Wiki Selling TSLA Options - Be the House

[adiggs]

I hope not, because after earnings is when I need to sell my share for my car purchase.

Also, because shortly after earnings is the election, which may also cause a drop due to the uncertainty of everything (like if the Orange one loses and makes a statement that he'll refuse to step down). So it'd be a double impact. Great for future call buying, but not so much for those who need immediate use.

That immediate use idea - that's one reason for me approaching this as an income production strategy. I think it'll be possible to retain ownership of the shares while also producing income for "stuff". Such as making payments on a car loan, for a car I really want to own

Not advice of course, but an idea to crank into the equation. I'd want a fair bit of education and experiences myself, already "in the bank" as it were, before counting on option selling for anything that substantial.

 

[adiggs]

My first non-trade, trading post

I've got a reasonably significant covered call position I've been looking to enter. For a few weeks now, my approach was to wait for today or tomorrow, and then open the position at a relatively high share price and relatively high IV. Neither of those things are true, at least as far as today goes. Sort of a buy the rumor, sell the news approach to opening a covered call. So a new plan is needed (and I continue to eat the opportunity cost of not having a covered call open -- all that time decay passing me by).

With the behavior so far this week, my new plan is I'll be continuing to wait until after earnings and see what happens then. As with all investment choices, there are opportunity costs; risks and rewards, etc.. My hope is that on the back of amazing earnings, the share price will bounce upwards in a meaningful way, and that will provide a better premium at what I believe is an unreachable share price. As with any such decision, I can be wrong, but at least you can add to the scale that I plan to have a significant position with this view of the world.


Due to my move to monthlies and longer dated options (minimize my daily effort), I'm looking at Nov - Feb monthlies, at the 600 or 700 strike. I prefer the 700 strike as additional protection from reaching 600. Both are well clear of the ATH, but I've also seen TSLA go this far above the ATH in a very short time period several times. I think that I've got good reasons to having a Jan/Feb expiration (if I hold that long then taxes will be in next tax year, and this is a taxable account; I don't put much weight onto the scales for tax outcomes though).

And though I view this as a pre-sale of the shares at that strike, I don't REALLY want to sell.

 

[st_lopes]

Because with earnings sometimes there is a sell-off even with good news.

50 day MA was up to 411 today... highly unlikely, but I guess anything is possible

 

[clmason]

My first non-trade, trading post

I've got a reasonably significant covered call position I've been looking to enter. For a few weeks now, my approach was to wait for today or tomorrow, and then open the position at a relatively high share price and relatively high IV. Neither of those things are true, at least as far as today goes. Sort of a buy the rumor, sell the news approach to opening a covered call. So a new plan is needed (and I continue to eat the opportunity cost of not having a covered call open -- all that time decay passing me by).

With the behavior so far this week, my new plan is I'll be continuing to wait until after earnings and see what happens then. As with all investment choices, there are opportunity costs; risks and rewards, etc.. My hope is that on the back of amazing earnings, the share price will bounce upwards in a meaningful way, and that will provide a better premium at what I believe is an unreachable share price. As with any such decision, I can be wrong, but at least you can add to the scale that I plan to have a significant position with this view of the world.


Due to my move to monthlies and longer dated options (minimize my daily effort), I'm looking at Nov - Feb monthlies, at the 600 or 700 strike. I prefer the 700 strike as additional protection from reaching 600. Both are well clear of the ATH, but I've also seen TSLA go this far above the ATH in a very short time period several times. I think that I've got good reasons to having a Jan/Feb expiration (if I hold that long then taxes will be in next tax year, and this is a taxable account; I don't put much weight onto the scales for tax outcomes though).

And though I view this as a pre-sale of the shares at that strike, I don't REALLY want to sell.

I’m in the same boat as you here.

I sold jan’21 CC at $680 back in Mid-Sept for $50/contract.

My plan was to sell 2 contracts (~3 month expiration) every month, taking in $5K in premium per contract... my theory is (was?) that I could generate $120K/year without much effort with this strategy.

Always a chance I could get called, but it would be at a very high price and I’m holding since the IPO, bought a lot over the years. Way overdue for at least a modicum of diversification.

But I’ve been watching premiums since my original trade and I have not seen anything close to $50 per contact that far out of the money. Back when I made the original trade TSLA was at $450 and it was only a couple weeks after $500.

So I’m thinking... the timing of opening these CC’s needs to happen when TSLA is at the high end of its mid-to-near-term trading range. Catching this high end of the range takes patience. There may not be a once per month opportunity where my desired expiration, premium price, and strike price all line up. It’s kind of like an eclipse event.

Some food for thought.... I’m watching and waiting for my Goldilocks moment and will strike when the iron is hot.

 

[adiggs]

I’m in the same boat as you here.

I sold jan’21 CC at $680 back in Mid-Sept for $50/contract.

My plan was to sell 2 contracts (~3 month expiration) every month, taking in $5K in premium per contract... my theory is (was?) that I could generate $120K/year without much effort with this strategy.

Always a chance I could get called, but it would be at a very high price and I’m holding since the IPO, bought a lot over the years. Way overdue for at least a modicum of diversification.

But I’ve been watching premiums since my original trade and I have not seen anything close to $50 per contact that far out of the money. Back when I made the original trade TSLA was at $450 and it was only a couple weeks after $500.

So I’m thinking... the timing of opening these CC’s needs to happen when TSLA is at the high end of its mid-to-near-term trading range. Catching this high end of the range takes patience. There may not be a once per month opportunity where my desired expiration, premium price, and strike price all line up. It’s kind of like an eclipse event.

Some food for thought.... I’m watching and waiting for my Goldilocks moment and will strike when the iron is hot.

There are definitely better and worse times to open a position. Trying to figure out whether it's a better or worse time, at any particular moment in time, is one of the activities I particularly want to avoid and am particularly bad at (so I sell both puts and calls - whatever direction the stock is going, I'll have a position going well!). All else being equal, I like to stay in the market so time decay is working for me as much as possible.

In your case, something to consider - maybe your strategy is a good one for you, but the month to month results will be more variable than you originally thought. So instead of a particular premium (which will be highly dependent on IV), you instead use some measure of risk that works well for you. Let the premium you earn vary, while keeping the risk at a level you're comfortable with.

Whatever platform you're trading on, you probably have access to a Prob ITM calculation (probability of ITM at expiration). That will be the most accurate representation of the markets belief in the likelihood any particular option will finish ITM. I've been using delta as a proxy for Prob ITM (I know it's less accurate, but it's also easier to find for me -- more creative laziness on my part).


I've been looking for a goldilocks entry - maybe I need to let the positions vary each month; keep the risk more consistent when opening the position, and let the results vary and fall where they may.

Thanks for the post - you got me thinking!

 

[clmason]

Let the premium you earn vary, while keeping the risk at a level you're comfortable with.

This struck a chord. Thanks for your insight!

BTW - i'm on Schwab. I don't see many Options tools. I'll have to fish around.

 

[clmason]

Regarding adiggs comment about using probability of ITM at expiration as a tool for evaluating options. What other tools or charts do you all use to vet your trades? Platform recommendations and/or links appreciated.

 

[juanmedina]

Regarding adiggs comment about using probability of ITM at expiration as a tool for evaluating options. What other tools or charts do you all use to vet your trades? Platform recommendations and/or links appreciated.

TastyWorks has it as well as ThinkorSwim... I use neither lol. I just set a Delta % of the SP when I sell the calls.

This is a recent decent video on the wheel strategy:

He suggest selling calls with a delta of .3 but IMO this doesn't work with Tesla SP the stock is too volatile.

 

[FS_FRA]

Regarding adiggs comment about using probability of ITM at expiration as a tool for evaluating options. What other tools or charts do you all use to vet your trades? Platform recommendations and/or links appreciated.

I like this tool here for a simple visual representation: Options profit calculator

 

[juanmedina]

IV crush is the best . All the calls that I sold c505-520s are worthless. Thanks for the $8700.

 

[adiggs]

He suggest selling calls with a delta of .3 but IMO this doesn't work with Tesla SP the stock is too volatile.

My own experience is that I use a different delta for the covered puts, than I do for the covered calls. When I've tracked this closely in the past, the puts were up in the .2 to .3 range, and I have comfortably gone higher (though not often, or much higher). I think that I prefer the .15 to .20 range on the puts.

On the call side I use something more like .05 to .10 and with a much stronger "pre-sale" mind set. I.e. - am I happy selling those shares at this strike price, in this time frame? I know that I'm most likely to roll if I'm going to finish ITM, but I still think about the "pre-sale" idea as well.

And if the strike doesn't make me happy in it's own right, regardless of the delta, then I don't make the trade.

My plan was to sell 2 contracts (~3 month expiration) every month, taking in $5K in premium per contract... my theory is (was?) that I could generate $120K/year without much effort with this strategy.

Your post got me thinking, and it's got me applying something similar. In my case, I'm breaking up my covered call positions into two batches, with an eye towards selling one batch each month with a 2 month expiration.

In that spirit, I've got 2 trades today.

In the first, I opened a covered call for the Dec 610 strike, collecting a $7.00 premium. I chose the 610 strike two ways - I was really thinking the 600 strike as being about $100 above the previous ATH - I think we're unlikely to reach that in this short (2 month) timeframe. I then bumped it up 1 strike in case $600 turns out to be close ATM at expiration. I like being 1 strike beyond the big strikes when that's feasible.

In the second, I rolled up 1 of my Nov 365 put positions to a Nov 385 put position, collecting a net credit of $5. This closed the first leg with a 2/3rds profit and moved the potential earnings in this November position up from $8 to $13. I would ordinarily be moving out a month at the same time, but I already have another Nov position I'm keeping track of and I prefer not (yet) taking this position out to Dec.


On the calls side, the one bit of news I worry about for being at risk of ITM in December is the S&P committee deciding that now is the time to add TSLA to the index. The problem with this worry is that whether it happens this quarter or in 10 years (I saw somebody else pointing this out about Microsoft - I haven't researched it myself), this will hang over potential share movements until it's done. So I either let this freeze me in place, or I proceed anyway using distant strikes.

On the put side, I can't think of anything I consider to be a serious risk of the position finishing ITM. I have the bias in the shares as upwards.

 

[smorgasbord]

My own experience is that I use a different delta for the covered puts, than I do for the covered calls. When I've tracked this closely in the past, the puts were up in the .2 to .3 range, and I have comfortably gone higher (though not often, or much higher). I think that I prefer the .15 to .20 range on the puts.

On the call side I use something more like .05 to .10 and with a much stronger "pre-sale" mind set. I.e. - am I happy selling those shares at this strike price, in this time frame? I know that I'm most likely to roll if I'm going to finish ITM, but I still think about the "pre-sale" idea as well.

And if the strike doesn't make me happy in it's own right, regardless of the delta, then I don't make the trade.




Your post got me thinking, and it's got me applying something similar. In my case, I'm breaking up my covered call positions into two batches, with an eye towards selling one batch each month with a 2 month expiration.

In that spirit, I've got 2 trades today.

In the first, I opened a covered call for the Dec 610 strike, collecting a $7.00 premium. I chose the 610 strike two ways - I was really thinking the 600 strike as being about $100 above the previous ATH - I think we're unlikely to reach that in this short (2 month) timeframe. I then bumped it up 1 strike in case $600 turns out to be close ATM at expiration. I like being 1 strike beyond the big strikes when that's feasible.

In the second, I rolled up 1 of my Nov 365 put positions to a Nov 385 put position, collecting a net credit of $5. This closed the first leg with a 2/3rds profit and moved the potential earnings in this November position up from $8 to $13. I would ordinarily be moving out a month at the same time, but I already have another Nov position I'm keeping track of and I prefer not (yet) taking this position out to Dec.


On the calls side, the one bit of news I worry about for being at risk of ITM in December is the S&P committee deciding that now is the time to add TSLA to the index. The problem with this worry is that whether it happens this quarter or in 10 years (I saw somebody else pointing this out about Microsoft - I haven't researched it myself), this will hang over potential share movements until it's done. So I either let this freeze me in place, or I proceed anyway using distant strikes.

On the put side, I can't think of anything I consider to be a serious risk of the position finishing ITM. I have the bias in the shares as upwards.

I don't think it's unlikely that the S&P would add TSLA to the index during its regular Dec rebalancing. That said, none of us know what the S&P committee is thinking or will think. But, I would caution that while selling covered calls for income can be nice, as we've seen in TSLA itself, it will also leave a ton of money on the table if the stock takes off.

My rule of thumb is that if I don't want to sell the shares I don't sell covered calls on them. Only if I have a "trading position" will I do that.

 

[adiggs]

I don't think it's unlikely that the S&P would add TSLA to the index during its regular Dec rebalancing. That said, none of us know what the S&P committee is thinking or will think. But, I would caution that while selling covered calls for income can be nice, as we've seen in TSLA itself, it will also leave a ton of money on the table if the stock takes off.

Totally agree.

My situation has me prioritizing income over maximizing growth (as of ~today). Even a year ago this wasn't true. It's important that we all understand where we're at, as well as the +/- of the strategies we're making use of.

I would say that FOR ME, it's better to take the risk of losing out on upside on share price growth than it is to take the risk of not collecting living expense money today by selling the options. I won't eat shares by selling them month to month, but pre-selling them at $610 sounds like a pretty good alternative to selling them as needed for living expenses, while collecting income either way to live on is just the right balance. For me and my household.

 

[bxr140]

My rule of thumb is that if I don't want to sell the shares I don't sell covered calls on them. Only if I have a "trading position" will I do that.

Lol! Of my few very hard and fast rules, one of them is "always sell covered calls against B&H shares". Its pretty much all upside. In the rare event I'm opening a 'trading position' against shares (mostly ETFs in that case) I never sell against them.

 

[clmason]

Your post got me thinking, and it's got me applying something similar. In my case, I'm breaking up my covered call positions into two batches, with an eye towards selling one batch each month with a 2 month expiration.

Got me thinking even more and reading more about the variables that contribute to options pricing. Time and volatility being significant factors and they both change.

Now I’m rethinking my strategy of waiting for the eclipse event to sell my monthly CC. That works well in a period of high volatility. Not so great when share prices is stable as the eclipse may never happen. Hence the really great premium I was able get in Mid-Sept when TSLA was coming off the epic run to $500. Since then TSLA has consolidated and volatility has decreased. Therefore, premiums have come down substantially and I’ve been twiddling my thumbs waiting...

A few personal insights and maybe this is me digesting your advice. High volatility brings great premiums. However, there can be periods of consolidation. With Time being the other important variable, that’s other key consideration. Both days until expiration AND days (or worse months) without having a new open contract. I think that’s kinda the point you made above.

So, perhaps a new strategy. If in the new month (going off my my monthly trade cadence strategy), TSLA share price has been relatively stable and there are no near term events looming, the trade may be a shorter term CC to get in an out and earn a premium. On the other hand, if there is some kind of known event around the corner and/or share price starts swinging and volatility increases, that when the bigger premiums start to show up. That’s my eclipse moment when I can sell for a big premium.

Anyway, thanks for the banter. There’s got to be many people who have scored big on a stock and figured out a dependable strategy for monetizing their holdings with Options. I’m kinda searching for that playbook. This thread is helping, but I’m only playing on one side of the wheel. I don’t see the light on writing puts when I already have too many TSLA shares.

 

[Towly420]

Your question about profits - when to take them. As you mention, Option Alpha talks about profits at that 2/3rds level. For myself, I use that 2/3rds level for most positions (more like 90% on really long positions). My thinking is that I can realize those gains, free up the backing for a new position, as well as remove the risk that shares suddenly move drastically against me (which has happened - in post split dollars a >$40 share price move on expiration day).

You mention closing at low IV - generally speaking, closing at low IV is a GOOD thing for you as an option seller.


The questions I ask myself when looking at closing a position:
1) Is there a different position I would rather be in? This is usually focused on a different position with better day to day profit potential. In your example, you've got a $3 option that started at $10 with 2 weeks remaining. You can (upper end) earn $3 more over the next 2 weeks. Is there is a different position you would replace it with right now with a better risk / reward profile?

If yes, then this is easy. Close and open the new position.

And sometimes there isn't! I've ridden out positions like yours to earn that last $3 because there wasn't a 'better' position I wanted to be in. Because heck - $3 is better than nothing . Just think of the current position as a new position - knowing what you know now, would you open that $3 position today for expiration in 2 weeks?


2) Do I want out of the current position because I see an event coming that could push this against me? You mentioned your view that IV is low right now. In an option selling strategy, any time you can sell at high IV and buy to close at low IV, that is good for you. You'll sell relatively high priced stuff, and then buy it back at relatively low priced.

If I want out for risk management, upcoming event, etc.. - then I vote for ruthless. In this case (getting out to avoid a freight train I foresee arriving soon) then I'm out immediately and cheer for my 2/3rds profit.


3) Close a current position at a good spot, to get ready for a new position 'soon' that you believe will be better. This sounds reasonably close to what you're thinking, in which case how much risk do you want to take on to earn some of that last $3, before closing to be ready for the new position?

BTW - in this situation, I've cheerfully closed at a 50% profit. Either for getting ready for a new position, OR because I've already ID'd a position I would rather be in.


Some other thoughts. You mention that this is your first covered call. An important characteristic I optimize for is my "sleep at night / stomach churn" quotient (stress, or risk). If the position is high stress for you, then close it. I believe that important to this strategy, executed over many trades over time, is that it needs to be something you can readily repeat over many trades over time. Individual trades won't always be low stress, but the more you can make them low stress, the better you'll like it. (Or at least, this is true for me).

Or another way to think about it - if you think you'll be doing this regularly, then optimize for choices that enable you to continue doing this over many trades.

( I think my own bias, given the circumstances you've described, is pretty clear. But I'm not you - hopefully these are some useful things to think about ).

Thanks for your detailed and very useful answer adiggs! Yeah especially the stomach part is pretty important. Earlier I did some crazy stuff, but with this wheel-strategy I'm super relaxed, because I kind of win when TSLA goes up AND down. I love this strategy, so far.

About taking profits early this is how I did it the last times:
1) Like you mentioned, is there something better I want to sell?
2) How's the profit per day rate, is it something I'm ok with?

Additionally I started some Poor man's covered calls (PMCC), with ITM-LEAPS (I chose 6, 12, and 24 months) as a substitute to the stock + selling calls like we do in the covered call. Did you guys already tried this PMCC?

 

[Nate the Great]

With the PUTs with SP down, I noticed an increase in premiums on the weeklies. (410)

I sold an arm full at 270.

 

[adiggs]

Additionally I started some Poor man's covered calls (PMCC), with ITM-LEAPS (I chose 6, 12, and 24 months) as a substitute to the stock + selling calls like we do in the covered call. Did you guys already tried this PMCC?

I've thought about doing this and ended up deciding not to. There were enough moving parts and some dynamics that I couldn't figure out, nor motivation to learn , that I've stuck with traditional covered calls.

Maybe you can help out - I've been trying to figure out the specific dynamics around an ITM leap paired up with a covered call. In particular, if assigned on the covered call, how do you fill that requirement? Do you sell the ITM leap and then buy the 100 shares owed?

I'm very curious.

 

[adiggs]

So, perhaps a new strategy. If in the new month (going off my my monthly trade cadence strategy), TSLA share price has been relatively stable and there are no near term events looming, the trade may be a shorter term CC to get in an out and earn a premium. On the other hand, if there is some kind of known event around the corner and/or share price starts swinging and volatility increases, that when the bigger premiums start to show up. That’s my eclipse moment when I can sell for a big premium.

Anyway, thanks for the banter. There’s got to be many people who have scored big on a stock and figured out a dependable strategy for monetizing their holdings with Options. I’m kinda searching for that playbook. This thread is helping, but I’m only playing on one side of the wheel. I don’t see the light on writing puts when I already have too many TSLA shares.

If you haven't been through the Option Alpha videos, I strongly recommend doing so. The are 3 tracks through their free education. I think of them as:
track 1 - option basics
track 2 - getting into a trade
track 3 - getting out of a trade

Among other topics, they will talk about the greeks that cover the value of changes in volatility (Vega) and time decay (Theta).


I caution against the idea of finding a dependable and repetitive strategy you can pursue. The way I think about it is that if there were a strategy (of any kind) in the market that consistently and reliably yielded desirable results, then that strategy would be inundated by hedge funds and other big traders that would mine out that strategy fully and completely. Some of these actors are busy scrabbling over arbitrage pennies, so any inefficiency in the market will be pretty quickly claimed by them.

Which doesn't mean you can't find something that works well for you.

If you haven't read the first page of the thread, that might also be helpful. For me, what makes this work for me is that after years of following Tesla, I'm convinced that I have an information edge over those big actors in the market. They've got most of the other edges, but I know the company better. And I can trade with that.


Here's something I can say about selling puts. My personal experience over ~100 trades over the last 5 months, is that I'm earning roughly 5x from put sales as I am from call sales. The ratio is actually more in favor of the puts if I look only at finished / closed positions (a LOT more in favor, but I had a couple of bad trades in calls, in terms of realized results). Oh - and I have rough 2x the value in shares as I have in cash, so earnings as a rate (instead of absolute value) is closer to 10x.

I believe that this is a combination of a few things.

1) I find that my risk threshold on put sales is a LOT higher. Following delta, my put sales are usually in the .15 to .30 range; probably .2 normally. On the call side, I'm working more like .05 to .10. Higher delta yields much higher premium. My rationale for the higher risk tolerance: if the share price goes down and I get assigned on the put, then I end up with more shares? Uhm - how bad is that!?!

2) In this overall up trend for TSLA, covered calls can get expensive (money losers) if you're not really ready to be assigned and the share price moves beyond your strike. Ask me how I know . A better way to think about it - selling covered calls in an up trend is possibly the worst strategy, even for income production, that is available.

Put sales though - they work great in an up trend (while being much less good than just owning shares). The dynamic being that the share price moves away from the put's strike price, thereby lowering the option premium, and enabling early close at a good realized profit. I'm frequently able to sell 2 and sometimes 3 of these puts for a given expiration date and have them all close at 2/3rds to 9/10ths profit.

The last thought that occurs to me - the value in put sales vs call sales I expect would flip around in a down trend for TSLA (or whatever you're trading).

 

[bxr140]

Additionally I started some Poor man's covered calls (PMCC), with ITM-LEAPS (I chose 6, 12, and 24 months) as a substitute to the stock + selling calls like we do in the covered call. Did you guys already tried this PMCC?

This is a spread, more specifically a calendar spread. And even more specifically, either a horizontal spread (if the strikes are the same and the expiry are different) or a diagonal spread (if both the strikes and the expiry are different).

Unrelated and really just so folks can fill out the visual, most have heard of a vertical spread--that's when the expiry are the same but the strikes are different. So, a spread--which is one bought and one sold contract of the same type (Call/Put)--can be vertical, diagonal, or horizontal. Depending on whether the anchor leg (the one closer to the money) is a bought or a sold contract defines whether its a credit spread or a debit spread and how much margin you may or may not have to use to hold the position. Next, change the other variable (contract quantity) and you get into ratio spreads. That's especially useful when you're trying to manage/balance The Greeks. Finally, if you combine any of the above spreads with a spread on the "other" side (so, both puts and calls) you can build very complex positions to really dial in a risk profile. Iron Butterlys/Condors (a double vertical) and double calendars (horizontal or diagonal) are the basic versions, but all manner of combinations are possible.


Back to the question at hand, assuming you go out far enough that theta is pretty much in the noise--which you would be in this case (6 months is about the closest you'd want to go)--the biggest risk with LEAPS calendars is volatility. While a farther expiration contract usually has much smaller IV movement than a close expiration, it almost always has a much higher Vega. Since each of us is really concerned with [IV% change] * [Vega]...right?...RIGHT?!?!?!, its imperative to understand that the far expiry contract value movement can exceed the close expiry CV movement. That of course is A Bad Thing when compared to a conventional covered call, because even with minimal or even upward price movement it's possible the far (bought) expiry burns off more value than the close (sold) expiry by the time the short expires. So where the CC would return net positive on your portfolio, the calendar may not.

BUT...back to the balancing of The Greeks, if Vega really is an issue with a LEAP calendar you can always go deeper ITM with the far/bought expiry, since Vega drops off moving away from ATM. That makes the whole position more expensive of course since the DITM call is more expensive, AND it increases your ∆ exposure (good news is DITM decreases theta)...BUT, both your capital and your ∆ exposure are still lower than an equivalent conventional covered call so it kinda all works out.

The last thing to look for with leaps spreads is the contract B/A spread--especially when you go DITM B/A can open up quite a bit and you can end up lining the MM's pockets for the pleasure of putting yourself at a disadvantage on your P/L curve. Not a show stopper, but something to manage.

Long story short, IMHO leaps calendars are a fantastic way to maximize capital over traditional covered calls, but they require a little more diligence in setting up the position.