I'm gonna admit I'm still a lowly novice when it comes to buying calls, especially short dated. I understand leverage and buying LEAPs when the stock crashes / IV is low. Obviously I'm very bullish on TSLA which is why I'm 100% in TSLA right now. It's just so hard to predict what the stock is going to do in the short term. FOTM short puts seem like a low risk way to generate extra returns while I'm learning TA. Are you buying calls into next week? If so, can you describe your thought process?
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Wiki Selling TSLA Options - Be the House
- Thread starter adiggs
- Start date
There's absolutely nothing wrong with having a preferred trading strategy, even if its suboptimal. Nobody is ever going to follow ideal strategy for every trade, and if we're honest, being comfortable in a position is more important than being exactly right. Ultimately if someone finds a strategy that works for them, great. Go with it.
What's irresponsible--and catching my ire--is false claims. Nobody said you can't make money selling puts, but it is objectively a very suboptimal way to do so against a very bullish analysis.
And again, it sounds like you're already making pretty good choices on timing and direction with your sold puts.
Runarbt
Active Member
My claim that buying call was gambling - was a bit "tongue in cheek". I see I didn't manage to make that clear in any way. 
My point was, you do add extra variables you need to get just right - time, and timing your exit - both which you partly avoid/is less important when selling naked puts.
Of course - buying calls can be a genius move when you get timing correct, and manage to exit at the right time.
For those of you who have mastered this art: I salute you.
My point was, you do add extra variables you need to get just right - time, and timing your exit - both which you partly avoid/is less important when selling naked puts.
Of course - buying calls can be a genius move when you get timing correct, and manage to exit at the right time.
For those of you who have mastered this art: I salute you.
sub
Active Member
I've settled on selling OTM calls at a safe distance with a set target to adjust. I've got enough shares that I can basically retire off the cash flow from this strategy. My goal isn't "max profit" it's "safe profit" while putting my shares at very minimal risk of ever getting called away. For now, using the premium to immediately add shares.
For sure, its a non-zero effort to develop a consistent technical analysis strategy. There's also no "right" answer, so its really up to you to figure out what works and what's in your comfort zone.
As far as "short dated". I'd recommend starting by never buying calls closer than 3 months, and never holding them any closer than 1 month. I'd also recommend not going any smaller than a daily timeframe for your TA. (FWIW, I personally don't find weekly that useful on TSLA). If you're a little unsure of your entries I'd also recommend multi-leg strategies where sold legs offset bought legs. If you're comfortable with selling puts, then fold that into a collar (a -P and a +C), which is really the best spread for Full Bull...but know there's plenty of choices. I'd recommend you calendarize that kind of position--if you're buying a 3 month +C, sell maybe a one month -P (or -C).
Just as a random and conservative example, a march $1000 +C (there's no April yet) is $52, or about ~2x the price of a Feb 5 $750 -P ($25). So, if you were going to sell that kind of -P anyway, you could use it to offset ~half the price of the $1000 +C. Assuming on ~Feb 5 you sold another 3 week (Feb 26) -P at ~$25, you would have ~fully paid for the +C, where any value in the +C (whether the contract itself is red or green) ends up as profit to you. (Of course that's assuming both cycles did not go ITM on the -P's). You'd want to either close or roll out the +C at that point also because it would only have three weeks left on it, and certainly if price didn't move as bullishly as you thought you'd make less than just selling the two -P's, but the above is also again a conservative example.
I don't own any TSLA shares right now, but I'm holding 50 March calls, 50 July calls, and 60 put spreads for this week (which I will likely roll). That's about as tapped out as I want to be, so I'm not buying going into earnings. I will also likely dump all the calls before earnings as well, maybe day of, for the purpose of capturing what I believe will be a volatility ~high. In that event I will likely re-direct pre-earnings capital into more put spreads and DITM CCs, again for the purpose of capturing (hopefully) high volatility.
Thanks for that detailed explanation. I’m still learning and very much appreciate your thoughts. I was thinking along the same line with respect to increasing IV toward earnings. Unfortunately, I bought into the trap of buying short dated calls last Friday near the end of the day (timed fairly well near the low). I had just closed out a sold put, and had the cash “burning a hole in my pocket.” I know better and should have bought a later dated monthly, but got caught up in the hope of a SP and IV rise this week into earnings. I will try to extract myself from the predicament without too much lost, and take your advice on not buying short dated calls.
Yeah, you can call it that. A collar is generally a short contract and an opposite long contract, though its typically its a closed position where both profit and loss are capped vs the one I described that's an open position with unlimited upside and downside. A synthetic long (also called a combination) is a specific instance of a -P and +C where both strikes and expirations are equal...so maybe its better to call the hypothetical a combination instead of a collar. Good catch. (Rarely if ever do I actually make that play...sorry for the terminology confusion)
Either way, the hypothetical I described above still looks like a naked call as far as margin goes (one of the reasons I don't play it), but if you were going to sell the naked call anyway then its kind of a a non-issue to you.
Rolled 800p 01/22 to 830p 01/29 at a little over 80% gains. I like the 830 strike given current 10-day MA (833 as I write this) as well as projected 20-day MA trending to same level (it's been climbing ~10/day, so +70 to get to 826 by end of next week).
Also, the amount of premium is tempting for next week on puts, gotta love an earnings week. 45% of the number of contracts on that new position for the same amount of overall premium.
In looking through the call side of the 01/29 chain, I'm not liking any of the strikes. IV doesn't seem to have influenced them as much as I would have liked so I'll be leaving my 900c 02/19 alone for now, as the only roll flat option is to go ITM at 835c, and I don't like the idea of trading extrinsic for that much intrinsic.
So I just learned today that you can't wait too long to roll those covered calls (especially for stocks that don't have much interest). I have some BHC covered calls (23 strike price while shares are currently at $27, so less than a 20% difference) that I tried to roll, and I couldn't find an OTM covered call with enough premium to cover the loss (at least within a year)!
bkp_duke
Well-Known Member
In this situation I roll forward a few weeks and see how much I can "dig out" in a 2-4 week roll. Basically buying myself some time to see if the stock will come back down.
20% is pretty mad deep ITM. That's like a $680 CC strike on TSLA. I don't really have a rule of thumb for how deep is too deep, but for me that's too deep. IMHO best to cut bait and re-allocate capital. Its a bummer for sure, but the capital you have tied up in those CCs is all but doing literally nothing for you right now. The way I see it, here's your choices:
1. Close the position and free up the capital that's currently wrapped up in the shares.
2. Roll way out and hope for a major market crash to bring the calls back to the money.
3. At the risk of stating the obvious, holding until they get closer to expiration is also on the table. What's the expiration?
4. If you need to keep those shares for some reason (like, they're RSUs that you can't sell or something, or if there's significant gains wrapped into a short term timeframe--gains that wouldn't be offset by the loss on the -C, mind) and don't want to roll way out, you can eat some of the underlying gains by paying to roll up in strike. I wouldn't roll all the way to the money, but maybe roll to 10% or something ITM. Maybe even 15% ITM gets you enough time value to make it worth it. Not sure. I don't like this one personally, but YMMV.
FWIW I have a quasai rule-of-thumb (that I was taught, not learned) on not trading options on low dollar value stocks. Lower than $30 or $40 can get you into trouble like you've found (I set my filters at $40, sometimes $50).
They expire tomorrow, so there's very little time value left. I've already performed "1", and closed the position at a loss. Just sharing what I learned (even though it might've been obvious to others, but I hadn't seen it mentioned). I could've stuck with the wheel and let the calls get exercised. I chose to roll them at a loss, because I thought the stock still had more upside.
Edit: This was done in my IRA, so no tax implications.
Along these lines, a thought experiment I just conducted has led me (independently) to a similar conclusion. The question I posed myself, and went looking on the TSLA option chain to explore, is how far ITM is too far? I got thinking about this in the context of the 775 cc I have expiring this week. I already know that I have some good roll options (I think I can roll up $40 on a 2 week expiration contract).
So how much deeper can that option go before it's time to take one of the options laid out by @bxr140 (or as I summarize them - abandon ship)?
I started with a $500 call expiring this week - what could I roll that to? That's $350 ITM or 41%. Even rolling out a month I couldn't get the strike to budge (given a net credit constraint). It wasn't really close either, though that far ITM has $10 between strikes.
Tried again with a $600 call expiring this week. Same problem - the strike still wouldn't budge for a 2-3 week roll, and that's the window I want to stay in (at least today - ask me in a month and I might well have a new answer). That is 29% ITM.
With a $700 call expiring this week, I started being able to budge the strike a little bit. A 2 week roll would move 700 to 705 and a 4 week roll would move me from 700 to 715 or 720. That's 18% ITM.
My conclusion is that I would like to keep my rolling options within 10% of the share price, but I can let that get a bit deeper and still have a reasonable chance at recovery (while earning strike to strike value that makes the roll valuable).
Of course this is all using TSLA options, and is relative to today's DTE (it's mid-week) and IV. These factors change and they matter.
These results are important to me in the context of the pattern I've been exploring the past couple of weeks. That 775 call is halfway between the share price and the strike where further rolls start getting difficult and/or not financially worth continuing.
As a result the pattern I'll apply on the next roll (and I expect any rolls in the future) is to roll anything ITM as far as I can subject to a small net credit (~$2/week at today's share price). The idea is to do what I can, every roll, to cover as much of the ITM deficit as possible. This will work as the ITM option is paired with an OTM option that is performing really well (well enough that it's results by themselves makes the overall position very good).
And if the ITM option is near enough that it can get back to the .40 delta OTM I'm targeting (today - ask me again in a week or 4, and I might have a new answer), then roll to that .40 delta with whatever net credit is left over.
Using this experimental position I've been using (buy 100 shares, write .40 delta strangle, roll options as needed to maintain as close to that .40 delta strangle as possible), I'm starting to think I've got a pattern that will work for me.
Round 1 always starts the same - sell the .35 delta strangle. That's a put and call with the same expiration. I'm choosing to use the .35 delta over a constant distance. At least today, the .35 delta put is pretty close OTM (about $40) while the .35 delta call is more like $90 OTM. The point is that the distance isn't necessarily constant.
If share price finishes between the 2 strikes, repeat. In practice, I'd roll out when the new positions have higher theta (by 10%?) over waiting for expiration.
The evolution is what I've been thinking about, when 1 leg is looking like it will finish ITM.
When time value has decayed enough that the theta for both legs is better at a later strike (aiming for 2 weeks out), then roll the put and the call. I want to roll them out to a later date together if for no other reason, it'll help keep me sane (fewer expirations to track). Along these lines, if the share price trades far enough away from one of the legs, then I'll roll it towards the share price but keep the expiration the same (or ignore it until the other leg is ready to roll out). But it's easy to figure out what to do with a leg that's on the right side of the share price move.
For the leg that has gone ITM and maybe deep ITM, the roll parameters I've got right now are:
- receive a net credit
- target roll is the .35 delta for that option
- when the leg can't get to the .35 delta, then roll as far as possible with a small net credit; say ~$1-2/week
And when establishing the new expiration strangle, set the other leg at the .35 delta. This can yield an inverted strangle (which it turns out, is an actual thing). Inverted strangles are more of a management technique than a position one would start with.
In this initial trade along these lines, I've had a big move upwards ($735 share price to $850+). The put leg has been loving that.
The call leg - not so much. The original call was at $760 though (protected me from some of that big move), and has been rolled up to $770 and then $775. My prioritization for these 2 rolls was more of a balance between strike improvement and the net credit.
Couple of consequences I can see.
1) I really only need the premium from either leg to be doing really well on this trade (in my standards). So having the other leg rolling as far as possible is better prioritization. Specifically to avoid going too far ITM, making recovery difficult, impossible, and/or a bad choice financially (my approach makes this a very capital intensive strategy, so positions that are 'dead' also have a lot of dead capital tied up).
2) Going to the .40 delta each time can create some "inverted strangles". The dynamic is the put strike being higher than the call strike. That creates a window between the 2 option strikes where both finish ITM (see the link above).
I think that both in line for an ITM finish like that, given that the window isn't too extreme, is actually desirable. It means that both legs are likely to roll back to that .35 delta or at least close. At the very least, it means that the deep ITM option had the share price trade back to at least some degree, so it should be much closer ATM after the next roll.
I think that the net of all of this - when shares trade sideways of a 2 week period, then both legs will be highly profitable (recent .35 delta premiums for 2 week expiration are in the $20-30 range). Good result, and the ideal outcome.
When the shares pick a direction and just keep going...
- A >30% move in a 2 week window may leave that side unrecoverable. Probably roll it a few times just for time to see if it regresses. But the other leg will be doing really well! I just have to be ready to accept assignment, or roll for more than 2 weeks.
Heck - my first effort along these lines immediately saw a 20% move in 1 week, and that leg is recovering where recovering is still an outstanding unrealized profit each week along the way.
- A more likely 10% move in that 2 week window is pretty straightforward to manage, especially with aggressive rolls for strike management.
- And a sustained but gradual move in 1 direction becomes highly profitable. The credits will be lower than flat share trading, but the strike improvement will be outstanding should I ever make a decision to take assignment. I think of this as chasing the share price with the option strikes, and I'm happy to do that forever.
- And I can reduce the risk of a really fast move in 1 direction by using a .30 delta strangle or something like that (farther OTM to start, means the underlying move needs to be correspondingly larger), trading lower risk for lower income.
We'll see how this evolves using the current 2 positions.
Round 1 always starts the same - sell the .35 delta strangle. That's a put and call with the same expiration. I'm choosing to use the .35 delta over a constant distance. At least today, the .35 delta put is pretty close OTM (about $40) while the .35 delta call is more like $90 OTM. The point is that the distance isn't necessarily constant.
If share price finishes between the 2 strikes, repeat. In practice, I'd roll out when the new positions have higher theta (by 10%?) over waiting for expiration.
The evolution is what I've been thinking about, when 1 leg is looking like it will finish ITM.
When time value has decayed enough that the theta for both legs is better at a later strike (aiming for 2 weeks out), then roll the put and the call. I want to roll them out to a later date together if for no other reason, it'll help keep me sane (fewer expirations to track). Along these lines, if the share price trades far enough away from one of the legs, then I'll roll it towards the share price but keep the expiration the same (or ignore it until the other leg is ready to roll out). But it's easy to figure out what to do with a leg that's on the right side of the share price move.
For the leg that has gone ITM and maybe deep ITM, the roll parameters I've got right now are:
- receive a net credit
- target roll is the .35 delta for that option
- when the leg can't get to the .35 delta, then roll as far as possible with a small net credit; say ~$1-2/week
And when establishing the new expiration strangle, set the other leg at the .35 delta. This can yield an inverted strangle (which it turns out, is an actual thing). Inverted strangles are more of a management technique than a position one would start with.
In this initial trade along these lines, I've had a big move upwards ($735 share price to $850+). The put leg has been loving that
. The call leg - not so much. The original call was at $760 though (protected me from some of that big move), and has been rolled up to $770 and then $775. My prioritization for these 2 rolls was more of a balance between strike improvement and the net credit.
Couple of consequences I can see.
1) I really only need the premium from either leg to be doing really well on this trade (in my standards). So having the other leg rolling as far as possible is better prioritization. Specifically to avoid going too far ITM, making recovery difficult, impossible, and/or a bad choice financially (my approach makes this a very capital intensive strategy, so positions that are 'dead' also have a lot of dead capital tied up).
2) Going to the .40 delta each time can create some "inverted strangles". The dynamic is the put strike being higher than the call strike. That creates a window between the 2 option strikes where both finish ITM (see the link above).
I think that both in line for an ITM finish like that, given that the window isn't too extreme, is actually desirable. It means that both legs are likely to roll back to that .35 delta or at least close. At the very least, it means that the deep ITM option had the share price trade back to at least some degree, so it should be much closer ATM after the next roll.
I think that the net of all of this - when shares trade sideways of a 2 week period, then both legs will be highly profitable (recent .35 delta premiums for 2 week expiration are in the $20-30 range). Good result, and the ideal outcome.
When the shares pick a direction and just keep going...
- A >30% move in a 2 week window may leave that side unrecoverable. Probably roll it a few times just for time to see if it regresses. But the other leg will be doing really well! I just have to be ready to accept assignment, or roll for more than 2 weeks.
Heck - my first effort along these lines immediately saw a 20% move in 1 week, and that leg is recovering where recovering is still an outstanding unrealized profit each week along the way.
- A more likely 10% move in that 2 week window is pretty straightforward to manage, especially with aggressive rolls for strike management.
- And a sustained but gradual move in 1 direction becomes highly profitable. The credits will be lower than flat share trading, but the strike improvement will be outstanding should I ever make a decision to take assignment. I think of this as chasing the share price with the option strikes, and I'm happy to do that forever.
- And I can reduce the risk of a really fast move in 1 direction by using a .30 delta strangle or something like that (farther OTM to start, means the underlying move needs to be correspondingly larger), trading lower risk for lower income.
We'll see how this evolves using the current 2 positions.
It sounds like it wasn't actually a loss though, just not as big a gain as you could have had...?
Hindsight at this point, but it looks like a $23 -C would BTC [at the closing bell] at $4.10 today. Possible rolls could have been:
--Feb 5 $23 at ~even
--March $24 at ~even
--July $26 for a small credit--probably $.15-$.25
--Jan 2022 $30 for a small credit--probably $.25-$.40
IMHO the July and Jan 2022 rolls would probably not be worth it, but the March expiry may have been worth consideration, then in march maybe you roll another two months out and $1 up, and maybe in that time price comes back down... But also IMHO, closing out was probably the right move. Marginally related, depending on how many calls you actually had, letting them expire could end up being better than closing a day before expiry at 5 cents, especially if you're not planing on immediately turning the capital right around into a new position. Like, if you had 20 calls, that's basically a guaranteed extra $100 by letting them expire vs BTC.
Anyway, long story long, the point of above is that when you're ITM on a CC it is often impractical to climb back OTM in one cycle. The strategy is really to just claw back strike price as much as you can every cycle until you're back OTM or until the position is so DITM its not worth it. Trying to find an OTM strike/expiry that's way far out doesn't really buy you much since there's so much potential for price movement between now and then.
First time I read this, I thought you were bringing bitcoin into the conversation, and was having trouble figuring out the connection
Then I figured it out.
Assuming this is in a brokerage account (as opposed to a synthetic strangle+shares made up of a cash covered put and a covered call that you'd have to do in an IRA) it might be worth considering just the strangle and no shares. The shares might be protecting the top side of the strangle in the event of a rally (so, you don't actually need to roll the ITM -C to protect profit), but they're more than doubling the downside of the position in the event of an underlying drop...and typically drops are bigger in magnitude than rallies so typically its easier to get screwed on the downside than the upside....TSLA's bananas 2020 not withstanding...
This is a position that you rightly identify as one that needs delta management--basically, you always want really small position delta, and any major move in underlying will necessarily move position delta away from 0. (That's one of the reasons no shares is better than 100 shares---easier to manage delta). Then, and I'm pretty sure I laid this out upthread (maybe in another thread?), in addition to rolling, management of delta can come in the form of adding (and possibly at some point, subtracting) shares, short shares, long calls, and long puts. Depending on how tight you manage the position, the P/L of the management legs (27 shares here, a long put there, etc.) ends up canceling out any negative P/L from the anchor legs so the net to you can be pretty minimal. Typically shares and short shares are preferred for management as they have no greeks that will unfavorably offset your anchor leg greeks (mostly Theta, but a bit of Volatility) and they have a fixed delta of 1/-1. Of course, preferences vary.
The fundamental issue with [same-expiry] rolling the anchor legs as part of position management is that, assuming you're always rolling at even (or small credit) the spread between the two strikes will always gets closer with every roll, squeezing your OTM window and eroding control over where those strikes are relative to significant underlying price points. Rolling expiry out can relieve that a little bit, but (again assuming an even roll) now you've tied up your capital for a longer period of time for no additional profit (and you're actually decreasing your annualized profit percentage), and you've increased capital exposure to further unfavorable movement.
Maintaining same expirations does make sense from a confusion perspective; allowing expiration asymmetry is another way you can manage the position, sort of half-way between same expiry and farther-expiry rolling. Imagine a -C that's close to the money and a -P that has gone pretty far OTM, both for this week (I've already dropped shares from this hypothetical FYI). You can roll the -P out at week for decent credit even at the same strike and potentially even up up in strike for more credit, depending on how underlying looks. Then you can use the credit from that -P to partially or even fully offset a same-week roll up in strike on the -C. Ideally the -C ends up OTM by the end of the week and then you roll it to some safer strike for next week. At the end of next week (assuming both are OTM) you didn't make any profit on the -P (assuming you used all the credit to bump up the -C), but you did make full profit on the -C...so you kinda made half profit for the position. And, you still made full profit this week.
I'll also put in another pitch for spreads instead of naked (so, IC instead of Strangle), but will leave it at that.
Yeah, if I had just let them exercise, then it wouldn't be a "loss", and my choice to roll them into July $27's wasn't too much of a realized loss either.
but as a proxy for potentially rolling a DITM TSLA option, it was a needed learning experience. I'll try your suggestions of doing multiple rolls next time, since I have some Apr $25 BHC covered calls coming up!
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