Wiki Selling TSLA Options - Be the House

[bxr140]

I'm still not seeing the risk of them, having been holding on to 900 puts at <500 share prices.

I'd encourage you to read through this thread. Its pretty long, but the downside of sold puts is pretty well spelled out. But, among other things, many (most?) people have a fundamental problem with a massive drawdown of their account balance, which is what happens when you have sold puts that go deep ITM. Some folks are ok with hoping price recovers.

As @st_lopes notes, there's an additional risk if you're selling puts on margin.

 

[juanmedina]

For the sake of learning (and making a ton of money), I've been rolling 5 x 900 puts for a couple weeks now (now up to Apr 19) and it looks like I'm going to start to learn the ITM rolling of covered calls also Like you said, no better time to learn. My golden rule is that I do not roll for a debit. Only credit (or zero) rolls are allowed and to be frank, one can make very good income on ITM puts or calls rolled indefinitely.

I'm still not seeing the risk of them, having been holding on to 900 puts at <500 share prices. I do see the cash income for sure.

The risk could be a margin call if you don't have enough excess margin. For instance just now E-Trade changed the margin requirement of Tesla from 40% to 50%. They could change it to 100% if they want to and if you sold too many naked puts you could find yourself in margin call situation. I don't have a Portfolio Margin account so if they keep increasing the margin requirement it could make it difficult on me; with that 10% change my excess margin got cut in half. Most of my positions expire on Friday so I should be good.

 

[st_lopes]

The risk could be a margin call if you don't have enough excess margin. For instance just now E-Trade changed the margin requirement of Tesla from 40% to 50%. They could change it to 100% if they want to and if you sold too many naked puts you could find yourself in margin call situation. I don't have a Portfolio Margin account so if they keep increasing the margin requirement it could make it difficult on me; with that 10% change my excess margin got cut in half. Most of my positions expire on Friday so I should be good.

Just had this happen with Questrade as well. Fortunately it's a gradual increase. Going to 45% this Friday and 50% next Friday. The run up today gave me more than enough cushion to not get called on that margin requirement change, but it does need to hold up over the next two weeks.

 

[Mokuzai]

Been margin maintenance called before. Not a fun feeling...though back then didn't know all the tools available to get through it without selling shares...so ended up taking a significant (at the time) real loss. During this recent downturn my maintenance excess got lower than I'd like but was able to stay above water while juggling 40 contracts (20 puts and 20 calls and a majority of them not covered).

There is also...albeit very small...chance of getting early assigned. The buyer of the contract has the "option" to exercise at any time. Had this happen to me long ago on some Citi shares I had covered calls against when I was first learning options. But I've been able to roll my $845 TSLA puts on expiration day even when we were trading in the $500's. Exercising early is generally not a smart thing to do so the risk there is small but still possible.

 

[st_lopes]

One question for those in this thread - I tried to buy inexpensive puts last week to try to hedge off a margin call, but it didn't seem to do anything. I think it may because they were classified as married puts. Anyone have any visibility as to how buying deep OTM puts somehow affects your margin maintenance?

 

[juanmedina]

One question for those in this thread - I tried to buy inexpensive puts last week to try to hedge off a margin call, but it didn't seem to do anything. I think it may because they were classified as married puts. Anyone have any visibility as to how buying deep OTM puts somehow affects your margin maintenance?

I did the same thing and it was classified as a married put for protection of my shares. I would like to know as well. Also, why are brokerage houses change the margin requirement for Tesla? just wondering.

 

[WattsHappening]

Hi, New Bee here, so please be kind!

Instead of buying Tesla stock, I am thinking to sell put @1,000 for Mar 2023. Is this a good strategy? What's the down side? (Of course, I cannot earn money using "The Wheel" as I do not own the stock. Which option is better - owning stock and then use The Wheel or sell long put? Appreciate your inputs/suggestions.

The big issue with this strategy is that you have to tie up your cash as your broker will require it for you to sell a put. The amount you have to have depends on whether you have a margin account. But you will tie up your cash for potentially a long time.

I've done this successfully (on shorter durations), but I found I was able to get much better returns by just using the cash to go long TSLA rather than selling puts.

 

[bxr140]

One question for those in this thread - I tried to buy inexpensive puts last week to try to hedge off a margin call, but it didn't seem to do anything. I think it may because they were classified as married puts. Anyone have any visibility as to how buying deep OTM puts somehow affects your margin maintenance?

When you buy a put to pair up wit a sold put--essentially two-stepping your way into a spread--there are a few things to keep in mind:
1. If the spread ∆ is so large that it results in margin that's higher than the margin requirements on the naked put (which could easily be the case if you go WAAAY DOTM), then you won't buy yourself anything on the naked put's margin requirement and your broker will still just see the naked put as the requirement.
2. If you enter a calendar spread and the long leg is the closer expiration, almost certainly your broker won't let the long put "count" toward reducing the -P's margin. That's because once the +P expires you'll be back in naked put territory. You might have plans to buy another put, but your broker doesn't know that (or care).

 

[st_lopes]

When you buy a put to pair up wit a sold put--essentially two-stepping your way into a spread--there are a few things to keep in mind:
1. If the spread ∆ is so large that it results in margin that's higher than the margin requirements on the naked put (which could easily be the case if you go WAAAY DOTM), then you won't buy yourself anything on the naked put's margin requirement and your broker will still just see the naked put as the requirement.
2. If you enter a calendar spread and the long leg is the closer expiration, almost certainly your broker won't let the long put "count" toward reducing the -P's margin. That's because once the +P expires you'll be back in naked put territory. You might have plans to buy another put, but your broker doesn't know that (or care).

This makes a lot of sense. What would happen if the number of bought puts exceeds the number of sold puts? Would they still ignore the bought outs of the delta spread is too large?

 

[Stretch2727]

This makes a lot of sense. What would happen if the number of bought puts exceeds the number of sold puts? Would they still ignore the bought outs of the delta spread is too large?

There is always a buyer and seller. Some times the buyer or seller is a market maker. The price will adjust to a given level based on the demand for the option, underlying stock price and volatility of the stock.

 

[juanmedina]

When you buy a put to pair up wit a sold put--essentially two-stepping your way into a spread--there are a few things to keep in mind:
1. If the spread ∆ is so large that it results in margin that's higher than the margin requirements on the naked put (which could easily be the case if you go WAAAY DOTM), then you won't buy yourself anything on the naked put's margin requirement and your broker will still just see the naked put as the requirement.
2. If you enter a calendar spread and the long leg is the closer expiration, almost certainly your broker won't let the long put "count" toward reducing the -P's margin. That's because once the +P expires you'll be back in naked put territory. You might have plans to buy another put, but your broker doesn't know that (or care).

I had excess bought puts vs naked puts last week but I also had put spreads so I am not sure what happened there. I had 4x $610 -P and I bought 10x $200 P's and the puts became married puts... I can't recall how many of them but the margin requirement didn't go down.

I can buy some puts today and see if my margin requirement changes as an experiment. What strike price would work to not make the spread way too wide? The -p naked puts that I have are 2x 530s for the 21st and 2x 480s for April 1st.

 

[st_lopes]

There is always a buyer and seller. Some times the buyer or seller is a market maker. The price will adjust to a given level based on the demand for the option, underlying stock price and volatility of the stock.

I appreciate the supply and demand dynamics of the options chain and how market makers play a role. My question was more about the theory that buying deep OTM puts somehow reduces your margin requirements.

In my case I had sold 22 x 850 04/16, bought 10 x 03/05 200p, but it seemed to have no impact on my margin requirement. Question is if I had instead bought 30 of the 200p, would it have changed anything.

 

[MP3Mike]

In my case I had sold 22 x 850 04/16, bought 10 x 03/05 200p, but it seemed to have no impact on my margin requirement. Question is if I had instead bought 30 of the 200p, would it have changed anything.

I think the problem may be that the puts you hold have to have an expiration date the same, or after, the puts you sold.

 

[juanmedina]

I think the problem may be that the puts you hold have to have an expiration date the same, or after, the puts you sold.

I just bought 3x March 21 $200 P's to my 2x March 21 $530 and my margin excess got reduced a lot like 40%. I don't know if my other positions are affecting the trade. I don't have anything else for March 21 but I have covered calls for this Friday, some call credit spreads also for this friday and some put credit spread for a later day.

 

[phantasms]

Question. I was listening to the newest Emmet and Dave Lee interview last night. He mentioned that if you write a covered call against short term stock it resets the tax basis timing but once it's held long term it stays long term. What's the deal with that? Does it matter if you bought it back or not, or if it expires worthless? I sold all before the C19 drop and bought back along the way up, for less, so all my holdings are short term for now. I was waiting for them to go long so I could be more aggressive writing covered calls.

p.s. Sold some this morning at $1.40 for next Friday $1000. Free money!

 

[juanmedina]

Question. I was listening to the newest Emmet and Dave Lee interview last night. He mentioned that if you write a covered call against short term stock it resets the tax basis timing but once it's held long term it stays long term. What's the deal with that? Does it matter if you bought it back or not, or if it expires worthless? I sold all before the C19 drop and bought back along the way up, for less, so all my holdings are short term for now. I was waiting for them to go long so I could be more aggressive writing covered calls.

p.s. Sold some this morning at $1.40 for next Friday $1000. Free money!

Browse this thread. I had the same understanding that weekly calls would reset your stock tax basis but someone said that was not accurate. The search feature after the update wants to search by "member" by default so I cannot find the post for you.

 

[bxr140]

This makes a lot of sense. What would happen if the number of bought puts exceeds the number of sold puts? Would they still ignore the bought outs of the delta spread is too large?

If the spread width is too large then yes, the bought puts are irrelevant to your margin...other than the fact that they generally reduce your available margin by as much as their purchase price (which of course is small relative to a sold put).

Having more +P's than -P's is irrelevant to margin in the context of creating a put spread to reduce the margin on an otherwise naked put. The additional +P's may slightly reduce your total portfolio ∆ (if they're way OTM, not by much) but that's not something your broker cares about; that's just you managing your portfolio ∆.

I had excess bought puts vs naked puts last week but I also had put spreads so I am not sure what happened there. I had 4x $610 -P and I bought 10x $200 P's and the puts became married puts... I can't recall how many of them but the margin requirement didn't go down.

It is VERY unlikely that a $200 +P bought against a $610 --with underlying at $6XX--will ever come close to reducing the margin requirements for your -P. Your broker should have a tool to calculate margin requirements, including what would happen if you sent XYZ trade on top of your existing positions. I would guess you need to be at least at $400 for the +P to materially reduce margin requirement on your $610 -P, but I'd also double check that before running out and buying a $400. The big kicker is that the calculations get worse the farther ITM the -P is, so the more the underlying drops, the higher your margin requirements become. That's because your exposure to the underlying 100 shares remains the same (you owe 100x strike) but your exposure on the -P becomes greater (if you were put shares early, you essentially eat the negative value of the -P).

In my case I had sold 22 x 850 04/16, bought 10 x 03/05 200p, but it seemed to have no impact on my margin requirement. Question is if I had instead bought 30 of the 200p, would it have changed anything.

No, that falls into both the #1 and #2 notes from my earlier post.

1: You're creating a $650 wide put spread, which would normally require $65k margin for each spread. A naked $850 -P is probably only going to require ~$30-40k (total guess) of margin, so the $200's do you no good.

2: Because the +P's are closer in expiration than the -P's, your broker still sees your portfolio has having excess margin exposure, because on 3/6 when the +P's expire, you're back to a bunch of naked -Ps.

And, as noted above, the quantity difference is irrelevant for what you're trying to do. (More +P's may or may not be a benefit to other greeks, but that's another conversation)

 

[Nate the Great]

I am curious as to when someone on this thread will be selling June?

 

[evermore]

Question. I was listening to the newest Emmet and Dave Lee interview last night. He mentioned that if you write a covered call against short term stock it resets the tax basis timing but once it's held long term it stays long term. What's the deal with that? Does it matter if you bought it back or not, or if it expires worthless? I sold all before the C19 drop and bought back along the way up, for less, so all my holdings are short term for now. I was waiting for them to go long so I could be more aggressive writing covered calls.

p.s. Sold some this morning at $1.40 for next Friday $1000. Free money!

My understanding is that weekly OTM covered calls do affect the holding period for the underlying short-term stock. Not all covered calls do this, only short-term out-of-the-money calls. The key is whether the CC is "qualified" (more than 30 days to expiration and not deep in the money; weekly OTM CCs fail the first test).

Tax Implications of Covered Calls - Fidelity

Profits and losses from covered calls are considered capital gains. Gains and losses can come from the stock, from the covered call, or from a combination of the two.

www.fidelity.com

Publication 550 (2023), Investment Income and Expenses | Internal Revenue Service

www.irs.gov

26 CFR § 1.1092(b)-2T - Treatment of holding periods and losses with respect to straddle positions (temporary).

www.law.cornell.edu

I am not a lawyer or an accountant and this definitely is not advice.

 

[juanmedina]

If the spread width is too large then yes, the bought puts are irrelevant to your margin...other than the fact that they generally reduce your available margin by as much as their purchase price (which of course is small relative to a sold put).

Having more +P's than -P's is irrelevant to margin in the context of creating a put spread to reduce the margin on an otherwise naked put. The additional +P's may slightly reduce your total portfolio ∆ (if they're way OTM, not by much) but that's not something your broker cares about; that's just you managing your portfolio ∆.



It is VERY unlikely that a $200 +P bought against a $610 --with underlying at $6XX--will ever come close to reducing the margin requirements for your -P. Your broker should have a tool to calculate margin requirements, including what would happen if you sent XYZ trade on top of your existing positions. I would guess you need to be at least at $400 for the +P to materially reduce margin requirement on your $610 -P, but I'd also double check that before running out and buying a $400. The big kicker is that the calculations get worse the farther ITM the -P is, so the more the underlying drops, the higher your margin requirements become. That's because your exposure to the underlying 100 shares remains the same (you owe 100x strike) but your exposure on the -P becomes greater (if you were put shares early, you essentially eat the negative value of the -P).



No, that falls into both the #1 and #2 notes from my earlier post.

1: You're creating a $650 wide put spread, which would normally require $65k margin for each spread. A naked $850 -P is probably only going to require ~$30-40k (total guess) of margin, so the $200's do you no good.

2: Because the +P's are closer in expiration than the -P's, your broker still sees your portfolio has having excess margin exposure, because on 3/6 when the +P's expire, you're back to a bunch of naked -Ps.

And, as noted above, the quantity difference is irrelevant for what you're trying to do. (More +P's may or may not be a benefit to other greeks, but that's another conversation)

LOL I forgot about the margin calculator. Yeah the 2x $400 +Ps will make a +18% change in excess margin for me. The puts will cost $2 each so not so cheap but not so bad.