I have margin to open more BCS, but not worth it right now. I'm hoping for a pop tomorrow morning. If we don't get one, then I will get a little more aggressive with 2.5 trading days left (but still at least 10% OTM).
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Wiki Selling TSLA Options - Be the House
- Thread starter adiggs
- Start date
Please do not believe this. The market has absolutely NOT priced in worst case expectations. Not even close. I am not saying it should, but believing that it has can be dangerous to your financial health.
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Perhaps 'worst case' was the wrong term for me to use. More like 'bad numbers.' I'm not betting on the market shrugging off horrible numbers. But it's certainly a possibility that numbers could be bad, AND the market shrugs it off. Just like it's certainly possible numbers are good and the market sells off.
Some background in these posts;
Thank you to
@Knightshade
and @elasalle
Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable
Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable
Knightshade wrote ” 25-50% ROIC a year.”
25-50% ROIC is huge. Stocks have returned an average of 6.5 percent to 7 percent per year after inflation over the last 200 years. I have made my investment thesis based on that and I’m ok with it. If something has larger return than diversified stock portfolio, risk should be higher.
If I could make 25% ROIC risk free investment, I would be blown away. But my problem is that I don’t believe that market would be that inefficient. If there would be that easy way to make money, everyone would be a millionaire.
My current situation is, that I don’t have any TSLA. Approximately half of my portfolio is cash. I could be interested in writing puts if it would give me 25% ROIC with low risk. When writing TSLA puts, worst thing to happen would be that I would need to buy TSLA, right? If I understand correctly, If I would write e.g., puts with 550 strike price and TSLA would drop to 500 and put would then be exercised, I would loss 9,1%?
Thank you to
@Knightshade
and @elasalle
Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable
Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable
Knightshade wrote ” 25-50% ROIC a year.”
25-50% ROIC is huge. Stocks have returned an average of 6.5 percent to 7 percent per year after inflation over the last 200 years. I have made my investment thesis based on that and I’m ok with it. If something has larger return than diversified stock portfolio, risk should be higher.
If I could make 25% ROIC risk free investment, I would be blown away. But my problem is that I don’t believe that market would be that inefficient. If there would be that easy way to make money, everyone would be a millionaire.
My current situation is, that I don’t have any TSLA. Approximately half of my portfolio is cash. I could be interested in writing puts if it would give me 25% ROIC with low risk. When writing TSLA puts, worst thing to happen would be that I would need to buy TSLA, right? If I understand correctly, If I would write e.g., puts with 550 strike price and TSLA would drop to 500 and put would then be exercised, I would loss 9,1%?
jeewee3000
Active Member
Only if you count your current portfolio value at that time (or if you sell). Which is not how long term HODLers count their $$.
Writing those puts is great if you intend to hold TSLA and you have a longer time horizon. You'll acquire shares at a lower cost basis (so more shares for your invested amount) compared to outright buying stock here and now.
But I very much agree 25%/year risk free is nonsense. It's very possible. But not risk free.
On Tesla it is/was pretty much as "risk free" as just hodling...
Only that buy & hold in the last 5 years would have outperformed TSLA severely comparing to the meagerly 25% annual ...
What is a 25% return, when most 12-months analyst targets are ~40% above the current SP?
Doing those puts DOES have an opportunity cost attached to it. It is not downside risk, but not-made-profit risk.
That is what I'm asking. As I said, 25% ROIC with low risk (low meaning as low as with diversified stock portfolio, which has 6,5-7% ROIC after inflation) would be screaming buy...So options are lower risk then buy & hold with "expected" returns?
In your situation you could consider starting with "The Wheel". Go back to the early posts in this thread and also the wiki (linked on page 1) where you will find resources to learn how it works in more detail. But essentially it will involve selling a cash secured Put on a weekly basis that you expect to expire so you keep the premium. If for some reason your Put does end up just ITM (in the money) you can either roll it to next week for a further credit or let it be exercised and receive shares. Then you can sell an aggressive CC (covered call) against the shares for the next week. If you are assigned then you go back to selling Puts the next week. This is a relatively lower risk options strategy if you aren't attached to the shares. The main risk is the stock price doing a large rise while you hold Puts, resulting in the cash not being sufficient to sell future Puts close enough to the money to earn decent premiums.
By way of example, you could sell Puts 13.5% OTM, which is the greatest M-F weekly down move we've seen in the last 2 years. With Monday's open @ $755.81, this would be a Put Strike around $650. If opened near the bottom on Monday this would have achieved a premium of around $6 per contract or $600. The Put requires $65,000 in cash backing, so this one Put would return 0.92% for the week if it expires (likely?). Selling a Put at a more typical -11.5% would yield around $10/$1000 on the dip for a 1.5% return but a bit more risk of being ITM.
You can get greater returns selling spreads (I typically average 1.5-3%) but with much higher risk and greater experience required to avoid significant losses. All investing and trading involves risk, so please do your own research to evaluate what you are comfortable with.
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0.4385% weekly compounds to 25% annually...
Obviously the variance in IV will determine distance from the money you can go to get such a return on any given week, but as way of example, as of close yesterday of $699.21 would require a premium $3.06, which would be a -p640 strike for this week's expiry
This certainly isn't "risk free", but it's very low risk and as mentioned, even if it went ITM you'd probably be able to roll such a strike for a much better credit than your target %age, or allow the shares to assign at $640, you'll get very juicy premiums on covered calls at that strike
Reality is you'd probably pick a more liquid strike with higher open-interest, which are typically the psychological strikes: 600, 650, 700, etc. -p650 would yield 0.63% and then you're already ahead for the yearly target
In my limited experience, the risk in this game - selling options - isn't making good returns, but rather - and this was discussed in the main thread - greed. You make a few good, safe trades and win, then slowly up-the-ante, keep winning, move the risk higher, then the ol' black swan flies past and shits on your head, wiping out a huge chunk of profits, if not all, and maybe the rest of your portfolio with it... if, on the other hand, one had stuck with the original, modest plan, 25% annually - I'm confident the losses, when they come, would not be so bad and the original target could still be attained
I'm targeting 1% weekly return on whole portfolio value, which is too high and often results in getting burned. Next year I plan to dial this back to 0.5% and sleep better
Obviously the variance in IV will determine distance from the money you can go to get such a return on any given week, but as way of example, as of close yesterday of $699.21 would require a premium $3.06, which would be a -p640 strike for this week's expiry
This certainly isn't "risk free", but it's very low risk and as mentioned, even if it went ITM you'd probably be able to roll such a strike for a much better credit than your target %age, or allow the shares to assign at $640, you'll get very juicy premiums on covered calls at that strike
Reality is you'd probably pick a more liquid strike with higher open-interest, which are typically the psychological strikes: 600, 650, 700, etc. -p650 would yield 0.63% and then you're already ahead for the yearly target
In my limited experience, the risk in this game - selling options - isn't making good returns, but rather - and this was discussed in the main thread - greed. You make a few good, safe trades and win, then slowly up-the-ante, keep winning, move the risk higher, then the ol' black swan flies past and shits on your head, wiping out a huge chunk of profits, if not all, and maybe the rest of your portfolio with it... if, on the other hand, one had stuck with the original, modest plan, 25% annually - I'm confident the losses, when they come, would not be so bad and the original target could still be attained
I'm targeting 1% weekly return on whole portfolio value, which is too high and often results in getting burned. Next year I plan to dial this back to 0.5% and sleep better
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Lower BB is 635-636. I honestly don't see a whole lot of support after 670.
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Knightshade
Well-Known Member
What I'm discussing is selling 20% OTM from Monday open-- not Tuesday close- you already gave up 2/5ths of the time premium in your math... (and in the original thread I also cited spreads as a way to do it with defined risk and defined space to roll for say, the 1 time ever, you'd have needed to)
For example this Monday I sold -600/+500 spreads, with -600 being ~20% OTM from the open
And for the -600 spread I got $1.23/sh, or $123 in premium. And required $10,000 in backing (both #s are per spread)
That's a return of 1.23% weekly if they expire worthless... (or probably more like $1.10-$1.15 if I close them out for pennies earlier sometime to be extra safe)
Which compounds to over 50% per year.
If you were selling 20% OTM you have acquired TSLA shares.... basically never since IPO.
There was only 1 drop that large in a single week ever (covid week) and barely even then (just slightly over 20- which you could easily have rolled to next week for another credit prior to ITM- or I guess if one wanted assignment that one time in 10 years you could take it and sell an ATM call-- or just sell the stock for about what it actually cost you after premium and still not have lost money).
To be fair he said he didn't hold tesla and intentionally plans to continue holding cash-- so using them to back put spreads that are far enough OTM to remain so is likely gonna supply a better return than most other uses of said cash.
I certainly agree with SP in the 600s holding shares right now is likely to beat 25% annual for a while yet in the long term (and if you believe the rebound comes anytime in the next 1-2 years holding LEAPS is probably even better)- but that wasn't really his question?
Knightshade
Well-Known Member
Because the maximum possible loss on the spread is $10,000.
If you sell say -600/+500, and the stock drops to 499 (or 399, or even 99) you are forced to buy 100 shares at $600, but can then sell 100 shares at $500, hence $100 times 100 shares=$10,000 max loss.
Spreads, rather than just straight sold puts, gives you a specific defined max loss much smaller than the straight put (which in turn allows you to sell more of them with the same amount of cash).
This can be pretty dangerous if you're selling nearer TM puts, since while it compounds gains it also compounds losses.... many in here who were doing spreads more like 10% OTM very profitably through much of 2021 got their accounts blown up when we began cratering early in the year.
20% ones would've remained safe that entire time (though obviously offering significantly smaller returns than the dangerous ones)
and again any loss at all for the 20s requires:
A Mon-Fri drop of 20%
AND
you to sit there and not do anything about it the entire time while it's happening (because you can typically roll the spread out and/or down for credit until the stock price reached halfway point of the spread- meaning a significantly bigger than 20% drop which has never happened)
Sold some 780CC for Friday (probably sold too early, but wanted to capture some premium and not watch it slip away like I've done too many times). Waiting for more premium to sell some 800/850 BCS.
I know, my example is a different approach from yours and is based on a target of 25% annually, which is what @Matias was looking for. This was one way to do it, and yes, of course, you'd write on the Monday, or even the Friday before, my case was just jumping in today, now...
I would not at all recommend spreads to anyone new to options, I think it's best to stick with cash-covered puts and stock-covered calls until you get a feel for things, and that can take a good year IMO
Knightshade
Well-Known Member
Personally I think if you're planning to operate anywhere near TM (which with just puts you'd need to do to hit 25% annual return because the backing required is so much higher) that's higher risk than doing spreads 20% OTM which can get you that return without just about ever needing to do any management (once in 10 years, and barely).
That said I'd certainly still suggest before anyone did anything they take the courses in the original post here to understand the terms, concepts, and basics of all the mechanics... and then consider either a period of paper trading, or at most doing a single such spread, and intentionally going through the motions of rolling just to get familiar with it even though it'd be incredibly unlikely to be needed.
I'd also add that this also assumes you're someone who can remain disciplined and stick to their plan. Because as I noted elsewhere there'll be a temptation when you notice even 15% doesn't happen that often, and well, the premiums are bigger, so that's probably fine right? And hey, 10% isn't THAT common and even bigger ones.... it's here spreads get considerably more dangerous than just cash secured puts. If you're someone who can avoid that trap I think it's a safer/easier path to 25%-- if you're not then you're gonna get in trouble.
That said I'd certainly still suggest before anyone did anything they take the courses in the original post here to understand the terms, concepts, and basics of all the mechanics... and then consider either a period of paper trading, or at most doing a single such spread, and intentionally going through the motions of rolling just to get familiar with it even though it'd be incredibly unlikely to be needed.
I'd also add that this also assumes you're someone who can remain disciplined and stick to their plan. Because as I noted elsewhere there'll be a temptation when you notice even 15% doesn't happen that often, and well, the premiums are bigger, so that's probably fine right? And hey, 10% isn't THAT common and even bigger ones.... it's here spreads get considerably more dangerous than just cash secured puts. If you're someone who can avoid that trap I think it's a safer/easier path to 25%-- if you're not then you're gonna get in trouble.
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