Wiki Selling TSLA Options - Be the House

[FS_FRA]

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.

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.

Thanks for you response. This has been my take on the strategy from day one: it seems to be a chicken/egg kinda situation.

I guess whoever came up with the idea assumed cash over stocks is the usual entry into the game.

Over the past days I re-read the entire 50 page thread here and I did look through several of the OA videos as well as other sources on the more complex (in my mind) options strategies out there. I am quite familiar in simple put/call trading, and have done so intermittently over the past several years. Regards the Wheel I just got stuck on the philosophical question, on where to start. I have considered to simply sell 100 TSLA to get the cash to start the wheel where the strategies suggest (writing puts), thereby keeping my cash liquidity in the trading account. However I now believe that the only one benefitting from that entry is the broker with an additional commission on the stock sale...

So: putting money where mouth is, I'm going to look for a nice covered call to sell as my entry into the Wheel.

Only issue on my mind right now is: sit on the sidelines over the election? Undecided on that.

 

[euro2012]

Max pain shows $420 for this week. With short shorts beginning to ship, how confident are we that we will end up somewhere near that magical number on Friday?

 

[adiggs]

Thanks for you response. This has been my take on the strategy from day one: it seems to be a chicken/egg kinda situation.

I guess whoever came up with the idea assumed cash over stocks is the usual entry into the game.

Over the past days I re-read the entire 50 page thread here and I did look through several of the OA videos as well as other sources on the more complex (in my mind) options strategies out there. I am quite familiar in simple put/call trading, and have done so intermittently over the past several years. Regards the Wheel I just got stuck on the philosophical question, on where to start. I have considered to simply sell 100 TSLA to get the cash to start the wheel where the strategies suggest (writing puts), thereby keeping my cash liquidity in the trading account. However I now believe that the only one benefitting from that entry is the broker with an additional commission on the stock sale...

So: putting money where mouth is, I'm going to look for a nice covered call to sell as my entry into the Wheel.

Only issue on my mind right now is: sit on the sidelines over the election? Undecided on that.

I can't help with the latter question - my decision has been to more or less ignore the election as a factor and be 'invested'.

But for the first, something that has helped me is to think of a covered call as a "pre-sale" of shares. So for instance, if you're thinking about selling 100 shares anyway to get started, then one idea would be to sell a covered call at any desirable price. You might choose the 500 strike to start as being more likely to finish OTM, while also being somewhat near to the current share price.

Of course, the expiration date also matters - the 500 strike might work well about a month out, where you might choose something closer for the options expiring this week.


By pre-sale, I mean that you're accepting a generous donation from the market today in exchange for agreeing to sell your shares on <expiration date> for <strike>. Of course, you'll choose a strike that, from the POV of today, looks pretty nice.

And you keep the premium either way.


With both puts and calls, this can be a lazy approach to making the sale or purchase of shares happen. Lazy as in it doesn't happen right this instant. Sometimes those transactions can work well on this sort of time scale. When the need is different, then you don't do them this way.


The other thing that helped me get started was to be as far OTM as it took for me to feel ok with doing something that I had effectively never done. That meant selling 200 strike puts when shares were 400 and following those up with 175 puts when shares were still around 400 (pre-split numbers - 1 month out). I was REALLY far OTM. And it worked, and I got paid to start acquiring the experience.

As a bonus, I chose about the best time ever to get started, and those first trades were also really profitable. Almost like I knew what I was doing

 

[bxr140]

There is no mechanical or intrinsic value to starting with #1 or #2 that I know of.

Yeah, it really doesn't matter. You still need more or less the same capital to get started, and total revenue is really driven by 1) balance (or imbalance) in risk for the put and call side and 2) bullish and bearish fluctuations. Where you start won't affect your long term pot-o-money unless you happen to be unlucky on where you choose to start.

That said, it makes sense to choose where to start based on your strategy intent, your risk tolerance, and your favorite market indicators.

On risk, generally an entry level strategy would be to take higher risk on the call side than the put side (= closer to the money on the -C's than the -P's) since an unfavorable move while holding sold puts can have significantly more impact on one's account balance than while holding covered calls. Risk is of course a very complex assessment that is all up to the individual.

 

[adiggs]

Investing and the Five Laws of Holes - Safal Niveshak

I just found this update to the law of holes -- the five laws of investing holes if you will. Mistakes that are variously easy to make and be aware of when investing.

At the very least, I figure you'll get as much of a kick from reading through these as I did

 

[FS_FRA]

Investing and the Five Laws of Holes - Safal Niveshak

I just found this update to the law of holes -- the five laws of investing holes if you will. Mistakes that are variously easy to make and be aware of when investing.

At the very least, I figure you'll get as much of a kick from reading through these as I did

Thanks. This thread clearly addresses the Third Law of Holes

 

[corduroy]

With IV dropping off a cliff at the start of October approaching levels not seen since June, it seems both sides of the wheel are much more difficult now. Any advice for maintaining this strategy in a low volatility environment?

 

[juanmedina]

With IV dropping off a cliff at the start of October approaching levels not seen since June, it seems both sides of the wheel are much more difficult now. Any advice for maintaining this strategy in a low volatility environment?

I haven't sold any options this week .

 

[Nate the Great]

If one's goal is to optimize the premium, you would wait until the TSLA is down approx 3% -5%. The PUT's for the next weekly become much more attractive.

The only downside is it's not favorable to close out your current handful of PUTs.

The solution could be two handfuls of PUTs. So I sold a few weeklies Nov 6 at 370 (3.94)

 

[Nate the Great]

I did have a question when you sell a PUT/CALL for the order type do you select market or limit.

I personally select market.

 

[Mokuzai]

I did have a question when you sell a PUT/CALL For the order type do you select market or limit.

I personally select market.

I usually split the difference between the bid and ask. Depends on how eager I am to get in the position I guess but rarely do market on an option.

 

[blckdmp]

I usually split the difference between the bid and ask. Depends on how eager I am to get in the position I guess but rarely do market on an option.

Obviously quite variable. But how much longer on average would you say it takes to get the order filled with a bid/ask split price?

 

[Mulligan Jake]

With IV dropping off a cliff at the start of October approaching levels not seen since June, it seems both sides of the wheel are much more difficult now. Any advice for maintaining this strategy in a low volatility environment?

I typically sell 2 calls and 2 puts weeklies. Currently I’m doing 3 of each. This gives me about the same weekly income.
It works great until it doesn’t.

 

[Mokuzai]

Obviously quite variable. But how much longer on average would you say it takes to get the order filled with a bid/ask split price?

Well with Tesla it moves fast but if you hit the mid point exactly it's usually pretty immediate. Otherwise it depends on which way the underlying TSLA is moving. If it's moving against me it'll never execute.

 

[corduroy]

I haven't sold any options this week .

I sold a $360 put for Friday, but it was hardly worth it. I am thinking of selling some Nov 13th puts with more aggressive strikes. They have some decent premiums and by then all the election craziness should be resolved and the SP on the way up. I'm not sure about Nov 6th, so I don't want to be in anything expiring then.

 

[adiggs]

Well with Tesla it moves fast but if you hit the mid point exactly it's usually pretty immediate. Otherwise it depends on which way the underlying TSLA is moving. If it's moving against me it'll never execute.

This is about what I do, and have experienced, as well. And of course I'll fudge that halfway point to create a faster / higher likelihood of fill, and further away if I'm more flexible about the entry and willing to wait to pick up the extra pennies (it happens - not often though).


There are two, seemingly contradictory patterns, I have been increasingly adopting (whether they are good or not - that's a different question ).

To open (option sale), I've been tending towards setting my sale price at the high end of the bid/ask, and sometimes even higher. Especially when it's early in the day - I've found that a day order at that higher sale price fills anyway if I wait for 5-100 minutes (which is to say - submit and forget). It doesn't always work that way of course, but since my own pattern is to sell an option and immediately see it go 5-15% against me (that first day anyway), if the position is sort of routine then I'm willing to be patient to get in.

On the close though, I'm getting much closer to the market order for exiting the position. The logic here is that if I'm ready to close a position, then end it and don't fiddle over pennies; take that pennies focus into the open of the new position instead. I have admittedly gotten burned on at least one position that I missed closing by a nickel or so for a profit and then watched it move >$100 against me later that day (expiration day). An admittedly extreme and extraordinary circumstance, but it happened and it can happen.


And lastly - I don't use market orders, only limit orders. I would consider a market order on the shares or on a high volume option (expiration and strike), but mostly I just don't use them. I've never experienced anything particularly extreme happening with a market order, but I've read of extreme occurrences and I just don't chance it - especially in the more thinly traded markets that are the options.

So my equivalent of a market order would be a limit order at or beyond the current bid/ask - so it fills like a market order, but nothing wonky can happen (which does mean that I can miss the fill on a fast moving position -- the market order is still there as a backstop).

 

[adiggs]

With IV dropping off a cliff at the start of October approaching levels not seen since June, it seems both sides of the wheel are much more difficult now. Any advice for maintaining this strategy in a low volatility environment?

My own view on this, which is also admittedly driven by my own circumstances; I try to keep my focus on the risk level, as priced by the market, and allow the income be what it will be. This IS an income or dividend strategy and outcome for me, and it is important to me that I operate the pattern in a fashion that is repetitive and will work for months or years, not for a trade or three here at the end of 2020. I'm still figuring out what precisely that pattern is for me, and I know it will always be evolving, but my real point - I'm going for global optimization of all of these trades, rather than local optimization of any one or a small handful of trades.

Thus, for me, the low volatility environment translates into a lower monthly income from this dividend source - I don't try to maintain an income level by taking on higher and higher risk levels.


I have occasionally chosen to sit out the market while I'm waiting for something to happen. Sometimes it's an event that I just don't want exposure to, plus or minus because I can't identify ahead of time which it will be (like the election).

Sometimes it's an upcoming event that I expect will significantly improve an entry (or exit) opportunity -- such as selling an option at high IV / right before earnings.

Mostly though, I bias towards staying in the market. The way I look at it, if each new position is opened immediately after the close of a previous position, then over time the good open situations will balance out with the bad close situations and vice versa. And by being in the market, time decay (which I consider to be my real and primary source of value) is working more consistently for me. Everything else that creates value requires some level of prediction regarding direction, magnitude, and timing of the share price - and I'm bad at all of these in the short term.


EDIT TO ADD: While I try to focus on the market measured risk level, rather than on the collected premiums, when deciding on individual trades, I am ALSO measuring the overall pattern and approach against an absolute standard of earning 1%/month. I would like to do better, but at 1% / month, I think I'm generating enough incremental upside (especially in this nearly 0% interest rate environment) over other dividend paying stocks, that it's worth the effort.

If the premiums I'm earning (not just collecting) fall below 1% consistently and it looks like the market has moved semi-permanently into that state, then that is when I'll be looking for something else to replace this with.

If I have a portfolio of $2M and I can use that to generate 1%/month, that's $20k/month in dividends and that's awfully good (at least in my world).

I'm not stuck on this personal 1% standard - just that if I'm consistently below that, then it raises a bigger picture question of whether this is a good use of my time or not.

 

[adiggs]

I sold a $360 put for Friday, but it was hardly worth it. I am thinking of selling some Nov 13th puts with more aggressive strikes. They have some decent premiums and by then all the election craziness should be resolved and the SP on the way up. I'm not sure about Nov 6th, so I don't want to be in anything expiring then.

I know that something I've consciously done several times over the last half year, is to put on a trade not so much for the money I thought I would earn, but because of the experience it would expose me to and the learning I would get from it.

Sometimes, the benefit from a trade isn't primarily found in the money it gains or loses - it's in the experience from the individual trade, as well as the experience you gain within your own larger trading pattern.

 

[bxr140]

I did have a question when you sell a PUT/CALL for the order type do you select market or limit.

I personally select market.

Depends on the B/A spread. For shorter expiration contracts the spread is often so close on TSLA that market vs limit won't make a material difference--you're probably as likely to get a mid point fill as you are having to drop your limit to below where the original order would have filled at market.

For longer expiration contracts (and also strikes farther away from ATM) the spread tends to open up. Contract prices also tend to move a little slower out there so its beneficial to aim for close to mid point, as others have described. There are cases where we could be talking a difference of hundreds of dollars per contrat, so its good to be cognizant. I always go market if the spread is less than 10 cents, and probably switch to limit somewhere in the many 10's of cents (though I don't have any hard rule).

My own view on this, which is also admittedly driven by my own circumstances; I try to keep my focus on the risk level, as priced by the market, and allow the income be what it will be.

Thus, for me, the low volatility environment translates into a lower monthly income from this dividend source - I don't try to maintain an income level by taking on higher and higher risk levels.

This is the way to do it. In fact, one should probably even take LESS risk when IV is low because of the pendulum effect of everything statistically gravitating toward some middle-ground between high and low. So if IV is low, the statistic odds of an increase (with corollary underlying movement) are likely. This is where identifying price points can help maximize the strategy, as a strong indicator in a favorable (or unfavorable) direction can help one determine how agressive a position to take. For instance, the $406 support seems to be holding up pretty solidly, but with it getting stronger there's a likelyhood that if it breaks there will be a big downward movement. There also seems to be an impeding macro bear, at least short term with the election right around the corner, and as I postulated somewhere in this forum the odds of year end profit taking on TSLA are pretty good, so its hard to imagine a major upward push.

 

[juanmedina]

Depends on the B/A spread. For shorter expiration contracts the spread is often so close on TSLA that market vs limit won't make a material difference--you're probably as likely to get a mid point fill as you are having to drop your limit to below where the original order would have filled at market.

For longer expiration contracts (and also strikes farther away from ATM) the spread tends to open up. Contract prices also tend to move a little slower out there so its beneficial to aim for close to mid point, as others have described. There are cases where we could be talking a difference of hundreds of dollars per contrat, so its good to be cognizant. I always go market if the spread is less than 10 cents, and probably switch to limit somewhere in the many 10's of cents (though I don't have any hard rule).


his is the way to do it. In fact, one should probably even take LESS risk when IV is low because of the pendulum effect of everything statistically gravitating toward some middle-ground between high and low. So if IV is low, the statistic odds of an increase (with corollary underlying movement) are likely. This is where identifying price points can help maximize the strategy, as a strong indicator in a favorable (or unfavorable) direction can help one determine how agressive a position to take. For instance, the $406 support seems to be holding up pretty solidly, but with it getting stronger there's a likelyhood that if it breaks there will be a big downward movement. There also seems to be an impeding macro bear, at least short term with the election right around the corner, and as I postulated somewhere in this forum the odds of year end profit taking on TSLA are pretty good, so its hard to imagine a major upward push.

don't forget about another possible shut down: Covid-19: Germany announces four-week shutdown as coronavirus cases spike

OT question: I have 5 Jun 21 250 calls that I bought for 14k a while back before the split and they are on my after tax account... if we have another shut down those calls will get trashed. I can either sell them and pay the short term capital gains, exercise 3-2 of them by selling a couple of them or just hold them and see what happens. My original plan was to exercise them next year and fund it by selling expensive LEAPs on other shares but is not looking good. Any suggestions?