I HAVE acted on the other leg of this straddle / trade this morning. When this all started, I also sold the 710 put to create a 710p / 760c straddle. I've rolled the 710 put up to 760, turning this position into a strangle (put and call at the same strike). The 710 was closed at about $0.50 and the 760 was opened at $2.50, so I get a ~$2 net credit on the same expiration (Friday).

My thinking here is that the put had very little time value left (50 cents) and rolling up got me some extra time value to decay aggressively.

EDIT to add: Maybe 15 minutes later after this roll, and I've already had about $0.40 in time decay on a flat share price. Last few days of time decay are brutal for buyers, and great for us sellers.


Assuming that the 760 rolls tomorrow at .50, then I'll have earned the $2 incremental premium I just rolled into along with the original premium on this leg of the straddle (I think it was $11). The extra $2 isn't much, but I want to keep this put lined up with the call so I roll into the new straddle next week at the same time.

 

[bxr140]

can someone explain why is Fidelity insisting on this being a limit order? Why can't I just tell them to execute the roll at market price?

Its Fidelity's approach to processing multi-leg trades, and I think there may be something in there about the way the exchange(s) actually process multi leg trades too (though I'm not totally sure on that so would appreciate any input/education). I've run into a similar situation with Fidelity where you can't set a stop loss on a spread....when I called up their trade desk to inquire I got quite a rude "why would you want to do that nOOb?" response, so thanked the person for their time and went on my way (as opposed to rattling off follow on questions).

FWIW, its always a good idea and especially when selling options to assess the actual lo-mid-hi price, roll or otherwise.

 

[adiggs]

Roll Thursday has arrived (Thursday before expiration) and the 760 call is ITM. With shares at $800.30 the call is trading at $42.40. So I'm $40 ITM with a $2.10 time value remaining.

This is all moving pretty fast this morning! The roll of this weeks 710/760 straddle to next week is complete. The new Jan 15 position is the 760p / 770c straddle (shares were near $800 at time of roll).

For the 710p I rolled up to a 760p an hour or less go, I rolled it straight out to the 760 Jan 15 put for a $11.34 net credit. On the closing leg, that's about an $0.80 profit in an hour or less (if only I could repeat THAT at arbitrarily large volumes ). Overall profit on the put for this week expiration was a little under $12.

On the call side, I decided to roll 1 week (more frequent feedback = faster learning / experience) to the 770 strike for a $4.00 net credit. I'm good with that result.


What might be interesting though is what the individual trades on the call roll looks like.
I opened the 760 call and received $901.29 net proceeds for selling that call at the beginning of the week and this trade.
I closed that 760 call on Thursday (4 days later) and payed $4563.69 to close it, while selling the Jan 15 770c and receiving $4962.20 (a $4 net credit, less the commission and fees from trading).

So the first call shows a realized loss of 3662.40. The replacement call for next week starts out with 4962.20 in value. The difference is the original $9 premium plus the incremental $4 net credit.


My decision to roll the call now instead of tomorrow is very similar to my decision to roll the put up. The $ time decay on the Jan 8 760 call was getting pretty small, while the $ time decay available on the Jan 15 770 call is much higher.

So I can generalize a little bit (from 1 unit of experience) from "roll at ~0 time value" to "roll when the time decay in the new position is higher". That's probably not quite right either, and I wouldn't roll at the crossover point.


Using this particular position as my guide, I'll keep rolling the call as long as I'm generating a gain in the upcoming period that I find desirable. That will be a combination of the strike gain (0 might be ok) and a large enough net credit each week / time period to retain my interest.

When I get to a roll and I don't have the credit / strike improvement that I want, then I let the position go to expiration instead. Because of my risk aversion, on this position, I'll bias towards small strike price improvements and bigger net credits.

 

[bxr140]

And.. my head starts to hurt if I try to think about the math that would be involved if we try to somehow capture how to optimize this that considers various possibilities of where the underlying moves if you do roll early. Uggh.

Eye roll for most at this point, but this above complexity is one of many reasons why selling options to capitalize on underlying movement is not the way smart money goes about making money.

Edit: actually now that I think about this, rolling out an ITM short call would make sense to go into ATM call since ATM call has maximum time value. So then the choice is simply based on if the slope of time value decay curve for an ITM option is steeper than for ATM option of a further expiration. Looks like that should for the most part favor keeping the ITM option.

From a practical perspective its hard to roll an ITM to ATM at net-zero, unless strike is really close to underlying. If one is ok with paying to roll, then yes, rolling to ATM/NTM maximizes extrinsic value and theta.

 

[LN1_Casey]

Welp. I am happy to have closed out of my 800 covered call yesterday during the riot dip, even if it only gained a little bit of money.

I also closed out my $725 put this morning, since I had in place a $0.69 buy limit set. Lol, figured it would have popped nearer to the end of the day or tomorrow sometime, but hey, a tidy sum of almost $300 for a day's wait isn't bad at all.

I sold a $950 covered call for next Friday for a small $2.77, and then followed up with a $745 put for a nicer $10.70. Now that my taxes are all paid up, going to start turning these options into shares, one nibble at a time with how pricy they're getting, haha.

 

[bxr140]

Hemmmmmmm...... To continue this to the extreme, can someone explain why is this wheel thing even a thing? Why is it not more profitable to keep selling ATM calls and letting them expire if the stock went down, and rolling them forward and up to ATM if the stock went up?

At some point ITM rolling is a really low return strategy, and ultimately, near impossible return strategy. The issue is that its hard to claw back an ITM call because as underlying goes down the intrinsic value of a contract goes up, and at the same time the extrinsic value gets smaller and smaller (since extrinsic always peaks ~ATM). Eventually you get to a point where the gain in extrinsic from rolling out (let alone up) isn't even enough to cover the B/A spread on the roll ticket. You might need to roll out many weeks if not a month or two just to hold a strike, and that manifests as you tying up a ton of capital to make literally no money.

The wheel, fundamentally, avoids that situation via assignments.

To be clear, I'm not advocating for The Wheel, I'm just not not advocating for The Wheel. Implemented properly its a valid strategy.

Maybe a bit out of place in context, but its also good to remember that The Wheel is asymmetrical; a covered call is not the opposite of a cash covered (let alone naked) put.


Totally sideways, to keep running with your extreme thought experiment, if one is really looking to profit on time value one could sell a ~zero ∆ (= ~ATM) straddle and constantly maintain a low ∆ with maintenance rolling. With high volatility contracts this can actually work out pretty well because for the most part IV and gamma are opposite (high IV = low gamma). Just as a refresher gamma is the rate of change of ∆--so if gamma is low that means ∆ will move slower with underlying movement--perfect for a position that will be negatively impacted by ∆ in either direction! The downside of course is that big underlying moves will be hard to manage (you might not be able to keep up with ∆), and the unlimited downside on both sides of such a position combined with the potential of tripping a margin call are also something to consider.

Similar to Gamma Scalping (super cool, FYI) one could augment maintenance of such a straddle by buying and selling long and short shares. If underlying moves too far up and ∆ on the straddle goes "up" to -20, then buy 20 shares to get back to ~0 ∆. Same on the other side with shorting shares.

One could also modify the above into a straddle or some kind of closed multi leg strategy like a butterfly, Iron Condor, Double Calendar, etc. (all of which could also be asymmetric variants). TLDR on the straddle or any closed strategy is that there is less total profit potential but a wider underlying window of profit.

 

[bxr140]

This whole thing really makes me want to run those algos on historical data. I'm getting a feeling that either way you go you'll end up with about 0 dollars on a long enough time span. If you get an unlucky time span with a big spike up, you'll get negative. If you get a lucky time span with only moderate price changes, you'll make money. So the ability to make money on this strategy would then be dependent on your ability to make short term stock move predictions.

Yes, exactly!

Any properly applied wheel strategy needs to be dynamic, balancing conservatism and aggression with volatility and likely price action. It is very much like counting cards at the blackjack table and adjusting your bet vs just applying straight blackjack strategy. The latter can still pay out if you're lucky, but in the statistical long run it will not. The wheel is certainly more forgiving than the casino table as it can pay out for even the most clumsy trader; randomly picking strikes and expirations is kinda like playing at the dollar table where all the kooks go and applying some kind of logical strategy is like playing at higher minimum tables...

To be clear for some folks skeptical of what I've been saying here, the reference to price action above does NOT contradict my long standing point that selling contracts are terrible directional plays; I've also been long saying that technical analysis is imperative for sustaining The Wheel.

 

[bxr140]

For my part, the large gain in TSLA and insight here has resulted in me having access to enough margin to sell puts. I can sell puts for income without tapping much of that margin. I'm not really interested in using lots of margin to buy shares instead. So it's not a matter of "how can I create the maximum increase in net worth" but "how can I do something productive with this margin that I don't particular want to use much of", and income is productive.

I can't overstate how spot on this philosophy is when it comes to selling options.

 

[sub]

I'm assuming there are some nervous covered call sellers around these parts right now? I do like the idea of using margin to sell puts, margin that you wouldn't otherwise leverage up with shares. I'm in an IRA so no margin.

 

[st_lopes]

I'm assuming there are some nervous covered call sellers around these parts right now? I do like the idea of using margin to sell puts, margin that you wouldn't otherwise leverage up with shares. I'm in an IRA so no margin.

Rolled the 810c 01/15 to 835c 01/22 for a $1 net credit. This was after rolling a 780c 01/08 to 810c 01/15 for $1.7 net credit. So, now sitting on $6.95 of net credit accumulated since the 780c sale on 12/31.

Next roll, if there is one, likely to be 30+ days out and a much higher strike.

That said... all those margined puts are looking great and likely to clip tomorrow at target gains, absent some major downward price action.

 

[dakh]

I'm assuming there are some nervous covered call sellers around these parts right now? I do like the idea of using margin to sell puts, margin that you wouldn't otherwise leverage up with shares. I'm in an IRA so no margin.

I'm not nervous I'm just curious what's gonna happen and not sure what do I want out of this deal. On one hand I wanna keep playing, on another hand I'm again getting stupid overweight on TSLA so need to trim. But giving up 500 shares is kinda tough Then again, the previous batch I sold went into GBTC and look where that is now. And one before that went into MP Materials which shot up like crazy as well.

I think out of my -5 780c I'll let 3 get assigned, roll 1 into ATM and pay the difference (given the AH action might be substantial), and roll 1 for neutral cash whatever that strike price ends up. And see how they do.

 

[dakh]

Yes, exactly!

Any properly applied wheel strategy needs to be dynamic, balancing conservatism and aggression with volatility and likely price action. It is very much like counting cards at the blackjack table and adjusting your bet vs just applying straight blackjack strategy. The latter can still pay out if you're lucky, but in the statistical long run it will not. The wheel is certainly more forgiving than the casino table as it can pay out for even the most clumsy trader; randomly picking strikes and expirations is kinda like playing at the dollar table where all the kooks go and applying some kind of logical strategy is like playing at higher minimum tables...

To be clear for some folks skeptical of what I've been saying here, the reference to price action above does NOT contradict my long standing point that selling contracts are terrible directional plays; I've also been long saying that technical analysis is imperative for sustaining The Wheel.

Thanks a ton for all the education. This one you're effectively saying, do the wheel once you can read charts and all that as a tool to monetize what you see. Without having an insight on the current market situation, just stick to investing long term and don't mess around.

My perception is that with selling covered calls and cash covered puts what once can accomplish is to smooth out a lot of bumps vs. being just invested into stock. You'll still likely get some gain, but it is overall going to be more steady and you can use this to take out some revenue on regular basis. This seems better vs. having to sell even at lows if you're using an investment for income. I've also seen advice to only do this with less volatile names like SPY, but I think that's just because people don't know how to adjust this strategy to reflect higher volatility. Is that again just not worth the effort and likely won't work?

 

[dakh]

Eye roll for most at this point, but this above complexity is one of many reasons why selling options to capitalize on underlying movement is not the way smart money goes about making money.

Ok thank you, feels good that I kinda got some grasp of what's going on to be able to see these things.

From a practical perspective its hard to roll an ITM to ATM at net-zero, unless strike is really close to underlying. If one is ok with paying to roll, then yes, rolling to ATM/NTM maximizes extrinsic value and theta.

From the psychological perspective, it is natural to see that like one on-going trade. If one leg got you under water, you can then use as many later legs as it'll take to get back into green. From that perspective rolling out to ATM seems the most natural. But I have a feeling all kinds of monkey biases make this look good, and the real deal is to just take losses and continue with whatever is the optimal strategy, be it 0.5 standard deviation OTM strike or something else.

 

[bxr140]

Thanks a ton for all the education. This one you're effectively saying, do the wheel once you can read charts and all that as a tool to monetize what you see. Without having an insight on the current market situation, just stick to investing long term and don't mess around.

I wouldn't quite go that far as the wheel--when applied conservatively--can be pretty safe, and is a good entry into selling options. It does have the downside of fooling people into believing its all easy/free, but I've soapboxed enough on that topic...

I'd say the most important thing with the wheel is to not use it as a primary trading strategy, because there are much more efficient ways to earn weekly/monthly/annual profit. Its a great secondary strategy for otherwise unused capital that, when appropriately used, can again be pretty low risk.

If one leg got you under water, you can then use as many later legs as it'll take to get back into green. From that perspective rolling out to ATM seems the most natural. But I have a feeling all kinds of monkey biases make this look good, and the real deal is to just take losses and continue with whatever is the optimal strategy, be it 0.5 standard deviation OTM strike or something else.

It is true that the big downside of selling options is that one bad cycle can wipe out multiple cycles of profit. This can be realized in a few ways, one of which is to cut bait at a loss and reset the whole strategy. The value to this, as you rightly note, is that it gets you right back to whatever optimized positions your strategy defines. Another exit strategy is rolling the underwater position every cycle until you get back to the surface. I prefer this method, and I hard-rule that rolling is never done at cost to me, so it can sometimes take quite a few cycles as the rolls are typically to less than optimal strikes. Paying to roll really isn't an <ahem> option in this situation--for instance, one strategy would be to pay as much to roll the underwater contract as you collected on that contract [before it went underwater]. While certainly plausible, this basically leaves you with the best case scenario of breaking even over the two cycles...and potentially more cycles of the winds don't shift in your direction. While opinion vary widely, for me its a bad deal to tie up capital to make literally no money...

A final option is something I describe upthread as well: the roll-split and roll-split-flip. If you still have capital, you can shift the value of your single underwater contract into multiple above water contracts (and potentially farther expirations), with the idea that you can reduce the number of cycles to get out of The Bad Place...in exchange for the higher capital exposure/risk of carrying more contracts (nothing comes for free...)

If you have an underwater -P for instance, a roll split would split the value into two (or more) -P's, and you'd do this if you thought underlying was going to go up. The roll split flip would again split them into two (or more) contracts but this time would flip them to -C's...which might be a good idea if you think underlying is going to keep going down. (That's why you're underwater on the -P in the first place, after all). An advanced version of roll-split-flip would split the original -P into two or more contracts but this time on both sides, effectively evolving into a short straddle(s). A variant of this would be splitting into spreads (so, ending up with an Iron Condor) which can be maximize capital efficiency, though multiple tickets will be required to get there.

Spreads aside the above mostly works on accounts where sold options must be cash or share covered, though obviously a ton of capital might be required.

 

[Budding]

Hello, my first post here. I have been following this forum now for the last few months. I sold a CC expiring Feb 12 $1075 (sold when SP was $770). I cant believe that I am actually now getting worried about it. I do not want my core shares to be called away because the cost basis is low. I am using TDA currently. I applied for portfolio margin. Can someone please guide me about buying shares on margin in case the SP gets to $1075?
Thanks!

 

[ammulder]

Hello, my first post here. I have been following this forum now for the last few months. I sold a CC expiring Feb 12 $1075 (sold when SP was $770). I cant believe that I am actually now getting worried about it. I do not want my core shares to be called away because the cost basis is low. I am using TDA currently. I applied for portfolio margin. Can someone please guide me about buying shares on margin in case the SP gets to $1075?
Thanks!

Don't panic! You have time yet. If you read up the thread a bit, you will see many people discussing rolling the call (effectively, buying your Feb 12 $1075 back and selling perhaps a March or April one at a higher strike price, where the total transaction gives you a little profit and more room for the price to run before threatening your new call). That wouldn't require using margin.

The one thing I'll say about opening a new margin account is that when I did it, I got an approval note early some morning, and the margin numbers in my account made zero sense for that whole day. I thought I completely misunderstood margin, but it was just that the numbers didn't settle until the following day. Maybe your broker is better, but if the whole thing seems whacked when you're first approved, give it a day.