Wiki Selling TSLA Options - Be the House

[juanmedina]

So...buy low volatility, sell high volatility?
.

I wish it was that easy . On my last two trades I sold low volatility and I am still trying to figure out how to get out them .

So...buy low volatility, sell high volatility?



The idea is that at mega high volatility the pendulum effect is theoretically going to damp out underlying price action as time moves on. A straddle maximizes capturing that volatility since both sides of the position are at max extrinsic value. Yes, the idea is to close before expiration, though thinking out loud one could imagine using a straddle to enter into a share purchase or unload at a more favorable cost basis.

But anyway...for a normal ATM straddle that is intended to be closed, management of the position is pretty critical to consistent success, either by rolling up/down to follow big price moves, or offsetting deltas with shares/shortshares. The rub is that if you're in the center of your profit window max profit really spikes up in the last day or two of the position, so you kinda have to hold it out till the end. If you get an early expiration on Friday just turn around and close the executed trade.

As an augmentation to the ATM straddle concept, one could fold in the max pain theory and set the initial strikes at max pain. That theoretically maximizes profit at (near) expiration by minimizing the amount of intrinsic value the position accumulates. If the strikes are offset from ATM that doesn't change the

For funsies, here's an end of month ATM short straddle.
View attachment 626777

And here's a 760/860 short strangle. If you think of it a bit as an area under the curve problem where the areas is more or less equal to above (that's not a thing really, but it helps the visualization), you'll note that the max profit "peak" from above got smushed into a lower but wider "plateau".
View attachment 626786



It kinda depends on your perspective of "better". A strangle has a slightly wider profit window, but less maximum profit. So, assuming perfectly played positions, over time your total profit from a straddle strategy requires fewer trades. Fewer trades = less exposure, which is usually a good thing, and fewer trades = more capital available for other trades, which is usually a good thing.

FTR, I don't straddle or strangle. I don't naked.

Thanks for that post it was very helpful. So you don't sell naked puts either? I was thinking about doing +/- 30% from SP weekly strangles for pennies when IV is high. I need to fund that Tesla Roadster some how .

 

[Discoducky]

Sold a lot of puts today: 780, 760, 740 and 720. Will be an interesting week!

 

[dakh]

Ok so I rolled this week's -1 c780 to next week's -1 c800 for free and another -1 c780 to next week's c860 for -$4300. The other 3 contracts are getting assigned, for about $26K of a "loss" vs underlying, that I got paid about $1K for lol. That is where the sting really is, once the OTM call goes deeper ITM, whatever you got paid for it is peanuts compared to what you're missing out on in the underlying appreciation

Current status of this trade as of Monday's close: -c860 is now worth $1300 (cost basis 4300) and -c800 is worth 3500 (cost basis 8050).

Overall the math for the option trades I still have
+660 sold 2x c780

-8600 bought back c780
+4300 sold c860 -> -4300


-8500 bought back the other c780 (stock moved between me figuring out my orders)
+8050 sold c800 -> -450

+3000 if I buy back c860
+4550 if I buy back c800

so if I got rid of the remaining two sold calls, I'd be up $3460 from the whole mess

On the assignment side, I sold those c780s when TSLA was 735 and got assigned at 780. Peak on Friday was 882. So with 3 contracts assigned, I improved $13500 over when I sold c780s (I was ready to sell the shares actually), or I lost $30.6K compared to if I were to time selling those shares perfectly at 882 vs. my call strike. So if we assume those 300 shares had to go, I did $17.1K worse than the perfect timing. If I factor in the profit on the sold calls (if I took it), actually $13.6 worse than perfect timing. Given that it's an $234K transaction, I'm 6% away from the optimal

Let's see what tomorrow brings. If TSLA hangs around low 800's, I will likely close those positions since I think the chances for further inexplicable abrupt moves are pretty high.

 

[dakh]

Further assessing the above screenshot, IMHO the IV30 peaks at ~125 from the summer are probably not something we'll see in this IV rally, but the more recent ~105 peak is probably in reach--that would probably be when I'd start selling options. FTR I'm almost certainly going to repeat my above ZM earnings play (DITM CC) with TSLA and am just waiting for the right entry. Easy money would be to enter now. Smart money would be to enter later.

I'm looking into the ITM call writing and yes this looks pretty attractive. When you say "smart money would be to enter later", I'm going to guess that you'll be watching IV and price movement and looking to pick a good combination of high premium and a strike price that looks safe enough vs. the premium for you to be interested in entering this trade? At this point I believe the exact date of the ER is not known, so once that is known we watch IV and price action and enter a position that is capturing at least 1 day after ER?

 

[Budding]

Further assessing the above screenshot, IMHO the IV30 peaks at ~125 from the summer are probably not something we'll see in this IV rally, but the more recent ~105 peak is probably in reach--that would probably be when I'd start selling options. FTR I'm almost certainly going to repeat my above ZM earnings play (DITM CC) with TSLA and am just waiting for the right entry. Easy money would be to enter now. Smart money would be to enter later.
/QUOTE]

How do you view these IV charts. Do you know if this can be seen on TDA or ToS?

 

[sub]

Absolutely true. More generally, rapid movement in either direction can make it hard even to break even.

The question is what are you comparing against and what are you trying to accomplish. I personally am thinking more in terms of a $4000 share price by 2030 than $400. The thing is - I don't NEED $4000 / share, ever; somewhere around $400 (or $300), we achieved "enough". A $4000 share price would, obviously, be very fun. But that'll be something like 5-8x of "enough".

What I do need is more stability and income than TSLA (shares) by themselves can provide. What I CAN'T afford is for our $800 share price to go to $200. Actually I probably can as long as it bounces back pretty quickly.

But what if we go to $200 (only 75% down) and stay there for a year or 3 on our way to $4000 by 2030? Simply owning shares and selling them as needed for living money, will be two problems for me:
1) the obvious - I'll be selling more shares each time I am doing so, to raise cash for the living expenses
2) non-obvious - because of that $4000 price target, my wife and I are emotionally not yet ready to be selling any of those shares. One outcome in my mind is that we go to our grave still owning all the shares we have right now.


So for me, selling covered calls / covered puts is more about income generation plus reducing the pain / mitigating the consequence of a significant move down. And I do consider a 50% drop to be inevitable between now and 2030. Heck, I think 2 or 3 are quite reasonable. What if this spike into the $800s is followed by an immediate drop back into the $400s - roughly the share price we were at when inclusion was announced?

It's not even hard for me to describe a larger macro circumstance in which this would happen - we're already living in that macro circumstance. Doesn't mean it will happen - does mean that up until this summer I wouldn't have cared. I'd just have owned the shares and that'd be that (the strategy you are advocating).


Not all circumstances are the same. This is my circumstance and one example of why to risk giving up that immense upside.

Of course. I'm not trying to discourage people from this, it does depend on the situation and what the goals are. I'm not at "enough" yet but I feel I could be there in the next 2-3 years. I've settled on a very safe covered call strategy that I think will actually produce enough cash flow that I could have enough now if I wanted to, while taking near zero risk of my shares ever getting called away. I have enough shares that I can sell far enough OTM to generate this cash flow. I look at it as icing on the cake, not trying to produce the most cash I can.

 

[dakh]

Let's see what tomorrow brings. If TSLA hangs around low 800's, I will likely close those positions since I think the chances for further inexplicable abrupt moves are pretty high.

Gah! Happy about the gains but this trade looks like will have to go for another century or so to get into green.

 

[ReddyLeaf]

Gah! Happy about the gains but this trade looks like will have to go for another century or so to get into green.

Selling CCs so near ATM is probably not a good bet right now. Even $150 OTM wasn’t enough for me. I bought back a 3/19 1000c yesterday. Until right before earnings, it’s very risky, and then it’s still very risky. Maybe, if there’s a huge spike the days before the announcement, it might be a good time to sell OTM or near ATM, hoping for a post earnings IV crush.

 

[bxr140]

So you don't sell naked puts either?

No--I don't like the uncertainty of dynamic margin, let alone on a hard-to-borrow security like TSLA. I always sell credit spreads instead of naked calls and puts, usually in an Iron Condor, but sometimes just as a vertical. Like, right now with the potential run up to earnings there's no way I'd sell a call vertical against TSLA but I'd consider a put vertical. In fact I did just that with unused capital/margin in my brokerage accounts. I just entered a truckload of 725/700 put spreads for this week for a credit of .42 (and .45). 725 is currently at ~98% probability OTM and is a decent (though not super strong) support, and the good recovery from yesterday suggests there's not a lot of downward pressure. That maths out to ~1.8% return on capital on a 4 day trade. I'll decide on Thursday or Friday if I want to let them expire or if I want to roll to next week.

When you say "smart money would be to enter later", I'm going to guess that you'll be watching IV and price movement and looking to pick a good combination of high premium and a strike price that looks safe enough vs. the premium for you to be interested in entering this trade?

Yes, my comment was in reference to what I believe to be a forthcoming increase in volatility and possible underlying run up into earnings. By waiting I'm hoping to maximize my volatility capture when I do enter, and I'm also allowing time to confirm (or not) my suspicion of underlying rally, which will better inform my choice of strike. I'm not going to mirror the trade from above in my retirement account because of the massive capital required and because I have a strong long position (50x July calls) that would FAR outweigh any gains from a DITM covered call.

How do you view these IV charts. Do you know if this can be seen on TDA or ToS?

That's a screenshot from my Fidelity platform--IVXX (and HVXX) are conveniently stock indicators. I can also get IV on my primary trading platform (Tradestation) though its a bit more complicated and honestly not as clean as that particular indicator on Fidelity. I also use etrade but only the web interface and near as I can tell I can't get that level of IV detail, only a two line "IV" vs "HV" chart that seems like it might just be IV30 and HV30. (Note that the windows 95 era UI on the etrade desktop platform makes me want to take an icepick to my head so I don't use it; no idea if one can get more IVXX detail). Don't know about any other platforms.

FWIW, typically the most accurate way of gauging high or low IV is to compare it to TTM HV (not to the TTM IV, which is usually how an IV% is derived), but this year has been bananas and kinda breaks "normal" rules.

 

[adiggs]

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.

Another week and this covered call contract (770c for this week expiration) is even deeper ITM than it was last week.

The decision to make this week - roll or let it go to expiration. Letting it go to expiration this week will yield $35 buy/sell profit on the shares plus $13 in premiums ($48 in 2 weeks; I'm happy with $10 in 2 weeks).

As a reminder, I've opened this covered call primarily to investigate and get experience with rolling contracts. And I am particularly interested in exploring, in a skin-in-the-game way, these deeper ITM situations.


As of this moment (Tuesday of expiration week), the call strike is 770 with the shares at ~860 (theta = 1.58). $90 ITM. The option is selling for ~$92. Resolving those approximate values gets me to a time value as of this moment of ~$2-2.50. That's getting pretty low, so I went looking, and surprising to me - there are decent rolls available. It might be that waiting until later in the week will be better or worse, but I know I can do well right now.

Choices I've evaluated (I haven't yet bothered with keeping the strikes the same):
- Jan 22 775c for a net 4.60 credit (and $5 improvement in the strike); theta = 1.52
- Jan 22 780c for a net 0.40 credit (and $10 improvement in the strike)

- Jan 29 780c for a net 16.60 credit (and $10 improvement in the strike) (theta = 1.59)
- Jan 29 790c for a net 10.45 credit (and $20! improvement in the strike) (theta = 1.66)
- Jan 29 800c for a net for a 4.45 credit (and $30!! improvement in the strike)
- Feb 5 800c for a net 14.80 credit (and the $30 improvement in the strike). $4 credit + $10 strike improvement over the 2 week / 790.

As an additional point of comparison, the Feb 19 850 strike call yields a $4 credit, while the March 900 strike yields a $10 credit. I'm not interested in either position, but it does help me understand the range of strike improvements that might be available.


I think that the Jan 29 790c is my best bet. The credit keeps me in the $4-5/week range, and the strike improvement is noticeably better than anything in the 1 week roll. If I let this go to expiration, then I'll be adding $30 and change to the overall position profit in the next 2 weeks (really 13 or 14 trading days).

The alternative I would consider is the Jan 22/775c. I'd like to keep the weekly credit in that $4-5 range, so that if the shares come back in a big way and the calls go OTM, then I'll have a good week to week premium left over.


My decision for now - time decay is approximately the same on all of the positions I'm considering, so wait. I'll allow this position to continue aging and keep an eye on evolving possibilities.


On the put side, I rolled up all of my puts (715 and 760 strikes) to 795 expiring this week. That gets me $5 in premium to age over the remainder of this week instead of $1. The 795 strike was chosen for being just the other side of $800.

 

[adiggs]

I just entered a truckload of 725/700 put spreads for this week for a credit of .42 (and .45).

I appreciate the detailed position and idea. Can you tell us approximately how much margin each of these spreads consumes?

 

[bxr140]

The option is selling for ~$92. Resolving those approximate values gets me to a time value as of this moment of ~$2-2.50.

Your options chain should have a column for time/extrinsic value so you don't need to calculate for ITM. Also a quick cheat is to look at the same strike put prices, as those will represent (obviously) just the extrinsic value of the OTM put. While the extrinsic value of a call and a put of the same strike are never exactly the same, they're close enough for "let me find a good roll" math.

Related, when doing the quick roll math, make sure to use the ask of the outgoing contract and the bid of the incoming. Same with spreads--always remember which side of the B/A you're on!

FWIW, I'd probably suggest another weekly (if you can) on the roll, and then next week do a 2-3 week roll depending on where premiums end up. Another week will allow volatility to run up toward earnings (if you think that's going to happen) and as you've noted upthread, ~3 weeks is a pretty good sweet spot for playing the sell-for-income game as opposed to weekly, and hopefully that maximizes capture of post earnings volatility drop.

I appreciate the detailed position and idea. Can you tell us approximately how much margin each of these spreads consumes?

Its a 725/720 vertical for this week, composed of a -P $725 and a +P 700. The margin requirement is just the difference in strikes, or [$25 x 100 shares = $2500 margin per spread]. That is exactly the margin regardless of the expiration, as long as its a vertical. That margin represents/covers the worst case loss at expiration (if price is under $700 at expiration, I'm down $2500/spread).

Just for funsies, the same spread on Feb 5 pays out ~$5.75, or 23% return on capital, and in Jan 22 (technically a 730/700, since there's no 725) pays out ~$17/share, or an ~annual return of ~55-60%. While the feb 5 spread might look attractive, its too agressive for me--prob ITM is ~25% or, round math, there's a 1 in 4 chance of it being ITM.

 

[LN1_Casey]

I think next week I'll sell a fairly aggressive put (after my current one expires). The typical run up to the Earning report, in theory, should ensure I just collect the tasty, tasty premium, but if I get the shares instead--oh no, more shares, whatever shall I do?

 

[Sanny]

Not sure if that's the right thread, but seems relevant. Let's say I have a number where I would be happy to sell a portion of TSLA and send it elsewhere. Let's say this number is $1300. Thinking about selling $1300 covered calls on the position that I would be happy to part with, for the furthest date out (Jan 2023. I guess). My understanding is that if we never reach $1300 before Jan 2023, I will have the whole position locked without the ability to sell it if I want to without rebuying the call. What are other drawbacks (aside from me being sad if the price blast through $1300 and to to $2000)? I have zero positive experience with calls and a bit worried before initiating quite a large CC position first time ever.

 

[adiggs]

Just for funsies, the same spread on Feb 5 pays out ~$5.75, or 23% return on capital, and in Jan 22 (technically a 730/700, since there's no 725) pays out ~$17/share, or an ~annual return of ~55-60%. While the feb 5 spread might look attractive, its too agressive for me--prob ITM is ~25% or, round math, there's a 1 in 4 chance of it being ITM.

Very good stuff indeed - thank you.

Now I've got another experiment / skin-in-the-game thing to try - the spreads.


Couple of questions around the mechanics; you enter these positions as a spread transaction ticket, correct? (EDIT: Yes). Assuming yes, is there a roll for the whole spread or should you need a roll, do you roll the individual legs? Or do you just not bother with a roll - take the loss and move on?

Assuming the individual legs get rolled, I figure the purchased puts get rolled first, and then the sold puts get rolled second.

 

[adiggs]

I think next week I'll sell a fairly aggressive put (after my current one expires). The typical run up to the Earning report, in theory, should ensure I just collect the tasty, tasty premium, but if I get the shares instead--oh no, more shares, whatever shall I do?

Do we have the earnings date announced yet, or are we all still guessing? This is one vector for improvement that I would like to see from Tesla - get the financial systems to a point where the quarterly (and annual) earnings announcement days are on a schedule / algorithm that anybody can use to know any quarter's announcement day.

Or at the very least, announce when earnings day will be at the end of the quarter, or for Tesla - on P/D day. Waiting this late into the month to find out when earnings will be announced is .. less than good in my eyes. Maybe I've been working with too well established of a company where these things are routine. (And no - this doesn't affect my investment thesis )

 

[juanmedina]

Not sure if that's the right thread, but seems relevant. Let's say I have a number where I would be happy to sell a portion of TSLA and send it elsewhere. Let's say this number is $1300. Thinking about selling $1300 covered calls on the position that I would be happy to part with, for the furthest date out (Jan 2023. I guess). My understanding is that if we never reach $1300 before Jan 2023, I will have the whole position locked without the ability to sell it if I want to without rebuying the call. What are other drawbacks (aside from me being sad if the price blast through $1300 and to to $2000)? I have zero positive experience with calls and a bit worried before initiating quite a large CC position first time ever.

That's pretty much it.

Why do you want to go so far our in CC? At 1055ish Tesla would have a 1T market cap... @FrankSG has a financial model so you can make a more educated guess choosing the strike and time for your covered calls. That model is somewhere in his blog here:. Tesla Investor Blog

 

[LN1_Casey]

Do we have the earnings date announced yet, or are we all still guessing? This is one vector for improvement that I would like to see from Tesla - get the financial systems to a point where the quarterly (and annual) earnings announcement days are on a schedule / algorithm that anybody can use to know any quarter's announcement day.

Or at the very least, announce when earnings day will be at the end of the quarter, or for Tesla - on P/D day. Waiting this late into the month to find out when earnings will be announced is .. less than good in my eyes. Maybe I've been working with too well established of a company where these things are routine. (And no - this doesn't affect my investment thesis )

I don't think word has passed yet as to when the ER will drop, I'm guessing the end of the month, since it also encompasses the year earnings, and forward statement for 2021. So the 22nd expiry sounds good for either simply premium harvesting, or for shares for the week following. It's bee the end of January for the last two years.

 

[Oil4AsphaultOnly]

Do we have the earnings date announced yet, or are we all still guessing? This is one vector for improvement that I would like to see from Tesla - get the financial systems to a point where the quarterly (and annual) earnings announcement days are on a schedule / algorithm that anybody can use to know any quarter's announcement day.

Or at the very least, announce when earnings day will be at the end of the quarter, or for Tesla - on P/D day. Waiting this late into the month to find out when earnings will be announced is .. less than good in my eyes. Maybe I've been working with too well established of a company where these things are routine. (And no - this doesn't affect my investment thesis )

Aren't you being a little antsy? Historically, Tesla announces their earnings date about 1-2 weeks in advance. Since we're expecting Jan 27th to be it, the earliest they would announce that would be tomorrow. Still plenty of time.

 

[bxr140]

Couple of questions around the mechanics; you enter these positions as a spread transaction ticket, correct? (EDIT: Yes). Assuming yes, is there a roll for the whole spread or should you need a roll, do you roll the individual legs? Or do you just not bother with a roll - take the loss and move on?

Yes you enter as a spread, though you can also do them on a "custom" ticket, or whatever your platform might call it. I find the custom build a little easier, as it allows you (platform willing) to pick actual contracts. Selecting "spread" or whatever other strategy usually ends up filtering contracts for you, and I find that to be a less comprehensive selection. Play around with it and see what works for you.

You can do up to four legs on any ticket, and those legs can be anything you want as far as opening/closing and buying/selling, account permissions and capital limitations not withstanding of course. In the case of a spread, you can roll the whole spread on one ticket with 1) STC, 2) BTC and then 3) STO, 4) BTO. If you already have a four leg position (like an Iron Condor) the rolling gets a little more complicated, and you may need to do some bookkeeping across multiple tickets to make sure you're getting the right return.

I'm pretty conservative with strikes so I'm rarely ITM with a spread, but if I am I roll. I don't like taking losses on credit positions, even if it means I'm going to tie up capital to get my "loss" back into the green (thus hampering my ability to make future gains). YMMV.

Generally (not just with spreads) rolling is better than closing and opening as you can end up making a few more bucks on the B/A spread and spend a few less bucks on fees, but big picture its not that big of a deal.