Wiki Selling TSLA Options - Be the House

[Yoona]

(I'm just adding on what I understand to be the larger context on this).

Looking up at the top of this page at your screenshot, I see a P/L on open of $19k - $9k, so credit of $10k. That credit is derived from 95 contracts of $40 ($4k backing each) so $380k is at risk. There is no incremental margin needed as there is a same date, same width put spread also being opened (hence we call this an Iron Condor). The risk assessment by the broker (and everybody else) being that if the put spread is experiencing a max loss, then the call spread is experiencing a max gain (and vice versa). The max loss of $380k can only be experienced on one side or the other.

So @Yoona has 95 contracts with the $40 spread size being opened. The call side generated a 3.21 - 1.44 credit, or 1.77 per share, $177 per contract. The call side position has a prob. OTM (1 - Prob ITM) of 95.5%.

Meanwhile she's also opening a put spread with Prob OTM of 79% and a credit of 69.32 - 49.76 = 19.56. Lots more credit but also lots more risk (based on how the market is pricing the positions).

I hazard a guess that most of us would be more worried about an 850 call going ITM than a 670 put going ITM, but the market is pricing the put as 10x as valuable to buy (and thus 10x as valuable for us to sell). This is where we (or at least I) believe that we have an information edge on the market as a whole - we (I) think that the puts are priced too high (good for us) and the calls are priced too low (bad for us, as option sellers). If we're right then that information edge can (is) earning us a lot of income.


Another way to look at this - by going out to 10/21, Yoona has found a position with what I at least consider low risk (put side anyway) that generates over 40% of the money at risk in premium. Collecting 40% of the money at risk each time she opens a position leaves a LOT of room to be wrong, as long as she's moderately aggressive at managing losers and taking early winners. The strikes are so far OTM, this doesn't sound like a stretch.


H'mm... maybe I need to look at this more closely Seems like whenever I dig into the details of what other people are doing, I find myself modifying what I'm doing! (We each make our own decisions, and experience our own consequences).

Thanks Yoona! Again!

380k is correct:

All good EXCEPT... the 2 sides weren't opened around the same time; the bps was opened 2 months earlier than the bcs (because i think of bcs as gravy)

 

[adiggs]

Not sure I'll read 376 pages but I'm keeping these tips around, thanks!

Pretty sure that I wouldn't either.

But the first page at least has the education link as well as several posts about the mindset and thinking that led me to create this thread. It's grown way beyond anything I dreamed possible when I started things. The evolution over time isn't necessarily important, but with the first page or two as background and maybe the most recent 10 pages for additional context -- maybe that's enough for you to get started with a few small and distant trades to dip your toes into the water and start your own learning. Maybe from there you'll find that there's a sweet spot in there for you as well.

And maybe you'll find it's a bad fit. Too much emotional energy gets tied up - too much time watching the moment to moment changes in the share price. Not enough fun.

My original trade was to sell 200 strike puts when the shares were in the low 400s. They traded down into the high 300s, I had some incremental cash arrive, and I sold some 175s. Freaked me out (in a good way) - I was simultaneously afraid of the shares coming down to my strike AND eager for it to happen as I thought buying at those strike prices would be a pretty good deal. Sadly that didn't happen and I was forced to retain the premium (very large compared to what we earn today).

Point is - start way far OTM and small positions; learn the mechanics by experience, collect some beer & sushi money, and use that experience to decide if you want to go further.


I don't want a different full time job from what I left. If for no other reason I'm finding that its difficult even to provide 1/2 time effort to a non-profit I'm working with. There's just too many things to do to allow for a full time commitment to anything!

One reason to even consider doing option sales - my own larger goal is to generate a comparable or larger income to what my paycheck income provided, under the general idea that if the income is replaced, then surely we can maintain the lifestyle. And if that really does work, then we're actually getting a long ways ahead because the portfolio isn't being sold off in bits and pieces for living expenses - it's being maintained or even grown while providing living expenses as a side benefit.

My own results thus far is that the cash and share counts are growing, while generating closer to a 2x income. And I still wouldn't do this if it weren't fun, but I also enjoy learning the stuff I'm learning and doing the stuff that I'm doing.


Last thing I'll add - if I were still years away from retirement, then I probably wouldn't be doing this. That's a personal choice largely driven by not wanting to throw another significant time commitment on top of a full time job AND following the long term Tesla prospects as closely as I do. I'll follow long term Tesla regardless - selling options makes better use of that knowledge on a short term time scale than working full time.

 

[adiggs]

380k is correct:
View attachment 713211

All good EXCEPT... the 2 sides weren't opened around the same time; the bps was opened 2 months earlier than the bcs (because i think of bcs as gravy)

So that ~$20 put credit spread premium comes from opening the position roughly 3 months in advance. That's also an important thing to understand.

Interesting tradeoffs that I see - bigger total credit, while being smaller than the week to week credits that can be accumulated by doing weeklies (or every other week) positions.

Fewer opportunities to make strike adjustments.


AND fewer opportunities to make strike adjustments = don't need to watch so closely. One might even go a while entire week and not know what the share price is!

Therefore less daily mental energy into the position.


And overall income from the position is good from any reasonable point of view. If one retains / realizes $100k out of the $162k (seems low) over that 3 months, that turns into a $400k annual 'salary' using $400k as backing. It's not that simple of course, but as a starting point, generating 100% realized p/l over the year is .. uhm ... good.

At minimum it explains one reason why Yoona might be studying, learning more, and putting that knowledge to use

 

[Yoona]

So that ~$20 put credit spread premium comes from opening the position roughly 3 months in advance. That's also an important thing to understand.

Interesting tradeoffs that I see - bigger total credit, while being smaller than the week to week credits that can be accumulated by doing weeklies (or every other week) positions.

Fewer opportunities to make strike adjustments.


AND fewer opportunities to make strike adjustments = don't need to watch so closely. One might even go a while entire week and not know what the share price is!

Therefore less daily mental energy into the position.


And overall income from the position is good from any reasonable point of view. If one retains / realizes $100k out of the $162k (seems low) over that 3 months, that turns into a $400k annual 'salary' using $400k as backing. It's not that simple of course, but as a starting point, generating 100% realized p/l over the year is .. uhm ... good.

At minimum it explains one reason why Yoona might be studying, learning more, and putting that knowledge to use

at 80% (right now), my long-dated 90DTE BPS will produce approx 150kx4=$600k annual income , if i simply repeat this 4x/yr (assuming prems stay the same, etc)

but since i can cash out now at 80% (ie 60DTE), it means i can do this 6x/yr (approx $900k income) instead of 4x/yr

PLUS: at 50%, the bcs gravy gives 8kx6=$48k annual income to pay for the Xmas party drinks

 

[llirk]

at 80% (right now), my long-dated 90DTE BPS will produce approx 150kx4=$600k annual income , if i simply repeat this 4x/yr (assuming prems stay the same, etc)

but since i can cash out now at 80% (ie 60DTE), it means i can do this 6x/yr (approx $900k income) instead of 4x/yr

PLUS: at 50%, the bcs gravy gives 8kx6=$48k annual income to pay for the Xmas party drinks
View attachment 713237

I also did not notice the BPS side was opened a couple of months back, thanks for clarifying. As for the BCS side, do you typically do them more frequently with a smaller DTE? If so, that would drive higher returns over the same period of time while hedging the risk of the short strike going ITM.

Thank you for giving us yet another strategy to consider.

 

[bkp_duke]

PLUS: at 50%, the bcs gravy gives 8kx6=$48k annual income to pay for the Xmas party drinks

I'm going to the wrong Xmas parties.

 

[alterac000]

PLUS: at 50%, the bcs gravy gives 8kx6=$48k annual income to pay for the Xmas party drinks

I'll be looking out for an invite!

 

[adiggs]

PLUS: at 50%, the bcs gravy gives 8kx6=$48k annual income to pay for the Xmas party drinks

Beer, sushi, and Xmas party drinks money. Good times

 

[Yoona]

I also did not notice the BPS side was opened a couple of months back, thanks for clarifying. As for the BCS side, do you typically do them more frequently with a smaller DTE? If so, that would drive higher returns over the same period of time while hedging the risk of the short strike going ITM.

Thank you for giving us yet another strategy to consider.

bcs is always a last-minute thing because i'm bullish (ie to minimize risk)

what i really, really like about this 90dte bps is that "maxpain/tallest call wall/tallest put wall" is out of the picture; one less thing to think about

note that income will probably be less than weeklies, but that's ok because it prevents me from putting all eggs in one basket (ie my weeklies will have their own separate drama)

 

[adiggs]

I also did not notice the BPS side was opened a couple of months back, thanks for clarifying. As for the BCS side, do you typically do them more frequently with a smaller DTE? If so, that would drive higher returns over the same period of time while hedging the risk of the short strike going ITM.

Thank you for giving us yet another strategy to consider.

Because of IC mechanics (same expiration date primarily), the ability to dip in and out is limited. If one opens a BCS for a date that doesn't have a BPS expiring, then you will need the full margin for backing that call spread.

On the plus side, if you did that, then you'd have a 'free' (margin perspective) slot to throw down a new put spread position! This is really the benefit that I see with Iron Condors - the ability to 'reuse' margin being used for 1 position to get a 2nd position with no incremental margin impact.


The risk, as nothing is free (if it were, there are bigger / better funded market participants that would have bought up all of the free money), is that you're adding risk in that additional direction. This has bitten me - I had a put spread on, and added a call spread to get into an IC. I'd have been great except then we had a share price surge that pushed my distant call spread all the way to its midpoint. I had these on in a few different accounts - I took losses of 40-70% on those 'free' call spreads.

It was a good lesson for me - I can and will land in ICs, but I analyze the put and call spreads independently and don't enter either side that I don't like the risk/reward tradeoff. I'm not thrilled with the call spreads these days

 

[phantasms]

Alright. Threw some 770s at the wall at the end of the day to bring me about even for the week. Couldn’t help myself. lol

 

[bkp_duke]

Because of IC mechanics (same expiration date primarily), the ability to dip in and out is limited. If one opens a BCS for a date that doesn't have a BPS expiring, then you will need the full margin for backing that call spread.

On the plus side, if you did that, then you'd have a 'free' (margin perspective) slot to throw down a new put spread position! This is really the benefit that I see with Iron Condors - the ability to 'reuse' margin being used for 1 position to get a 2nd position with no incremental margin impact.


The risk, as nothing is free (if it were, there are bigger / better funded market participants that would have bought up all of the free money), is that you're adding risk in that additional direction. This has bitten me - I had a put spread on, and added a call spread to get into an IC. I'd have been great except then we had a share price surge that pushed my distant call spread all the way to its midpoint. I had these on in a few different accounts - I took losses of 40-70% on those 'free' call spreads.

It was a good lesson for me - I can and will land in ICs, but I analyze the put and call spreads independently and don't enter either side that I don't like the risk/reward tradeoff. I'm not thrilled with the call spreads these days

I thought the full margin for an IC is either the BPS or BCS side, whichever is greater. So the "lesser" side comes along basically for free, and reduces margin requirements a little bit more b/c of the extra premium. I've been dipping in and out of IC legs (BPS or BCS) with only a small change in margin requirements. Am I missing something?

 

[adiggs]

I thought the full margin for an IC is either the BPS or BCS side, whichever is greater. So the "lesser" side comes along basically for free, and reduces margin requirements a little bit more b/c of the extra premium. I've been dipping in and out of IC legs (BPS or BCS) with only a small change in margin requirements. Am I missing something?

Nope - that is more precisely correct. The expiration date must be the same - that's not negotiable. The rest of it exactly correct.


I've found though, at least with Fidelity (my broker), I was only able to leg into an IC when the second leg also had the same spread size. When the spread sizes were different it tried to hold the full put spread margin AND the full call spread margin.

I just assume I would be able to enter fewer contracts when the spread sizes matched up but haven't tested that.


I also suspect that if I entered the IC as a single trade ticket, then I'd be able to have different spread sizes and have the margin reservation be the larger of the two. And also untested

 

[bkp_duke]

Nope - that is more precisely correct. The expiration date must be the same - that's not negotiable. The rest of it exactly correct.


I've found though, at least with Fidelity (my broker), I was only able to leg into an IC when the second leg also had the same spread size. When the spread sizes were different it tried to hold the full put spread margin AND the full call spread margin.

I just assume I would be able to enter fewer contracts when the spread sizes matched up but haven't tested that.


I also suspect that if I entered the IC as a single trade ticket, then I'd be able to have different spread sizes and have the margin reservation be the larger of the two. And also untested

Yeah, I saw that with fidelty as well. The spreads had to be equal. I almost got a nasty margin call for this.

 

[InTheShadows]

Pretty sure that I wouldn't either.

But the first page at least has the education link as well as several posts about the mindset and thinking that led me to create this thread. It's grown way beyond anything I dreamed possible when I started things. The evolution over time isn't necessarily important, but with the first page or two as background and maybe the most recent 10 pages for additional context -- maybe that's enough for you to get started with a few small and distant trades to dip your toes into the water and start your own learning. Maybe from there you'll find that there's a sweet spot in there for you as well.

And maybe you'll find it's a bad fit. Too much emotional energy gets tied up - too much time watching the moment to moment changes in the share price. Not enough fun.

My original trade was to sell 200 strike puts when the shares were in the low 400s. They traded down into the high 300s, I had some incremental cash arrive, and I sold some 175s. Freaked me out (in a good way) - I was simultaneously afraid of the shares coming down to my strike AND eager for it to happen as I thought buying at those strike prices would be a pretty good deal. Sadly that didn't happen and I was forced to retain the premium (very large compared to what we earn today).

Point is - start way far OTM and small positions; learn the mechanics by experience, collect some beer & sushi money, and use that experience to decide if you want to go further.


I don't want a different full time job from what I left. If for no other reason I'm finding that its difficult even to provide 1/2 time effort to a non-profit I'm working with. There's just too many things to do to allow for a full time commitment to anything!

One reason to even consider doing option sales - my own larger goal is to generate a comparable or larger income to what my paycheck income provided, under the general idea that if the income is replaced, then surely we can maintain the lifestyle. And if that really does work, then we're actually getting a long ways ahead because the portfolio isn't being sold off in bits and pieces for living expenses - it's being maintained or even grown while providing living expenses as a side benefit.

My own results thus far is that the cash and share counts are growing, while generating closer to a 2x income. And I still wouldn't do this if it weren't fun, but I also enjoy learning the stuff I'm learning and doing the stuff that I'm doing.


Last thing I'll add - if I were still years away from retirement, then I probably wouldn't be doing this. That's a personal choice largely driven by not wanting to throw another significant time commitment on top of a full time job AND following the long term Tesla prospects as closely as I do. I'll follow long term Tesla regardless - selling options makes better use of that knowledge on a short term time scale than working full time.

The way I attacked this thread. I think I came in around page 175, is I read the first page. Watched a few of the videos but not all of them because I already understood the mechanics of selling cash secured puts and how the wheel worked and how to use it.

I think I read like the first 5 pages, then started skimming every 5th page and what looked good on that page read with depth. This sometimes took me to the next page or two before I realized I was trying to catch up.

whatever pages are from June - July of this year is I think where everyone really started going down the spread and condor paths. And as we all started testing the trades in small positions and sharing results the lightbulbs really started to brighten.

So much so that I am constantly having to remind myself to not over leverage and no matter what there is a 50/50 chance that the stock will go up or down tomorrow. No matter how much “inside” (different from “insider”) information we have.

there is nothing anyone could do at this point to convince me that this is not a low risk high reward investment strategy. The only thing IMO that could make it high risk is letting emotions rule my trades and start doing stupid things like selling 40 delta put spreads with $10-$20 spread widths.

 

[InTheShadows]

One might even go a while entire week and not know what the share price is!

Blasphemy!

All joking aside that is the ultimate goal though. To be able to figure out how to do this with out having to follow the hourly or daily movements.

Another thing I have wondered is once our accounts have grown to $50-100M+, how do we manage this all. Are we really going to be entering 10,000 contract trades? Geez, we really will be the MM at that point. My average weekly return for the last 8 weeks is 1.91% (and I know others here are crushing that). That’s 167.4% annualized. And tsla is going sideways right now. When it starts rocketing up 3-5% per day, we will be closing and reopening our put spreads 2-4 times per week likely doubling or even tripling our weekly trading income. Not to mention the appreciation of the underlying shares and leaps.

 

[AquaY]

Nope - that is more precisely correct. The expiration date must be the same - that's not negotiable. The rest of it exactly correct.


I've found though, at least with Fidelity (my broker), I was only able to leg into an IC when the second leg also had the same spread size. When the spread sizes were different it tried to hold the full put spread margin AND the full call spread margin.

I just assume I would be able to enter fewer contracts when the spread sizes matched up but haven't tested that.


I also suspect that if I entered the IC as a single trade ticket, then I'd be able to have different spread sizes and have the margin reservation be the larger of the two. And also untested

I believe to qualify to be an Iron Condor the spreads have to be equal
If the difference between the put legs is $10, the difference between the call legs has to be $10

 

[adiggs]

Blasphemy!

All joking aside that is the ultimate goal though. To be able to figure out how to do this with out having to follow the hourly or daily movements.

Another thing I have wondered is once our accounts have grown to $50-100M+, how do we manage this all. Are we really going to be entering 10,000 contract trades? Geez, we really will be the MM at that point. My average weekly return for the last 8 weeks is 1.91% (and I know others here are crushing that). That’s 167.4% annualized. And tsla is going sideways right now. When it starts rocketing up 3-5% per day, we will be closing and reopening our put spreads 2-4 times per week likely doubling or even tripling our weekly trading income. Not to mention the appreciation of the underlying shares and leaps.

I sort of expect that I'll stop growing my "assets under management" pretty quickly. If I'm getting 100% / year (a ridiculous thing to assume, but it's directionally accurate), then $1M being managed this way is plenty of annual income. With the annual risk level dropping as the overall portfolio continues growing (more cash means larger ability to ride out a large loss).

I think like many I'm in a place where I've got uses for a really big pile of money - in my case there are some businesses I'd like to buy in the utility sector and change how they operate . An example might be Portland General Electric with a roughly $5B market cap - I would like the opportunity to be the primary decision maker for a utility, with myself as the shareholder I'm accountable to (or maybe a small number of fellow shareholders with a similar objective), to try to push the current utility business model aggressively into the renewable energy economy, and find out what that new utility business model might look like.

But short of that kind of significant business buying ability, this (made up example) $1M / year income is already a ridiculously large amount of income. So I'd bias towards having more and more cash build up rather than continually bigger positions and start doing something others would recognize as diversification. In my case, investing more in real estate via an outfit I found named Fundrise and have the extra build up there. Even as my wife and I are busy trying to give it away.


I do see the possibility of needing to opening 10k contract trades when position sizes just keep on growing. Somewhere in there we get a large account problem around getting orders to fill. Maybe we'll need a new thread for people to talk about the #SeriousFirstWorldProblem of getting big position sizes opened and closed.

You can create that

 

[MP3Mike]

I do see the possibility of needing to opening 10k contract trades when position sizes just keep on growing. Somewhere in there we get a large account problem around getting orders to fill. Maybe we'll need a new thread for people to talk about the #SeriousFirstWorldProblem of getting big position sizes opened and closed.

You can create that

Just wait until Tesla does a 1:10 split and you need to open 100k contracts.

 

[adiggs]

Just wait until Tesla does a 1:10 split and you need to open 100k contracts.

I'm already somewhat dreading a repeat of the 5:1 split. I don't know if my broker will accept >200 contracts per leg in an order ticket, but that won't be a tough limit to hit on these spreads. Heck - some of us are getting close to that already without a repeat of that 5:1 split.