Wiki Selling TSLA Options - Be the House

[LN1_Casey]

Well, I feel like I made a mistake today. I wanted to sell a 1/15 put, and it seemed like there was just no MMD, so I gave up waiting and sold with the stock price in the 730s. Then the dip came and the rest of the day was in the 720s and this put has been red since like 5 minutes after the trade. Sigh. Wait for the dip!!

I’ve just been going for cash from puts for living expenses, but I’m going to try to grit my teeth and wait until next Friday, and if I get assigned then I get to try the CC part of the wheel.

Eh, in my opinion, I think 740's is probably the goal for MM's this week, since I don't think they can legit try for sub-700. 750 is a MASSIVE hinder currently. 51k options sold currently, according to Maximum-pain.com.

 

[kchop]

Hello, sorry if this is a repeat, but super long thread
I'm holding long term TSLA in a ROTH and want to generate some CC income. Nothing fancy, just decent 1-3%/month CC income with minimal adjustments. What delta and time-frame strikes are y'all looking at for this?

 

[st_lopes]

Hello, sorry if this is a repeat, but super long thread
I'm holding long term TSLA in a ROTH and want to generate some CC income. Nothing fancy, just decent 1-3%/month CC income with minimal adjustments. What delta and time-frame strikes are y'all looking at for this?

You’re looking for $2-6 premium per week per call at current SP... or $8-24 per month... fairly broad range of strikes and timing can achieve that.

 

[Nate the Great]

I do not know if this has been discussed yet up thread. But there are no monthly options for April & May.

I was curious about how others were going to handle this?

 

[kchop]

You’re looking for $2-6 premium per week per call at current SP... or $8-24 per month... fairly broad range of strikes and timing can achieve that.

that helps thanks!

 

[adiggs]

Hello, sorry if this is a repeat, but super long thread
I'm holding long term TSLA in a ROTH and want to generate some CC income. Nothing fancy, just decent 1-3%/month CC income with minimal adjustments. What delta and time-frame strikes are y'all looking at for this?

My primary suggestion is to find that delta, Prob ITM, or just strike distance that you like pre-selling your shares at (i.e. covered all), and let the weekly / monthly income be what it will be. I did a point-in-time and informal comparison of different delta calls in Apple versus Tesla over the summer. At that point in time, what I found was that something closer to 1/2 to 1% per month looked reasonably achievable using Apple options.


I'm assuming that you've been through the educational videos linked in the first page of the thread (or have equivalent education and/or experience from other sources) about options. If not, that is your first stop, even for writing covered calls (at least - that's my opinion). As somebody that has gotten themselves into a bad position, even a covered call can go badly against you.

Remember - if there was no risk; just 1-3% monthly returns selling covered calls, then everybody else would be doing it, and there would no longer be 1-3%/month available using that strategy. When in doubt, just remember that as a retail investor, there is ALWAYS somebody else in the market with more knowledge, more money, than you can ever hope to have.

Every strategy has risks and rewards, costs and benefits; it's critical to understand what these are.. ultimately so you can make your own decisions about delta / timeframe that will work for you. If something is too good to be true in the investing world, then it is more often than not.


THAT being said... when I started selling options, I went WAY far OTM. Like .05 to .10 delta. That is still approximately 5-10% of finishing ITM; you can approximate that as 1 in 10 to 1 in 20 positions you open going badly enough against you to finish ITM. At that 5 to 10 delta level, you won't be earning 1%/month (which is one reason I suggest letting the premiums be what they will be). Starting at this distant strike, you're much less likely to find yourself in a bad place, and you WILL be gaining experience with the mechanics and the daily gyrations in the option price vs. the share price.

For expirations, I started with the weeklies; mostly the weeklies expiring this week. That evolved pretty quickly to the weekly expiring in 3-8 days from whenever I was making the decision about a new position. The primary benefit I realized from such short duration options was the rapid experience I developed (something like 100 positions in 3-4 months). The dynamics of longer date options, either the 1-3 month window, or out into the long dated options (6-24 months) is different from the very short duration positions. But the short term dynamics provide something to compare with.

The most important experience and trouble I had with weekly covered calls was that I couldn't get to a high enough strike to be comfortable with assignment at that strike. In practice, I would roll that position to avoid assignment and buy time (and a net credit) for the share price to work in my direction. But staying comfortable with the strike also is a big mitigator to a huge run in a short time (which has happened to me; something like $50 (post-split) in a single (expiration) day when I was comfortably OTM by $2-5 (post-split, and share price <$300 post-split).

 

[Discoducky]

Are you saying you have zero concern getting shares called away and having to buy back in later at a higher price? I'm not talking about shares you bought specifically to sell calls against, I'm talking about shares you plan to hold for many years? My concern is that it works until it doesn't, and the lost gains on the lost shares will never be made back selling premium.

Yes, no concerns, ymmv though. I don't mess with my core shares like you guessed.

Remember, TSLA is volatile, but I am appreciating lately how we are continuing to just go up lately. Which is why I've been selling more cash covered puts. And possibly portfolio margin in the near future.

 

[bxr140]

I've mostly been a buyer of TSLA stock and LEAPS, but am now considering switching over to something more like the wheel. I wanted to see what typical weekly and monthly price changes TSLA has experienced over the years, so I put this together and thought it might benefit others:

This is a GREAT way to build up a quantitative strategy to The Wheel. Knowing the statistical distribution of price action (and finding a comfortable place on that distribution will significantly inform how you choose your strikes/expirations. Near as I can tell you've basically set up Average True Range (ATR) on a weekly and monthly timeframe; note that you can do that pretty easily as well in most trading platforms too...though at some point you're exporting to excel or some other tool anyway so it probably doesn't matter too much.

I'd suggest the next layer of analysis be focused on the big moves to see if there's some common catalyst (earnings, etc.), and maybe take a look at other indicators to see if there's a correlation with the big moves, and especially the big downward moves. The end goal would be to find indicators that allow you to be more or less agressive with strikes and expirys so you minimize risk for the big downs. (Given that its the wheel, its probably not worth complicating matters trying too much trying to maximize on the big ups).

You may also want to test early days data too. Its hard to say right now, but you may find that the price action from the early years could contaminate your assessment. Use at least a few years of data for sure, but like...the post IPO data is probably going to be a little more wonky. You may also even want to test the strategy with and without 2020 data, since 2020 was definitely an anomaly.

 

[bxr140]

Who's been doing the wheel or covered calls only over the last couple of years and can say they have come out ahead or at least not lost any shares while collecting the theta decay?

You're conflating Buy-And-Hold shares with The Wheel capital.

People here are not applying The Wheel to their buy and hold TSLA shares. People apply some of their capital to The Wheel, where "some" is a function of what's left over after they've maxed out their comfort/the risk of owning shares/leaps. The Wheel is, generally, a much more conservative strategy than owning shares, and people applying The Wheel are consciously sacrificing the potential of TSLA growth (had the capital been otherwise used for shares/leaps) for the purpose of smaller but more consistent gains.

Its not for everyone (its not for me, I prefer other methods of "low" risk trading), but it is as valid a method of portfolio diversification as any.

 

[bxr140]

You won’t find many here selling cash covered puts (rather than margin covered).

FWIW, most (and maybe all?) American IRAs don't allow higher levels of margin and options trading, so anyone doing The Wheel in that kind of account is doing so by selling cash covered puts.

 

[bxr140]

I do not know if this has been discussed yet up thread. But there no monthly options for April & May.

That's pretty normal. Beyond 6 months you usually only see quarterlies. The monthlies will show up a ~quarter out or so and the weeklies will show up maybe ~2 months out. For instance, you'll note that there's no March weeklies yet--they only go through Feb, but probably in a couple weeks we'll see the March monthlies populate.

 

[bkp_duke]

Here's the way out of that dilemma: if your call that is expiring say this Friday has been run up, and you risk your shares being called away, then you can almost always "Roll" your call forward to a new expiration, and likely at a higher price. You take advantage of Theta decay to protect your core position.

For anyone that cares, I did this today. I had sold on 12/21 Covered Calls for $700, which had gone from OTM to ITM. Today I rolled them out to Feb 5, and at a higher price of $765 for some additional premium. I used the proceeds to add to the core TSLA position today. The goal is to get another 100 shares in play for more covered calls, but I'm not there yet.

 

[adiggs]

For anyone that cares, I did this today. I had sold on 12/21 Covered Calls for $700, which had gone from OTM to ITM. Today I rolled them out to Feb 5, and at a higher price of $765 for some additional premium. I used the proceeds to add to the core TSLA position today. The goal is to get another 100 shares in play for more covered calls, but I'm not there yet.

It's this roll dynamic, especially on shorter term options, that I especially want to build some experience with. With that roll, if you take assignment, then you'll have earned the net credit from the roll plus the $65 change in strike price in your favor.

The tricky detail that I see in a rolled position, is that you have to be cautious about when you take profits on the new position. Broadly speaking, all of the option premium decay in your favor is earning back the previous losses on the position, so until all you've got left is that net credit, then your overall position is still a loss. I figure the simple way to manage this dynamic is to just plan on holding these positions until very close to expiration (day before, or day of).


So much more to learn . Good thing I find this stuff interesting.

 

[ammulder]

Confessions of a Square Wheel

I can't seem to do this. I was really nervous about the 1/15 $720 put I sold, because there's so often a drop later in the week. Prices in the $730s are all great now, but if "they" decide that $720 or less is the target for the week, I'm not that confident we won't end at $719. So I bought back for a slight profit and sold a 1/8 $710 instead. Not that much lower of a strike but hopefully rapid time decay will work in my favor and I can sell before the end of the week. I guess this is "rolling" the put.

I see above someone rolling a call.

But this isn't what we're supposed to do in this thread, right? We're supposed to let the shares get assigned or called away, and then swap puts/calls, right? Why is that so hard?

 

[pz1975]

Confessions of a Square Wheel

I can't seem to do this. I was really nervous about the 1/15 $720 put I sold, because there's so often a drop later in the week. Prices in the $730s are all great now, but if "they" decide that $720 or less is the target for the week, I'm not that confident we won't end at $719. So I bought back for a slight profit and sold a 1/8 $710 instead. Not that much lower of a strike but hopefully rapid time decay will work in my favor and I can sell before the end of the week. I guess this is "rolling" the put.

I see above someone rolling a call.

But this isn't what we're supposed to do in this thread, right? We're supposed to let the shares get assigned or called away, and then swap puts/calls, right? Why is that so hard?

If you want to reduce the need to buy them back or have them assigned, you can always choose to sell puts with a lower strike price, and can sell more of them to still get decent profit. This is what I do. I’ve sold puts between 550-650 over the last few weeks expiring this week (higher strike prices as expiry day got closer), and I’ve never once felt any risk of them becoming in the money. I also have sold calls between 800-900.

 

[LN1_Casey]

Confessions of a Square Wheel

I can't seem to do this. I was really nervous about the 1/15 $720 put I sold, because there's so often a drop later in the week. Prices in the $730s are all great now, but if "they" decide that $720 or less is the target for the week, I'm not that confident we won't end at $719. So I bought back for a slight profit and sold a 1/8 $710 instead. Not that much lower of a strike but hopefully rapid time decay will work in my favor and I can sell before the end of the week. I guess this is "rolling" the put.

I see above someone rolling a call.

But this isn't what we're supposed to do in this thread, right? We're supposed to let the shares get assigned or called away, and then swap puts/calls, right? Why is that so hard?

Each person is different, but sometimes it may be more profitable to "roll" the call you sold than to let it expire ITM. Just being in the wheel doesn't require you to keep your ITM calls or puts. It just basically gives more of a guideline to the selling option phases. You sell calls when it's profitable to do so, and then sell puts if the calls are executed.

 

[bxr140]

The tricky detail that I see in a rolled position, is that you have to be cautious about when you take profits on the new position. Broadly speaking, all of the option premium decay in your favor is earning back the previous losses on the position, so until all you've got left is that net credit, then your overall position is still a loss.

This is exactly where my "never pay to roll" rule comes into play. You basically end up never worse with the 'rolled to' position than you would be with a freshly opened position; the time decay is effectively clawing 'up' from your old/lower strike to your new/higher strike. If you roll at a debit, whatever you paid for the new contract is at higher risk precisely as you note.

ITM covered calls have the added bonus of having downside protection, both in the short term since the ~high ∆ of the call offsets the -100 ∆ of the shares, and of course in the long term (= near expiration) because your strike is below underlying.

I actually can't remember the last time I entered a covered call that wasn't ITM!

 

[adiggs]

But this isn't what we're supposed to do in this thread, right? We're supposed to let the shares get assigned or called away, and then swap puts/calls, right? Why is that so hard?

The good news is that there are many variations of the wheel being practiced by people here. Some are aggressively going back and forth, earning very large premiums per contract compared to writing further OTM options. I mostly like the share and cash positions I have, so I would prefer keeping the premiums and not turning shares into cash; cash into shares.

The way I think about it - The Wheel (turning shares into cash; turning cash back into shares) - is one of my fallback positions to selling options.

I.e. - a covered call goes far enough against me, then one of my choices is to let those shares get sold at the strike price, and use that cash to sell puts.

The ultimate fall back for me is my investment thesis and expectation that Tesla will do really well over the next decade. So at the end of the day, I own extra shares on a put assignment.

As I'm more focused on income these days, then the downside of a big upmove is that I get assigned on covered calls that represent an excellent selling price over when I sold the call. I give up that upside exposure and gain some risk mitigation with the premium I collect.

My primary and first solution to a position that moves ITM against me is to roll that position, typically to a later and better strike than I'm closing.

I expect that each roll will have a few characteristics:
- always for a net credit
- the strike price is at least flat, and ideally moves at least 1 strike closer to ATM
- the net credit is large enough that it's about the same as a new position rather than a roll


That last bullet is a reasonable outcome whenever a rolled position is more aggressive than the original position. I.e. rolling into a .40 delta position, when the .30 delta is more typical.

Lastly - I also believe that they key to getting rolls right consistently is to wait for the time value to be close to 0. That mostly means waiting until the day before or day of expiration before executing the roll. You want to have 'earned' as much of the time value from your original open of the position before you roll - any time value that still remains when you roll is something you have to buy back first (you're giving that away), and the less of that time value you have to buy back the better.

I say time value close to 0, as any position that goes a lot against you (deeply ITM) might see it's time value approach 0 much sooner than expiration.

This dynamic of waiting for time value to be ~0 is something I'm starting to experiment with using the aggressive strangle I'm trying this week for the first time, and plan to be working repeatedly in the weeks to come. If it works as well as I expect it to, then I'll expand the number of contracts somewhat - I don't want to do this with the bulk of the portfolio, but I also don't want to invest the energy if it's trivial. For now I'm in education / experience mode; how much better results, how difficult to manage strong moves (either direction), etc..

 

[adiggs]

I actually can't remember the last time I entered a covered call that wasn't ITM!

Now this is a dynamic I find interesting. And I expect is the opposite of how most of us are thinking.

Heck - I probably suffer from being TOO attached to my shares, but I see what you mean about ITM covered calls providing downside protection - their gain in value offsets losses in the share price.

How deeply ITM do you go?

 

[adiggs]

Confessions of a Square Wheel

I can't seem to do this. I was really nervous about the 1/15 $720 put I sold, because there's so often a drop later in the week. Prices in the $730s are all great now, but if "they" decide that $720 or less is the target for the week, I'm not that confident we won't end at $719. So I bought back for a slight profit and sold a 1/8 $710 instead. Not that much lower of a strike but hopefully rapid time decay will work in my favor and I can sell before the end of the week. I guess this is "rolling" the put.

I see above someone rolling a call.

But this isn't what we're supposed to do in this thread, right? We're supposed to let the shares get assigned or called away, and then swap puts/calls, right? Why is that so hard?

Oh yes - an easy tidbit that is helping me a lot. I can't stand the idea of losing any of my core shares, so I solved that problem by buying 1 lot of shares earlier this week just to test out some of these new ideas. I bought those at $735 and wrote a $760 covered call against them.

If those 100 shares are called away on Friday, then I earned $25 plus the premium in one week. I can do that

Even though there isn't actually any difference between those 100 shares and the other shares I have in that account (except the tax consequences of the sale), there is an emotional difference to me and I'd rather work with that than trying to logic my way out of that.