Wiki Selling TSLA Options - Be the House

[mongo]

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

Quick note regarding the article: That is a shutdown of restaurants, bars, theaters, cinema, and other leisure facilities, not a full shutdown. Take out is still ok, shops and schools are staying open.

 

[adiggs]

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.

Good observation about the low IV / pendulum effect. I have sort of had the same feeling, but without it being conscious or yet being able to put it into action. Thanks for putting this into words for me

It will take an extra measure of discipline to not only maintain risk through lower premiums, but even lower the risk taken on in the face of already low premiums, to even lower levels.

 

[Nate the Great]

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.

I just did this, however, with limit used. With a favorable result. A sold another set of puts at 375 @ 4.5 (Nov 6)

 

[wnorris]

@adiggs You had some Nov 385s. Did you do anything with them?

I am trying to determine at what point is appropriate to either roll or close out a position that is close to ITM.

 

[juanmedina]

I sold a $345 put for 11/6 for $6. I have no other positions opened

 

[adiggs]

@adiggs You had some Nov 385s. Did you do anything with them?

I am trying to determine at what point is appropriate to either roll or close out a position that is close to ITM.

I still have those, along with some Nov 365's as well.

We are far enough away from expiration (3 weeks or so) that I'm not doing anything with them. I will continue to monitor them of course, but my guess of the moment is that if the shares don't rebound, then I'll either be rolling these near expiration or I'll let them be assigned.


One of the concepts I haven't encountered anywhere else except from OA was something called "touch". It's related to Prob ITM- the probability that an option will be ITM at expiration. Touch is the probability that the option till be ITM at some point prior to expiration and is 2x ProbITM. I think about touch, not as something I use to make decisions with particularly, but to remind myself that just because an option goes ITM somewhere along the line doesn't mean it's going to end ITM.

For myself and my situation, I am very comfortable giving these two positions more time to develop. If I were going to roll - something I will definitely be considering - then I'll be waiting until close to expiration.

 

[Nate the Great]

For those of you have an option go against you on expiration day.

What were the repercussion?

I haven’t had this happen, as of yet.

 

[Mokuzai]

For those of you have an option go against you on expiration day.

What were the repercussion?

I haven’t had this happen, as of yet.

Based on today's action you either bought a call or sold a put.

Bought call - I normally take the loss and lesson and move on. Bought calls are all gambles for me so have to go into it with the idea that I'll lose the paid premium.

Sold put - You could take assignment and start selling calls for the other side of the wheel. This is providing you have the cash to purchase the shares or enough margin. Or you could roll forward to either increase your overall premium, try to break even on premium or mitigate loss.

You have "options".

I sold some $400 puts for Nov 6 which is looking like might be assigned unless there's a pop on whatever results from Tuesday. I don't have the cash to cover the assignment but I went into it with the idea that I'd dip my toes into margin. It'll represent about 1/8th of my stock buying power if assigned. Still deciding if I want to roll or take assignment to wheel into calls...but that's a decision for next week.

 

[Nate the Great]

Based on today's action you either bought a call or sold a put.

Bought call - I normally take the loss and lesson and move on. Bought calls are all gambles for me so have to go into it with the idea that I'll lose the paid premium.

Sold put - You could take assignment and start selling calls for the other side of the wheel. This is providing you have the cash to purchase the shares or enough margin. Or you could roll forward to either increase your overall premium, try to break even on premium or mitigate loss.

You have "options".

I sold some $400 puts for Nov 6 which is looking like might be assigned unless there's a pop on whatever results from Tuesday. I don't have the cash to cover the assignment but I went into it with the idea that I'd dip my toes into margin. It'll represent about 1/8th of my stock buying power if assigned. Still deciding if I want to roll or take assignment to wheel into calls...but that's a decision for next week.

My strike price for those weeklies was 375 and 370 Nov 6th. I am hoping it stays above that for next week.

 

[bxr140]

One of the concepts I haven't encountered anywhere else except from OA was something called "touch". It's related to Prob ITM- the probability that an option will be ITM at expiration. Touch is the probability that the option till be ITM at some point prior to expiration and is 2x ProbITM. I think about touch, not as something I use to make decisions with particularly, but to remind myself that just because an option goes ITM somewhere along the line doesn't mean it's going to end ITM.

Haven't heard it described that way but its a good concept. Holding sold contracts can take some fortitude if you go ITM--especially early--as your position P/L can be WAY red. Having price target conviction on the underlying can mitigate some of the emotional toll of being ITM--in other words, if your price target is out of Touch, its ok that the current price is in Touch.

Marginally related, in the event I'm doing a short term covered call (I'll do weeklies or 2 weeks around earnings to capitalize on volatility without exposing myself to the significant downside of a naked -C) in the event of an unfavorable move I'll usually bail out of the shares somewhere around my CC break even and leave the -C naked. Logic being that, especially around earnings, if there's unfavorable underlying movement post earnings significant enough for me to pull the rip cord, price is unlikely to recover in the short term back to the money (or in other words, I'm applying anti-Touch). FWIW often I will enter ITM CCs to provide even more downside protection, with a break even below a technical price point.

 

[bxr140]

For those of you have an option go against you on expiration day.

What were the repercussion?

I haven’t had this happen, as of yet.

Are you talking about being assigned?

The mechanics are that on Monday morning you're the proud owner of [100 shares X number of contracts] with a cost basis of your contract strike price(s). Since the underlying will almost certainly be below that cost basis, your account will show those shares in the red. For instance if price is $350 on Monday morning your 375 shares will represent a $2500 loss (per contract) and your 370 shares will represent a $2000 loss. If the premium you collected on the front end is greater than the loss on the shares your account balance will be up relative to when you sold the contracts.

Scrolling upthread it looks like you sold $375's for $4.5 (or $450 collected) and $370's for $3.94 (or $394 collected). So in this example of allowing your ITM puts to execute on 11/6 AND TSLA opens at $350 on Monday 11/9, your total loss on the trade will be $2050 times however many 375's you have and ~$1600 times however many 370's you have.

Depending on how many contracts you actually have, your break even is probably in the high $360's.

 

[adiggs]

For those of you have an option go against you on expiration day.

What were the repercussion?

I haven’t had this happen, as of yet.

I'd have to go dig back to find the specifics - this is going off of memory.

There was an expiration day - pretty sure it was in August - where the share price started off flat to slightly down first thing at the start of the trading day. I remember that because I tried to fill a close order that would have netted me an 80 or 90% profitable trade, and freed up the backing to start a new trade. I think the share price was around $1400 or $1450 and my position was a $1460 call.

I missed the fill and the shares moved against me. And I could have closed at a 50% profit, but missed that fill. I kept watching for the usual and inevitable reversal, and it just kept getting worse . $20-40 moves in a flash, a 5 or 10 minute pause, and another big move. Over and over.

The shares peaked at around $1780 that day - a $300 move!?! I'm going off of memory, so maybe it wasn't quite that bad. About 20%.


Somewhere along the line, the position had moved far enough against me that I no longer had enough cash to close the position at a loss. That was also when I realized that emotionally, I wasn't really ready to sell those shares for $1460, and never had been - I was just trying to nick some small $ on short time, at a strike I considered unreachable. (Oops - that's a mistake I'm not making again - the covered calls will stay on the shelf if there isn't a strike price and duration I'm actually willing to be assigned at, even if I'd roll instead to avoid assignment).

I finally rolled up to the 1700 strike and out - I think it was a month out, and paid a net debit to make that roll. In retrospect, I would have (and have since, in a different situation) chosen a less dramatic increase in the strike and would have generated a net credit (period, full stop). I paid an $80 debit for that roll.


And when all was said and done, that particular trade went badly against me, and the rest of that month went well enough that it ended up being my best month so far. It was also a month that was bad enough part way through to be so bad as to offset all of my gains from a few months to that point. "It was the best of times - it was the worst of times". It worked out in the end, but it wasn't fun.


My learnings (which doesn't mean I actually learned what I should or could have ):
1) don't sell covered calls at any strike or duration, where I'm not actually willing to accept assignment (I think of covered calls as "pre-sales" of shares). This pushes the strikes really high (I have a 610 call open for December expiration for example, and 840s in 2 years). I'm more risk averse to the upside than the downside, due to my knowledge of the company.

2) I missed exiting that position by pennies and ended up paying an $80 debit to get out (via roll). I'm a lot less likely today to miss a fill trying to grab an extra nickel. I'm more likely to chase those pennies on the open of the position. When I decide that a position is done, then it's done. I don't haggle over pennies - the limit order that splits the bid/ask is usually a nearly immediate fill.

3) And I won't chase something that long again - I'll just do a market order a lot sooner to be done and out.

4) Did I mention that I don't open covered calls at a strike I'm really not ready to sell at? It's translated into not very many new covered call positions the last month or two. It's also translated into the put sales generating roughly 5x what the calls are generating.

I'm more worried about calls that are $200 OTM over puts that are (as of close Friday) $0 and $20 OTM.

5) Keep working on understanding how my own emotions work on these trades, and setup trades that work with instead of against those emotions. And also stay clear on my own financial situation, and desired outcomes.

It's important to understand that for my own situation, generating income / "dividends" is increasingly important, while a larger and larger portfolio is nice but not as much of a priority. Think of the 60/40 asset split in retirement - some growth, and some income generation, as a better mental model for me. That means I'm making choices that aren't optimal for even a year ago when I was still in growth mode so that I could retire.

 

[bxr140]

I'll just do a market order a lot sooner to be done and out.

I highly recommend a stop loss to mitigate this kind of situation--even more secure if its an OCO. With liquid contracts I tend to use the contract value itself, and if you have the ability to trigger off the bid or ask instead of last, that's even better. If there's not a ton of contract volume (which is often the case with long expirations) and you can't trigger off the B/A, then its best to just make the stop conditional based on underlying.

Anyway, assuming you're going off the B/A or last, one might enter with, say, a max loss of -20% on the bottom side of the bracket and profit of +75% of the top side. If it runs up to 50% right away from a big move, for instance, bump but bottom side up to ~even to protect against a reversal, then maybe bump the top side up to 90% to eek out a little more potential. As expiration gets closer bring the bottom side of the bracket up as far as you like--75%, 85%, whatever. And unfavorable move will trigger your exit and you go away with the profit you wanted and you freed up capital to make another trade.

It's important to understand that for my own situation, generating income / "dividends" is increasingly important, while a larger and larger portfolio is nice but not as much of a priority. Think of the 60/40 asset split in retirement - some growth, and some income generation, as a better mental model for me. That means I'm making choices that aren't optimal for even a year ago when I was still in growth mode so that I could retire.

I know I'm beating the horse here, but just to provide a bit of a counterpoint for those still following, there's a bit of a fallacy in the assumption that the seemingly incremental and steady-ish 'income' from selling options and is somehow safer or less work than other kinds of trades.

It is not, and it is definitely not with something as volatile as TSLA.

 

[juanmedina]

I know I'm beating the horse here, but just to provide a bit of a counterpoint for those still following, there's a bit of a fallacy in the assumption that the seemingly incremental and steady-ish 'income' from selling options and is somehow safer or less work than other kinds of trades.

It is not, and it is definitely not with something as volatile as TSLA.

What other kind of trades do you recommend? you have to consider that most people are not as well verse on trading as you are. In my case I mostly held index funds for many years and then decided to buy some Tesla stock. I later bought some Tesla options and I got lucky and after that I started selling option which seemed very straight forward and so far it feels like really easy money.

Do you have any book recommendations? courses? etc. I am really interested about learning more about trading.

On the wheel, I end up closing p345 for Friday for $1.7. I am feeling an easy about the elections and Corona shut downs and the stock possibly taking a **** from some posts from the main tread. Do you guys have any recommendation on how to hedge in this circumstances? I see some people are selling their shares on the main thread.

 

[Tempus]

to me, it's a signal to start looking at buying leaps. I've done fairly well so far with mostly selling puts. As the stock price has dropped below where i consider "reasonable" (made up in my head number, 400!), and the IV on out year options has gone quite a bit lower, I've dipped into adding a couple of leaps here and there.

If it continues going down from here, *shrug*, it'll be back up before those come due. If it goes back up, also great. I've generally only really done poorly with TSLA when i've tried to play short term to up to 6 months out with options on the buy side.

 

[bxr140]

What other kind of trades do you recommend? you have to consider that most people are not as well verse on trading as you are.

Upthread and in other threads here I discuss my various trading perspectives and I'm generally very happy to opine, so don't take the comment as me trying to hide something or be purposefully curt with folks. Short story though, I don't like selling options as a standing strategy because the return is extremely small relative to both a) the capital required and thus the capital exposure and b) especially on the put side, the risk for me is untenable. It simply doesn't make sense to me to cap upside or expose my portfolio to massive downside. Mind, there are plenty of positions where a short contract make sense in spreads, and I can get on board with having otherwise unused capital return a few buck in your portfolio from time to time, but for me that's after I've exhausted other potential entries.

In other words, why cap myself to $1000 profit in a month on $XXk capital when I can return 2 or 5 or 10x that on $Xk capital in a week or three, with the same or less downside risk?

I'm just trying to make sure people don't walk away from this thread thinking selling contracts is easy money. Seriously, if I could give only one piece of officially sanctioned internet trading advice it would be that if it feels like its easy money, you're doing it wrong. This year is an absolute once in a lifetime for traders of TSLA, myself included--don't be fooled.

Do you have any book recommendations? courses? etc. I am really interested about learning more about trading.

Its kind of one of those things where pretty much any knowledge is good knowledge--there's so many free resources out there to align with your preferred media that you might as well just dive in. Investopedia is probably as good a place as any to start, but I've found that diversification of knowledge inputs is helpful. Fidelity seems to have a pretty decent knowledge portal and I assume other big players do too, though honestly I haven't used it (Fidelity's) too much. I've found that self directed learning is useful too--find an indicator, research why it came to be, figure out what part of it's foundation is useful even if you don't use the indicator. (Most indicators are useless if you don't use them for their specific purpose)

Pretty much the only thing to be wary of is someone trying to sell you some get-rich solution, and ESPECIALLY if they don't let you test drive it first. Huge red flag there.

 

[adiggs]

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.

I closed this position today at $2.40, about a 2/3rds profit. I was waffling back and forth - I don't have another position I'm ready to open, but 2/3rds in 10 days on a 60 day contract is a pretty good deal. I'm getting a lot more aggressive about taking pretty good deals on limited upside (with unlimited downside) positions.

And that takes any risk of a big run up off the table in terms of this particular position.

Of course if the shares drop, then I lose out on the opportunity to collect some of that last $2, but I'm getting much more aggressive about the 2/3rds target. So put ~$5 in the bank and we'll see what develops.


My guess right now is I'll next be looking at roughly the same position if we see a spike up in the shares in the next week or two. This might happen if the election reaction amounts to jubilation, or it might happen due to the market suddenly realizing that the beta FSD update is a big deal. Or just random walk brings the shares up and creates another good entry.

 

[juanmedina]

Upthread and in other threads here I discuss my various trading perspectives and I'm generally very happy to opine, so don't take the comment as me trying to hide something or be purposefully curt with folks. Short story though, I don't like selling options as a standing strategy because the return is extremely small relative to both a) the capital required and thus the capital exposure and b) especially on the put side, the risk for me is untenable. It simply doesn't make sense to me to cap upside or expose my portfolio to massive downside. Mind, there are plenty of positions where a short contract make sense in spreads, and I can get on board with having otherwise unused capital return a few buck in your portfolio from time to time, but for me that's after I've exhausted other potential entries.

In other words, why cap myself to $1000 profit in a month on $XXk capital when I can return 2 or 5 or 10x that on $Xk capital in a week or three, with the same or less downside risk?

I'm just trying to make sure people don't walk away from this thread thinking selling contracts is easy money. Seriously, if I could give only one piece of officially sanctioned internet trading advice it would be that if it feels like its easy money, you're doing it wrong. This year is an absolute once in a lifetime for traders of TSLA, myself included--don't be fooled.



Its kind of one of those things where pretty much any knowledge is good knowledge--there's so many free resources out there to align with your preferred media that you might as well just dive in. Investopedia is probably as good a place as any to start, but I've found that diversification of knowledge inputs is helpful. Fidelity seems to have a pretty decent knowledge portal and I assume other big players do too, though honestly I haven't used it (Fidelity's) too much. I've found that self directed learning is useful too--find an indicator, research why it came to be, figure out what part of it's foundation is useful even if you don't use the indicator. (Most indicators are useless if you don't use them for their specific purpose)

Pretty much the only thing to be wary of is someone trying to sell you some get-rich solution, and ESPECIALLY if they don't let you test drive it first. Huge red flag there.

That's my feeling too... I been telling my wife there is no way it can be this easy.

 

[adiggs]

if it feels like its easy money, you're doing it wrong

Not enough Like buttons in the world on this. At the minimum if it feels like easy or free money, then realize that it really isn't. There are risks you're missing or not accounting for.

If it really WAS easy or free money, then realize that there are always more sophisticated and well capitalized entities in the market than you, and they would be mining out all of the value in that free or easy money, until that "free and easy" was priced into the market, and it would no longer be free or easy.

 

[adiggs]

That's my feeling too... I been telling my wife there is no way it can be this easy.

If nothing else, one of the subtle risks that can be hard to think of as a risk (using a made up example)....

if you sell a put for $20 instead of buying the shares, and then watch the shares go up $100 which enables you to buy back / close the put for $1, it's easy to look at that $19 in realized gains and be thinking free money.

Or you could look at it as trading a $100 unrealized gain for a $19 realized gain, which doesn't sound nearly as good. If you were to then sell those shares you had bought instead (buy shares strategy, vs sell put strategy), then you'd have a $100 realized gain vs. a $19 realized gain.

And you tied up about the same amount of capital earning that $19 as you would have buying the 100 shares (capital intensity high). And that really makes the option sale look bad (risky).


It's a made up example that isn't far off of some of the trades I've done over the summer, so it's at least directionally accurate. Whether that's actually a bad outcome is more context dependent, and isn't as simple as comparing a $19 gain over a $100 gain. Understanding that risk though is important in your own context.

I consider @bxr140 more flexible approach to be superior to my own. It's not enough superior (for me) to invest the time in deeply learning other strategies and to learn and start making use of the other strategies. That's not a permanent decision for me - just a decision that has held over the summer and fall.


Another way I like to think of this stuff - whatever your decisions are, own them! I'm a big believer in an idea I encountered elsewhere - Strong convictions, Weakly held. I've got convictions based on my research and understanding of the world and I'm acting on them (and making money based on them). And I'm not done learning, and changing what I'm doing as my understanding of the world expands. Which includes conscious choices to not go in some directions (but strong convictions, weakly held - maybe next week!)