Wiki Selling TSLA Options - Be the House

[adiggs]

I've been thinking about how I can get closer to the high water mark on options I sell. I sold 940's for 6/19 yesterday and collected $13. Today they're about $37. This pattern, though not necessarily this extreme, is routine for me.

My first (and only ) thought so far, is to wait a few days. So for instance, if I'm looking to sell an option and it's the beginning of the week, that means I just closed a position; wait a couple of days for either late Tuesday or sometime Wednesday, and then sell the option for this week.

Or if it's Wednesday and I just closed a position, wait for Thursday or Friday before opening the replacement position. It would certainly have made me a lot of money this week (or more likely, spread out my strike prices).


In short, wait a day or 2 between the close of 1 position, and the open of the replacement position.


I guess the second and obvious thought is to leg into positions. If I'm going to sell 3 of an option, then sell 1 today, 1 tomorrow, and 1 the day after (at whatever strike and expiration makes since for each, though likely for the same expiration). More work to get into a position, but I probably exit all of them together. This sounds doable and keeps me away from trying to time or establish direction in the market.

 

[adiggs]

Yeah, I sell multiples. It keeps me on the sane side with fewer things to keep track of. And so far it's worked great. Maybe this is my next big advance to further increase returns (my education in this stuff has been paying really well - I like education where I get paid to learn).

OMG - I realized that I need to do this (break up my open position transactions at minimum) over days.

And then I realized that I track each trade individually offline (an open position, and the close - not daily changes). That is going to be so much more tracking . On the plus side I'll have closer to daily updates on change in my results as I'll have ~3x the transactions.

 

[Mokuzai]

Guess I didn't need to panic roll my $950 covered calls. I would have thought they would pin to just under $1k this week.

 

[adiggs]

Guess I didn't need to panic roll my $950 covered calls. I would have thought they would pin to just under $1k this week.

This is the toughie, and one reason I'm normally so far OTM. I like to avoid that stress and making those kinds of decisions. One thing that helps me with this, at least with the closer expiration dates I usually work with, is that if I do nothing, then I know when the time value will go to 0. Somewhere close to that might be an opportunity to close the position (though as time value gets closer to zero, the likelihood of early assignment goes up). Time decay (theta) is our friend.

And I try to choose strikes that I believe, when I open the position, will be OTM at expiration.

I know I was doing the math earlier this week on what it would take to get out of my 6/19 $1000 covered calls. In one account, I didn't have enough cash (so I couldn't get out), and in the other I had the cash but didn't want to take that big of a hit. And it was a big hit at that point - would have wiped out 2/3rds of my option sale results from the last 2 months.

And besides, I figured that spike to $1027 was going to come back, at least for next week (yay - I'm right so far). I was really hoping that wasn't the start of a breakout to the upside - I've seen 2 big ones, and 2 or 3 small ones, and all of them are on the order of 33%+ moves.

MOSTLY (but not always), over the last 8 years these spikes to the high side are followed by a move back to the middle or even the bottom of the trading range. We did this over and over in the 180-280 trading range, and then again in the 280-380 trading range. I don't yet know what this new trading range is. Today I'm thinking it's about 700-1000, but we've been down to 400 a month or 2 ago, so maybe it's more like 400-1000? It's too new to say really, but my opinion and how I'm trading, is that we're at the top end of the trading range (priced close to perfection), rather than having lots of near term head room.

And I know that's not the general view here. (my longer view is unchanged - TSLA to many thousands, and planning to hold core shares another 10 years).


I'm feeling much better today about the likelihood of those calls finishing <$1000, and I'm starting to think we'll be in the $800's next week (and shooting back up the week after). I'm also a good contrarian indicator for share movement

 

[Dharma]

Hello gang. My $1000 calls expiring today will not be exercised which I'm happy about. Was quite worried earlier this week! Now just need the same to happen to the batch I have expiring next week.

This current volatility is making selling options a favorable proposition. I sold a 8/21 $1500 call today for around $20, and a 7/17 $700 put for around $15. Their IV are in the 70% - 80% range, with delta of 0.1. Seems like a good premium for far enough OTM prices.

 

[adiggs]

Hello gang. My $1000 calls expiring today will not be exercised which I'm happy about. Was quite worried earlier this week! Now just need the same to happen to the batch I have expiring next week.

This current volatility is making selling options a favorable proposition. I sold a 8/21 $1500 call today for around $20, and a 7/17 $700 put for around $15. Their IV are in the 70% - 80% range, with delta of 0.1. Seems like a good premium for far enough OTM prices.

That's very good IV compared to the last month or so. Makes me wish my current positions were closing today so I could be writing new options next week.


Looks like you like the monthlies in the 1-2 month range. What led you to that approach? (Looking to learn new ways of seeing things)

 

[adiggs]

Just curious, because it hasn’t happened to me yet but eventually will (probably next month): do the sold puts and calls that expire ITM get exercised automatically? And when (day, time) does your broker buy or sell those shares for you? Does it differ per broker?

Yes, automatic exercise (for both the sold, and purchased, options - but that's kind of the same thing, or at least the 2 sides of a coin).

My understanding is that option holders also have another half hour after end of trading to exercise (maybe they're slightly OTM and they want the shares anyway due to after hours action, or just because); hence the idea of buy-to-close even for a penny.

My understanding is that the resolution of moving money and shares around to option holders and sellers, happens over the weekend. If you need to buy or sell as you don't have adequate cash, then I don't know specifically what happens. I think you've got a couple of days to settlement, so you might get to handle the share purchase yourself (via limit order) instead of taking a market order by the broker. I wouldn't test that either way - if you've sold a call that is ITM, go ahead and buy the 100 shares before close on Friday (this assumes that you wrote a naked call and have the authorization to do that - that's a pretty high level of authorization).

I wouldn't be surprised if there are differences in the processes, but all brokers are working with the Options Clearing (Co?) - OCC - to get all the options matched up and either expired or exercised/assigned. I think they intentionally do it over the weekend as it takes more than a day to get everything done (I have this mental image of people in green eyeshades sitting around, moving data and processing all this stuff in spreadsheets; surely it's better than that ).

 

[adiggs]

Hello gang. My $1000 calls expiring today will not be exercised which I'm happy about. Was quite worried earlier this week! Now just need the same to happen to the batch I have expiring next week.

This current volatility is making selling options a favorable proposition. I sold a 8/21 $1500 call today for around $20, and a 7/17 $700 put for around $15. Their IV are in the 70% - 80% range, with delta of 0.1. Seems like a good premium for far enough OTM prices.

And thank you for the note about IV going up - that's a good catch, and will be good news for all of us the next time we're selling options. And will be bad news for those of us with already open positions waiting for them to expire. Now I know why my current options aren't aging as gracefully as I have come to expect (though still decaying to 0 time value next Friday - god I love selling options over buying them).

 

[Right_Said_Fred]

Yes, automatic exercise (for both the sold, and purchased, options - but that's kind of the same thing, or at least the 2 sides of a coin).

My understanding is that option holders also have another half hour after end of trading to exercise (maybe they're slightly OTM and they want the shares anyway due to after hours action, or just because); hence the idea of buy-to-close even for a penny.

My understanding is that the resolution of moving money and shares around to option holders and sellers, happens over the weekend. If you need to buy or sell as you don't have adequate cash, then I don't know specifically what happens. I think you've got a couple of days to settlement, so you might get to handle the share purchase yourself (via limit order) instead of taking a market order by the broker. I wouldn't test that either way - if you've sold a call that is ITM, go ahead and buy the 100 shares before close on Friday (this assumes that you wrote a naked call and have the authorization to do that - that's a pretty high level of authorization).

I wouldn't be surprised if there are differences in the processes, but all brokers are working with the Options Clearing (Co?) - OCC - to get all the options matched up and either expired or exercised/assigned. I think they intentionally do it over the weekend as it takes more than a day to get everything done (I have this mental image of people in green eyeshades sitting around, moving data and processing all this stuff in spreadsheets; surely it's better than that ).

If I write calls I have shares to cover them and if I write puts I have the cash to cover them. So I guess that means that I’ll start the following Monday with a clean slate, right? Either with the assigned shares or with the cash from the sold shares.

 

[adiggs]

If I write calls I have shares to cover them and if I write puts I have the cash to cover them. So I guess that means that I’ll start the following Monday with a clean slate, right? Either with the assigned shares or with the cash from the sold shares.

Yep.

EDIT: We had a post from somebody a few pages back talking about some options they had sold that finished OTM. They were assigned anyway as somebody had exercised their OTM and expired options and our hero got assigned (among the pool of people that sold that option).

That can sting if the shares move against you on the next trading day. Or if you need a margin loan to cover.

In your case, shares you thought were still yours might be gone on Monday and replaced with cash (or cash got turned into shares).

Either way - it leads to the idea of proactively closing your options prior to the end of business. My broker makes that painless by offering commission free closes when the option is .65 or less. (And they talk about on their site as good "options hygiene" - my translation). If you watch the order book, as we get near expiration, you'll see a big pile of buy offers at 0.01 (presumably buy-to-close) accumulating. That's what people are doing (I expect that market makers sell-to-open as many .01 options as are needed to fill all those buy orders, and gleefully take their pennies each week by letting them expire worthless; from my POV, they can have them).

Another reason to clean up options - that frees up their backing, so you can open a new position immediately, instead of waiting for Monday.

 

[Dharma]

That's very good IV compared to the last month or so. Makes me wish my current positions were closing today so I could be writing new options next week.


Looks like you like the monthlies in the 1-2 month range. What led you to that approach? (Looking to learn new ways of seeing things)

Right, if I'm remembering correctly IV was in the 50s the last few weeks, so this seemed like a good deal. Would you happen to know how high TSLA's IV had been in the past? Is there a source to look this up?

I'm still getting a feel for the best approach as I am learning about this more. I'm doing longer terms on the put/call I sold today because this week's stress worrying about the weeklies had not been enjoyable. I sold the $1000 weeklies a week or two ago when the stock was around $850. I got very little premium for them, and they blew up on me dramatically when SP was >1000. I know at the end of the day I'm covered, but seeing the ~500% losses on my daily P&Ls was not fun. I was also worried about short term capital gain tax if they do get called. I remember seeing Fred's post about selling higher priced options because it's more efficient use of his time which I thought made so much sense. The options with higher DTE have smaller delta and higher prices, so I can worried less on short term SP movement and get a decent premium by selling just one or two options, instead of selling 8 or 10 lower priced options to get the same premium. Not sure if this is the best approach but I thought it's worth experimenting.

And thank you for the note about IV going up - that's a good catch, and will be good news for all of us the next time we're selling options. And will be bad news for those of us with already open positions waiting for them to expire. Now I know why my current options aren't aging as gracefully as I have come to expect (though still decaying to 0 time value next Friday - god I love selling options over buying them).

You are very welcome. I'm starting to love selling options too, it feels like I'm the dealer (as long as the options are not naked). I tried to catch the macro movement this week by buying short term puts but they all turned against me thanks to theta, although directionally I was not wrong. The odds are stacked against short term option buyers since they had to get both the timing and the direction right. I feel much better writing them.

 

[Chenkers]

Right, if I'm remembering correctly IV was in the 50s the last few weeks, so this seemed like a good deal. Would you happen to know how high TSLA's IV had been in the past? Is there a source to look this up?

This is the site I use: https://marketchameleon.com/Overview/TSLA/IV/ IV is currently around 73.

 

[paydirt76]

So my ask - there are people on the board with a lot more experience buying and selling options. I know I'm new to this - what would you suggest I go learn more about? Any suggestions for how to do this better?

adiggs, I was a stock options market maker at the CBOE for 5 years and trained our new stock options floor traders on options for several years.

Options are insurance. When you are buying options, you are buying insurance. When you buy a call, you are insuring against the price going up, you pay a premium upfront (insurance premium) if the price goes up, then you get a payout on your insurance. The converse is true. When you are selling options, you are selling insurance.

Insurance is either cheap, or expensive, or fairly priced. So how do you know whether options are/were cheap or dear? You know by looking at the Implied Volatility vs the Historical Volatility the stock actually moved at. A good site for historical volatility is: Tesla, Inc. (TSLA) - Historical Volatility (Close-to-Close) (90-Day)

If you look today, you can see that 90 trading days historical volatility has been 92% close-to-close. So if you routinely sold options during this period at 70% volatility, then you sold it too cheap compared to what happened. Maybe you got lucky in that your strikes were never hit, but you're playing with fire and essentially collecting nickels in front of steamrollers.

There is no "one size fits all" options trading tactic. One shouldn't always be selling premium no matter what. One also shouldn't be selling premium just with an eye to IV. If the time period you're selling includes an earnings announcement, the implied volatility is much higher because the company event will tend to create more volatility in the actual shares.

...

A friend of mine thinks we're in an environment where one should be doing somewhat the opposite of the wheel. They have 60x their 60k Roth in the last year. But one must still be mindful of the volatility that one pays. There are two key fundamentals in play in their opinion.
(1) If WS analysts continue to predict 25% unit growth and Tesla delivers 50% unit growth, then there will be upside pressure on the stock.
(2) For traders/investors who do not make daily or even weekly adjustments, if a stock goes on long runs then options are vastly underpriced even with IV trading some above historical/actual close to close volatility.

What do you think?

 

[Tslynk67]

If I write calls I have shares to cover them and if I write puts I have the cash to cover them. So I guess that means that I’ll start the following Monday with a clean slate, right? Either with the assigned shares or with the cash from the sold shares.

Yes, the contracts get settled around 14:00CET (in my experience) on the first trading day after the strike date, the necessary transactions appear in your trading account.

More info on the process: How Does Options Exercise & Assignment Work? - Financhill

 

[Tslynk67]

A friend of mine thinks we're in an environment where one should be doing somewhat the opposite of the wheel. They have 60x their 60k Roth in the last year. But one must still be mindful of the volatility that one pays. There are two key fundamentals in play in their opinion.
(1) If WS analysts continue to predict 25% unit growth and Tesla delivers 50% unit growth, then there will be upside pressure on the stock.
(2) For traders/investors who do not make daily or even weekly adjustments, if a stock goes on long runs then options are vastly underpriced even with IV trading some above historical/actual close to close volatility.

What do you think?

The big money I've made in my trading account over the last 9 months has all come from LEAPS. So I'm always looking to hold some long-term bought calls, close to the money (well my current batch is June 2022 $1250's), once they go ITM then I'll wait for a local peak and roll.

What I haven't worked out yet is whether it's more profitable to buy lower strikes for the same date - so my example was that I hold 4x$1250's, I could have bought 8x $2000's instead...??

I did well with Jan 2021 $675's from last year, then this yet with Jan 2021 $875's, so close to the money seem to accumulate faster.

 

[paydirt76]

The big money I've made in my trading account over the last 9 months has all come from LEAPS. So I'm always looking to hold some long-term bought calls, close to the money (well my current batch is June 2022 $1250's), once they go ITM then I'll wait for a local peak and roll.

What I haven't worked out yet is whether it's more profitable to buy lower strikes for the same date - so my example was that I hold 4x$1250's, I could have bought 8x $2000's instead...??

I did well with Jan 2021 $675's from last year, then this yet with Jan 2021 $875's, so close to the money seem to accumulate faster.

So the fugue/melee was intense during this 60x... What they learned was if you are too aggressive and the stock proceeds to go into a channel for a 2-year time period, then your options are in dire straits. The trap is if you keep rolling up, then eventually it will come out snake eyes. It seems unlikely that Tesla will get stuck in a channel during the next 8 years, but it is bound to happen. It's happened twice in the past 10 years.

My friend got lucky in the timing. The stock made beefy upside moves early in the contract life of the options. To reduce luck, they are going with lower strikes and farther out expirations. While the premiums are much higher, (1) leverage remains--just not as much, (2) risk is reduced but not completely, (3) stress is greatly reduced.

The breakeven on going with the 1,800 strike vs the 1,250 strike is very high. Guessing it's 2,200 or higher on SP at expiration. That's demanding too much of the underlying (the share price).

They want their cake and to eat it too. Minimize busting out on positions but also having the leverage and not tying up $925 per share, when you can own long-term deltas for much less... $480 per share in the case of Jun22 1,000C, less for the 1,250C.

 

[EV forever]

Well, I closed my 07/17 @ 830 Put for $21 for $35 in profit - not bad profit for 6 days. Beginners luck most likely Who would have thought the SP would run up that high today - big surprise!

Now trying to decide the next position to sell, hard to guess since the stock has gone up so fast!

Opened two new positions last week on Thursday - both cash covered puts. Both are significantly in the red on Friday, but I do have some time so expect things will change over the next week.

 

[vwman111]

They want their cake and to eat it too. Minimize busting out on positions but also having the leverage and not tying up $925 per share, when you can own long-term deltas for much less... $480 per share in the case of Jun22 1,000C, less for the 1,250C.

I think i'm going to need some additional explanation. I'm not familiar with the concept of owning long-term deltas.

you have provided lots of knowledge/input in very few posts, however it may be going over lots of other posters heads like it is mine. Any additional explanations that you can provide in your posts would be greatly appreciated.

 

[EV forever]

A friend of mine thinks we're in an environment where one should be doing somewhat the opposite of the wheel. They have 60x their 60k Roth in the last year. But one must still be mindful of the volatility that one pays. There are two key fundamentals in play in their opinion.
(1) If WS analysts continue to predict 25% unit growth and Tesla delivers 50% unit growth, then there will be upside pressure on the stock.
(2) For traders/investors who do not make daily or even weekly adjustments, if a stock goes on long runs then options are vastly underpriced even with IV trading some above historical/actual close to close volatility.

What do you think?

By opposite of the wheel, you mean better strategy is to buy options for long term hold, correct? Just like @Lycanthrope stated above, I too made most of the big returns in holding call options - was lucky to buy a bunch of calls in Oct 2019 - the returns have been fabulous. I still hold a few of the original ones for July and Sept strikes. I am also holding some June'22 @ 1260 LEAPS, which were bought Feb3rd, the day before the crazy run up of SP followed by the sudden crash. Anyways, they are doing pretty well for me - 2.5X, which is fine for me.

I agree with you - for LEAPS i would prefer the ones with strikes in 1200 to 1400 range - higher premium but better chance of making it to that price. I will probably add some more LEAPS later as well.

 

[paydirt76]

By opposite of the wheel, you mean better strategy is to buy options for long term hold, correct? Just like @Lycanthrope stated above, I too made most of the big returns in holding call options - was lucky to buy a bunch of calls in Oct 2019 - the returns have been fabulous. I still hold a few of the original ones for July and Sept strikes. I am also holding some June'22 @ 1260 LEAPS, which were bought Feb3rd, the day before the crazy run up of SP followed by the sudden crash. Anyways, they are doing pretty well for me - 2.5X, which is fine for me.

Yes. You seem to be on a good path. I'm going to write a guide about psychology and options, and also bringing a LT perspective to them (the opposite of the weekly crowd)