Wiki Selling TSLA Options - Be the House

[Mo City]

Can someone advise an options rookie?

At the moment, I can sell a Jun 17 2022 300 Put for $68.52 and buy a Jun 17 2022 750 Call for $68.20. Of course, both x100.

Nearly even.

I'm obviously a bull. Tell me why this breakeven sell/trade is not a no-brainer. I think TSLA is coiling for another breakout within 12 months because Q4 and every quarter of 2021 will be lights out. Not to mention I believe the FSD beta will generate positive TSLA movement well before Jun 2022.

TSLA falling below 300 seems very unlikely IMO.

What am I missing? Am I too optimistic?

 

[bxr140]

That's a collar, or at least a version of a collar.

IMHO, don't play the "break even" game; IMHO those are two different positions and should be treated as such.

Either way the $300 put still sucks up $30k of your capital/margin for the next year+ (for 22% over ~18+ months, which really isn't too bad) and, at least without factoring in rolling and/or closing before expiration, you end up at $0 if price doesn't rise above $750 (currently options are priced such that there's only a ~14% chance of being over $750 in Jun22) and even then you won't return too much on it unless price goes WAY over $750. That's the rub with the break-even game (you can do it with calendars too)--your long strike ends up so far OTM that its hard to return real profit. There are so many better positions to take with the capital you'd otherwise consume.

As an alternative, a 240/270 Jan22 vertical put spread credits ~$1100 on $3k of capital. x10 that and for the same $30k capital as a single Jun22 $300 put you return $11k (37%) with a 10% lower anchor strike and 6 months less capital exposure. (The risk profile is of course much steeper so assess accordingly).

For the long OTM call, I prefer a calendar spread to burn down entry price. A monthly TSLA call with 10% probability of assignment currently sells around $250, if we napkin math that as a constant (its not, but its probably close-ish) you're looking at ~$3k annual that can offset the purchase of a long call. Even then, that's not a suggestion to go find the net-zero long call (in this case, jan 21 $1000)--that would put you in "stupid OTM land". In a world where nothing comes for free (note, its TERRIFYING that options noobs sell puts...), paying to play is just part of the game. A jan 22 $500 call costs you the better part of $10k, if you can reasonably safely burn off $2-2.5k of that entry price before you close/roll, that IMHO is a pretty good deal. And the $500 is a reasonable strike for a bull. Jan 22 $600 strike is even reasonable-is too, and that's ~$7.5k.

 

[bxr140]

As an alternative, a 240/270 Jan22 vertical put spread...

Forgot to mention--this isn't arbitrary. ~$270 is pretty strong support for TSLA.

 

[Stretch2727]

I rolled a 447.5 put I sold from this week into next. Got about a $3 premium. I sold the 10/23 put for $27 last week so it was about break even at the close today.

I read a better strategy than allowing assignment is to hold the strike on the put and roll. This way you get the full upside if the stock recovers and still get a small premium.

More I think about it I could have just allowed assignment and sold a covered call on any stock recovery next week per the wheel strategy.

I want to have upside position going into Monday morning as TSLA seems to have high probably of upside on Mondays.

Thoughts on which way is better to handle an in the money sold put?

 

[Towly420]

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.

Well even though I'm not sure if I can help you out because of your deep understanding of options I'll try

Here's an example:

• $TSLA is $420
• Buy ITM Call @350 exp Sep 2021
• Sell OTM Call@500 exp monthly
• $TSLA goes to $520

• your shares get called (your are short 100 shares with strike price $500)
• you can exercise your $350 call using the money from the $500 buyer to buy him his shares OR
• you can buy the shares and keep the LEAP

ATTENTION:
This is my understanding of the process, I'd be super glad for confirmation, because I never experienced this process by myself yet.

The advantage of the PMCC is your buying power, you don't need as much cash as with the normal CC.
One clear disadvantage (can turn into an advantage) is the impact of volatility on the LEAPS. After the "IV-crush" the last days the LEAPS lost a lot of value, nearly the same like I made with the premium. But I'll see like this will work out in the long term.

 

[juanmedina]

That's a collar, or at least a version of a collar.

IMHO, don't play the "break even" game; IMHO those are two different positions and should be treated as such.

Either way the $300 put still sucks up $30k of your capital/margin for the next year+ (for 22% over ~18+ months, which really isn't too bad) and, at least without factoring in rolling and/or closing before expiration, you end up at $0 if price doesn't rise above $750 (currently options are priced such that there's only a ~14% chance of being over $750 in Jun22) and even then you won't return too much on it unless price goes WAY over $750. That's the rub with the break-even game (you can do it with calendars too)--your long strike ends up so far OTM that its hard to return real profit. There are so many better positions to take with the capital you'd otherwise consume.

As an alternative, a 240/270 Jan22 vertical put spread credits ~$1100 on $3k of capital. x10 that and for the same $30k capital as a single Jun22 $300 put you return $11k (37%) with a 10% lower anchor strike and 6 months less capital exposure. (The risk profile is of course much steeper so assess accordingly).

For the long OTM call, I prefer a calendar spread to burn down entry price. A monthly TSLA call with 10% probability of assignment currently sells around $250, if we napkin math that as a constant (its not, but its probably close-ish) you're looking at ~$3k annual that can offset the purchase of a long call. Even then, that's not a suggestion to go find the net-zero long call (in this case, jan 21 $1000)--that would put you in "stupid OTM land". In a world where nothing comes for free (note, its TERRIFYING that options noobs sell puts...), paying to play is just part of the game. A jan 22 $500 call costs you the better part of $10k, if you can reasonably safely burn off $2-2.5k of that entry price before you close/roll, that IMHO is a pretty good deal. And the $500 is a reasonable strike for a bull. Jan 22 $600 strike is even reasonable-is too, and that's ~$7.5k.

Interesting.... I never really use any of my small margin but it is kind of tempting to do a play like that. Maybe some put spreads and a long dated put because you never know .

 

[corduroy]

I wanted to share my mistakes on my last 2 trades to help other rookies jumping into the wheel. I am definite newbie myself, but learning a lot with each trade.

My underlying assumption was that earnings were going to be home run, the stock would rise above the $480 level by Friday's expiration.

About 10 days out from earnings, I sold 2 Oct 23rd put options, one OTM strike at $415 for $14 and then another ITM at $480 for $42.50. I knew selling a deep ITM $480 strike was risky, and not my normal probability of success, but I wanted to try an aggressive bullish earnings play. I was hoping to net a nice $5,650 from these after earnings.

The first couple days, everything was going as I expected, then the SP began it's downward march and nothing went to plan. Yes, the earnings were awesome, but the SP did the opposite of what I expected.

The $480 strike became really deep ITM, which made me nervous enough that I bought to close at a pretty significant loss. I was going to wait for a couple days to do a delayed roll.

I thought the $415 was definitely still safe to stay OTM so I held it, but on Friday, that one also went ITM when the SP went to around $408 after the recall news. I bought to close that one too while it was ITM, still making profit but not as much as I could.

Mistake #1, Broke a big rule of cash secured puts - I wasn't really prepared to be assigned. As the stock was dropping, I became convinced there would be a chance to buy in a lower levels between now and the election, even with my premium discounts factored in. I might have been OK being assigned on the $415 strike with a cost basis of around $401, but not the $423 cost basis of the $480 strike.

Mistake #2, I let the loss on the first trade cloud my judgement in the second trade. I really wanted to get the whole premium of the $415 strike to make up for the other loss. I could have closed it out the day before expiration a 92% of max profit, but I left it to expire. Then when the stock dropped unexpectedly past even the $415 strike, putting that ITM, I bought to close at about 70% profit. Next time I will close it out, because you never know what will happen when the option is near ATM. (Note the SP did end up closing above the $415 strike later that day, but hindsight is 20/20)

The net of both trades was a slight loss of around $100 bucks, but I figure that was worth it for the education. If I would have stuck with my normal conservative OTM strategy it would have worked out well, even with the unexpected moves. I'm still up overall for my option trades, so I can't complain!

 

[Nate the Great]

@bxr140

Are you adjusting your trades around the election?

If we see a drop with TSLA how much?

 

[Stretch2727]

I wanted to share my mistakes on my last 2 trades to help other rookies jumping into the wheel. I am definite newbie myself, but learning a lot with each trade. My underlying assumption was that earnings were going to be home run, the stock would rise above the $480 level by Friday's expiration. About 10 days out from earnings, I sold 2 Oct 23rd put options, one OTM strike at $415 for $14 and then another ITM at $480 for $42.50. I knew selling a deep ITM $480 strike was risky, and not my normal probability of success, but I wanted to try an aggressive bullish earnings play. I was hoping to net a nice $5,650 from these after earnings. The first couple days, everything was going as I expected, then the SP began it's downward march and nothing went to plan. Yes, the earnings were awesome, but the SP did the opposite of what I expected. The $480 strike became really deep ITM, which made me nervous enough that I bought to close at a pretty significant loss. I was going to wait for a couple days to do a delayed roll. I thought the $415 was definitely still safe to stay OTM so I held it, but on Friday, that one also went ITM when the SP went to around $408 after the recall news. I bought to close that one too while it was ITM, still making profit but not as much as I could. Mistake #1, Broke a big rule of cash secured puts - I wasn't really prepared to be assigned. As the stock was dropping, I became convinced there would be a chance to buy in a lower levels between now and the election, even with my premium discounts factored in. I might have been OK being assigned on the $415 strike with a cost basis of around $401, but not the $423 cost basis of the $480 strike. Mistake #2, I let the loss on the first trade cloud my judgement in the second trade. I really wanted to get the whole premium of the $415 strike to make up for the other loss. I could have closed it out the day before expiration a 92% of max profit, but I left it to expire. Then when the stock dropped unexpectedly past even the $415 strike, putting that ITM, I bought to close at about 70% profit. Next time I will close it out, because you never know what will happen when the option is near ATM. (Note the SP did end up closing above the $415 strike later that day, but hindsight is 20/20) The net of both trades was a slight loss of around $100 bucks, but I figure that was worth it for the education. If I would have stuck with my normal conservative OTM strategy it would have worked out well, even with the unexpected moves. I'm still up overall for my option trades, so I can't complain!

https://seekingalpha.com/article/4210320-selling-puts-good-bad-and-ugly

I am using this strategy in a small account with a few TSLA contracts a week. In the end if you are selling puts or calls it is all about earning the premium value but you don't want to loose the intrinsic value chasing the strike price around if you end up with an ITM option at expiration.

First time I rolled the put this week as it was in the money. Let see how it goes.

 

[Stretch2727]

@bxr140

Are you adjusting your trades around the election?

If we see a drop with TSLA how much?

I plan to push the date out a few weeks when I re-write my weekly position at the end of next week.

 

[bxr140]

• $TSLA is $420
• Buy ITM Call @350 exp Sep 2021
• Sell OTM Call@500 exp monthly
• $TSLA goes to $520

• your shares get called (your are short 100 shares with strike price $500)
• you can exercise your $350 call using the money from the $500 buyer to buy him his shares OR
• you can buy the shares and keep the LEAP

ATTENTION:
This is my understanding of the process...

Sort of. If you are called shares you don’t own, you will automatically sell short shares to cover. You don’t get a choice. If you don’t have enough cash/margin to cover the short you will immediately receive a margin call and will have to immediately close the short position (which means buying 100 shares at the current price) otherwise your brokerage will start to liquidate your other positions to cover. The sort of good news is your account got credited (in this case) $50k for the short sale, so when you buy 100 shares (since you're currently -100) your P/L will only +/- based on your purchase price difference from the execution price.

Also, with the margin call you will almost certainly get put in your brokerage’s penalty box and won’t be able to trade for some (short) period of time other than closing positions. This could be especially painful if you have other critical positions open that need maintenance, like rolling or whatever.

If there is no issue with account balance as a result of the short shares, you’re free to maintain that short position (or close) as you like.

The other leg of the spread (a long $350 contract in this case) really doesn’t come into play at all. You’re free to hold or close that position as you like (though again if you're in the penalty box you won't be able to roll for some period of time).

The good news is that any sensible investor will have rolled or closed the -C $500 on Roll Thursday or even before, especially if pretty DITM, so the above scenario would never play out; One would never be called the shares they don't own.

Last, if you are stupid enough to hold the -C $500 to expiration (and maybe even just to execution) in this example you may see some wonky account balances: Like, you won’t necessarily see the $50k credit right away for the short sale and so your balance will appear $50k in the hole until the transaction clears, maybe Saturday or Sunday. This is essentially what happened to the kid that killed himself a few months ago.

Interesting.... I never really use any of my small margin but it is kind of tempting to do a play like that. Maybe some put spreads and a long dated put because you never know .

Maybe a bit of a nomenclature thing, if you open a spread of any kind where the short leg is shallower than the long leg (so, regardless if it’s a debit or credit spread) your broker will require you to cover the risk with ‘margin’. In the 240/270 put example I posted above, the risk is $30 x100 shares, or $3k per spread.

That ‘margin’ can either come from your cash reserves or your brokerage enabled leverage, which is also typically referred to as 'margin'. Near as I know in this situation every brokerage will deplete your cash before dipping into your margin, but either way It’s really transparent to you as a trader other than the fact that your brokerage will charge you interest on however much leveraged margin you use. (Its not a huge amount of interest--check the fine print on your margin agreement) Also, obviously, the more leverage you use the more risk you’re taking on, so assess accordingly.

@bxr140

Are you adjusting your trades around the election?

If we see a drop with TSLA how much?

I’m bearish on the macro post election; I have a *sugar* ton of QQQ puts and GLD calls. I’ve been working a number of TSLA calendars over the past few weeks (I outlined the play in some thread here) which are kind of neutral, and the only long term shares I'm holding (including my B&H pot-o-TSLA) are all paired with DITM CCs, so they're super protected from price movement.

Im not one to predict prices beyond their probable and very self evident technical points, but either way pretty deep in a consolidation at this point so odds are we’re not going to see a super strong move either way. Note that macro trends may supersede that speculation.

On the upside there’s going to be some effort to push through $465, and it’s hard to imagine pushing above $500. That’s based on the rudimentary logic that 2020 has been such an unprecedented once in a lifetime year for TSLA, the likes of which are almost never (if not never) seen with such a large cap, and I have to imagine there’s going to be some serious distribution/profit taking over the next few months driving the price down (that goes for Macro, not just TSLA).

On the downside we're pretty much at a strong convergence of signals where, if they break, we're heading down. Those are: 50ma, the price support at ~$406, the rising trend line from early Aug (the higher of the two rising TLs shown below), and a phenomenon my trading buddies and I call "backside of the trend line" (the descending TL--not sure if I've talked about that here). Moving down the rising TL from May (the lower of the rising TLs) might offer a bit of support in the high 300's as will the late Sept low at ~$350, but I think the real support will be in the 320's, and then super strong support in the 270s.

 

[adiggs]

I rolled a 447.5 put I sold from this week into next. Got about a $3 premium. I sold the 10/23 put for $27 last week so it was about break even at the close today.

I read a better strategy than allowing assignment is to hold the strike on the put and roll. This way you get the full upside if the stock recovers and still get a small premium.

More I think about it I could have just allowed assignment and sold a covered call on any stock recovery next week per the wheel strategy.

I want to have upside position going into Monday morning as TSLA seems to have high probably of upside on Mondays.

Thoughts on which way is better to handle an in the money sold put?

My opinion only - not a pro, and heck - still learning.

I don't look at individual strategies as better and worse - they are better and worse in particular environments and circumstances. A good choice today will be a bad or indifferent choice in a similar situation another day.

That being said, you've covered several of the potential outcomes that are available, and that (at its core) is what I like best about the idea of the wheel.

In your particular situation and belief, taking assignment (more shares!), is probably a better outcome based on your belief that the shares are going to take off this week. But it might not turn out to be (depends on your share ownership timeframe).

It's also important to realize that option sales is a lower return strategy than straight share ownership with rising a rising share price. For me, the risk of doing nothing and not earning income, is higher than the risk of the shares taking off (I choose VERY high call strikes to ease the pain of assignment should that happen).

Option sales though, are a great strategy for a sideways stock. Think we've got that?


In practice, the only assignment I've accepted over 100 trades this year, was the one I actively courted and finally got. I wanted a more controlled experience with the entire cycle, and I got it . Not just the theory, but also the mechanics and most importantly - the emotions in the moment and how that effects decision making. Turns out that turning shares into cash was an emotional problem for me - I was really worried about the share price taking off when I was out of position. I am very comfortable turning cash into shares, and waiting for a good opportunity to get back to cash.


This is my view on the wheel - it's at least how I approach things.

1) The biggest picture view of things, and what backstops every other choice, is that I have a really long term view of the business outcome I believe highly likely for the company. Long term as in 2030 right now (10+ years), which is an update from my original investment in 2012 that had a 10+ year view. Actually, I consider it likely that I'll own shares in TSLA for the rest of my life (which I expect to be much more than 10 years ).

Thus - worst case on covered puts is I end up owning more shares than I really want (oh noes!). And the worst case on covered calls is I sell at a significantly higher price than today, and turn around and buy back in or sell puts. Even on the cc, for my situation, it's a good (though not necessarily best) outcome.

2) My first preference on every option sale is that they expire worthless. Actually, under this heading is an early close for 2/3rds to 9/10th profit, and is the most common outcome. But when I don't have another position I would like to be in, milking that last 1/3rd to 1/10th is something I'll do as well.

3) Since I mostly don't want assignment, then my next preference is a roll if the alternative is assignment. I've rolled out. I've rolled down (more of a take profit / open new in this case). And mostly, I've rolled out and up (talking calls) or out and down (puts); use some of the new time value I'm selling to provide a credit AND pay for a better strike. This sometimes means going out further - say 2 weeks instead of the weeklies you're currently selling, or 2 months when you're normally working the near month.

I mostly think of a straight roll as being the most aggressive - if the shares take off on you, then you didn't gain any additional breathing room and you're in the same situation at the new expiration but now farther ITM. And of course, if the shares reverse around your original strike, then you maximize your end result. Risks and rewards, costs and benefits. Every trade has risks and rewards, and understanding the range of risks - especially when selling puts or calls (theoretically unlimited losses) is sort of important.

4) And of course, I can take assignment and run the wheel, selling the other side of whatever I was assigned on.


The point here is that we have a LOT of available outcomes and with one exception they're under our control. I like that.

And the key on this, at least for me, is #1. I don't know another company well enough to believe #1 about the company, and because of that, none of the others matter. That doesn't mean that there aren't other companies out there with a similarly bright future, only that I don't currently know which those are, nor am I ready to invest the very large amount of time (or close) that I do with Tesla to follow and understand the company.

 

[adiggs]

Well even though I'm not sure if I can help you out because of your deep understanding of options I'll try

Here's an example:

• $TSLA is $420
• Buy ITM Call @350 exp Sep 2021
• Sell OTM Call@500 exp monthly
• $TSLA goes to $520

• your shares get called (your are short 100 shares with strike price $500)
• you can exercise your $350 call using the money from the $500 buyer to buy him his shares OR
• you can buy the shares and keep the LEAP

ATTENTION:
This is my understanding of the process, I'd be super glad for confirmation, because I never experienced this process by myself yet.

The advantage of the PMCC is your buying power, you don't need as much cash as with the normal CC.
One clear disadvantage (can turn into an advantage) is the impact of volatility on the LEAPS. After the "IV-crush" the last days the LEAPS lost a lot of value, nearly the same like I made with the premium. But I'll see like this will work out in the long term.

The cash from the sale / assignment is the part I've been missing. I've been thinking I would need just-in-case cash in the account to cover buying the ITM leap shares; just use the cash from the ITM CC to pay for the shares from the ITM call. In practice I'd sell the ITM call so I get all if it's ITM value plus it's time value, and use all of that to pay for the 100 shares that need to be delivered.


I'll need to think on this - do some math to make sure I've really got it. It's close enough to what I'm already that it would be easy to setup a small position to get a feel for how the dynamics work out in practice. I can see the benefits - it's a lot less capital intensive than outright share ownership for backing the cc. That can juice the returns, which means it can also juice the losses (it's the nature of leverage - everybody would be doing if it weren't).

It seems like this PMCC (as you call it) would really shine in any circumstance where you can sell repetitive cc's. And if you can keep avoiding assignment while having the shares rise, that'd be REALLY awesome (but not something to plan on ).

 

[adiggs]

I think some specifics on using rolls to avoid assignment are in order. This is what I've put together, from @bxr140 comments, plus my own experience.

You might have noticed bxr.. talking about "Roll Thursday". I think I've finally figured out what this is about and why it's valuable to wait until the day before expiration before executing the roll.

Whatever else happens with your position, by expiration day (so the day before - Thursday for a small additional margin of safety) the time value of the position is just about all gone. This represents your earnings, if you will, on the position. Even if the overall position is pretty badly ITM.

Thus when you roll, if you keep the strike and only go out in time, you'll still be equally deeply ITM, but now you have incremental time value. That gets you your credit and additional time for the position to come back to you.

If you roll earlier than that - say 1 week before expiration, then you've earned less of that time value and thus you need to roll further out to get a comparable credit. I guess the way to think of it is you're paying for the time value when you roll, and the less of that there is, the better the roll.


So the next time I'm facing assignment, I'll wait for the day before expiration and roll then. Worst case I'll stick with the same strike and gain whatever time premium is available for 1 additional week / month / quarter / year (as I like, at the time). I have a bias towards out and up (down), so collect a credit (though smaller) while also improving my strike. That improved strike will improve the likelihood of finishing OTM, will reduce the credit, and help that position end sooner (or at least stay closer to ATM, which will improve the credits on each roll).


The key ah-hah here for me, and I can tell this is going to require discipline on my part, is waiting for the day before (or nearly 0 time value) before rolling. They key is for time value to be as close to 0 as is "safe".

Other observations?

 

[Mokuzai]

Other observations?

I have been early assigned before...not on TSLA but when I was learning options with C (Citigroup). If you're far enough ITM the option buyer on the other end can decide to exercise at anytime.

 

[adiggs]

I have been early assigned before...not on TSLA but when I was learning options with C (Citigroup). If you're far enough ITM the option buyer on the other end can decide to exercise at anytime.

I haven't yet had early assignment, but I know it's a real possibility. I think that the generalization isn't that you wait until the day before - rather you roll if/when you find that time value is nearly gone (to eliminate that increasing probability of early assignment). I don't have a specific number for that, but I like to keep in mind that the big traders are looking for reliably acquired pennies (with enough volume).

My guess is that the earlier you roll, when time value is practically zero, then the more time value you'll get from the roll, so waiting is counterproductive.


My guess at timing for these early rolls - when the total time value has gone below the typical bid/ask spread, and maybe below 1/2 of the bid / ask spread, then it's time to start thinking early assignment is a real possibility. (I totally made that up just this moment, but it doesn't sound ridiculous to me ).

 

[bxr140]

IYou might have noticed bxr.. talking about "Roll Thursday". I think I've finally figured out what this is about and why it's valuable to wait until the day before expiration before executing the roll.

Sort of--guess I should have elaborated.

So a number of things come into play:
--Its actually kind of annoying to execute a contract before expiration, so it doesn't happen that often.
--Really no smart money is selling options for the purpose of executing before expiration, and there are few scenarios where smart money is interested in moving shares at all through options assignment (covered calls opened explicitly for time value is one of them)
--Early assignment almost never happens before expiration week and more often expiration day, because executing earlier than that is generally a financially stupid thing to do.
--Only very rarely do you have some retail kook grabbing shares early, and the probability of that happening is so deep in the sigmas of the gaussian curve that you might as well just write it off as 'unlucky' if it ever happens to you.
--If there IS early assignment it will often be at opening bell on Friday, so you won't have a chance to act. Good morning, congrats on the new shares (or short shares). BTDT...800 BABAs later...

Wrap all of that together and what it really means is that if you plan to roll a short ITM contract on Thursday (the day before expiration), its almost a non-existent probability that you'll ever be called/put. Hence Roll Thursday. You end up eating the time value of Friday, but dems da breaks. If you're close to the money you're almost always good to let it go till Friday to see what happens; of course that approach can backfire. If you're OTM its kind of a dealer's choice on closing the position and moving that capital into another position or letting them go to expiration and collecting the full time value. Upside to waiting is you don't end up eating the B/A spread to close the position, downside is that you can't put the capital into a position before the weekend to earn your couple days of free theta.

As @Mokuzai notes, when you're DITM the kook window on assignment gets a little bigger, but the good news there is that, as you note, the time value is so small on a DITM contract that you can roll earlier with minimal or downside, and sometimes even an upside (sometimes the time value of the expiring contract is so low that the theta of the farther contract is actually higher). FWIW I always roll my B&H DITM CCs (I have many) the week before expiration just to hedge against the kook factor. And, as noted way upthread, always rolled at even or for a credit.

 

[FS_FRA]

Alright...some late-ish Sunday evening musings have brought me back to the topic of the Wheel, and as I'm looking to dip my toes in over the next week or so - here's a basic newbie question:

Assuming Wheel strategy:

1. sell cash covered puts (roll if possible), collect premium, until assigned

2. sell covered calls (roll at will), collect premium, until assigned

3. rinse .. repeat

What advantage is there to starting at 1. if I have the shares in my trading account (and am willing to have them called away)?

If I have the shares, why not just start with 2. and then rotate the Wheel to 1. as per the strategy?

Pros/Cons?

Cheers

 

[bxr140]

Sorry about the mid quote post up there.

 

[adiggs]

Alright...some late-ish Sunday evening musings have brought me back to the topic of the Wheel, and as I'm looking to dip my toes in over the next week or so - here's a basic newbie question:

Assuming Wheel strategy:

1. sell cash covered puts (roll if possible), collect premium, until assigned

2. sell covered calls (roll at will), collect premium, until assigned

3. rinse .. repeat

What advantage is there to starting at 1. if I have the shares in my trading account (and am willing to have them called away)?

If I have the shares, why not just start with 2. and then rotate the Wheel to 1. as per the strategy?

Pros/Cons?

Cheers

That's the idea in a nutshell.

There is no mechanical or intrinsic value to starting with #1 or #2 that I know of. I guess something needed to be #1 between the two.


My guess is that the more willing you are to have your shares called away and more precisely - the more balanced you are in your risk aversion / tolerance for risk on each side of the wheel, then the more balanced your results will be. And thus, wherever you start, the income results will be closer whichever side of the wheel you're working.

I'm very imbalanced - high risk tolerance on sold puts (willing to be assigned) and low risk tolerance on sold calls (avoiding assignment). I believe that is the primary dynamic leading to the roughly 5X or higher results from the put sales over the call sales that I am seeing so far. The general move up in the shares also contributes of course


If you haven't already, I commend reading the first page of the thread to you. Not all of the assumptions there (which are true for me) are true for everybody else in the thread (we're each where we're at, with our own circumstances). But that might be helpful to you.

Mostly there are link(s) there to the basic option education material that I consider to be the baseline knowledge. If you already have options education and experience, then I doubt that the basic education linked there will add much. But it is still assumed as the baseline, at least for my own contributions.