Wiki Selling TSLA Options - Be the House

[EV forever]

Wow - what an ending to this week - closing at 843 and up another $6 in after-hours!
Just catching up with all the posts from today - lots of new folks joining and plus we get @The Accountant joining in too! Yes, we definitely are playing in the big leagues now!

For those of you like @ammulder mentioning that this feels like buy the rumor sell the news, I have to disagree. To me this has the feel of October 2019 - just prior to the ER. At the time, folks on the main thread, with all the excellent analysis done by folks on the Near-Future Quarterly Projection thread, were predicting a massive beat - plus we had China Gigafactory close to completion...the expectation was that the stock was poised to take-off. I feel we are in a parallel situation now - MMM are underestimating TSLA, TMC folks are expecting a strong ER with a significant beat of expectations, and we are on the verge of 2 new Gigafactories starting production. We may still have plenty of red days, but in general FUD is having less impact. I just went back and looked through @Papafox's thread - $TSLA shot up almost 20% in after-hours after Q3 2019 ER. After that, it never came back down to those levels again.

So, I am not opening any BCS or CCs for a while from now, the premiums are not worth the risk. I am also staying a bit conservative on the BPS side - just being gun-shy after the pain with margin calls in Feb-Mar this year. My biggest worry for downside is the possibility of an FSD related accident - even if Tesla is not at fault, the FUD headlines will do some damage.

This week was not bad, although not as profitable for me as last week - still made about 30K, so no complaints here. I closed out most of my positions early - about 70% profit and opened positions for 10/22. Many of my orders for today did not go through, and I was busy at work and did not monitor enough to change the ask price. If there is a drop on Monday or a good IV jump, may open more.

Brokerage (Margin account): +p665/-p715 @$4.5 and +p675/-p725 @$5
IRA (Cash secured): +p680/-p730 @$5 and +p700/-p750 @$4.5
Roth IRA (Cash secured): +p700/-p750 @$4.5

My brokerage and IRA accounts are very heavy in $TSLA stock and Calls - these are all long term HODL so this week was excellent for my overall gains. The margin available in my brokerage is due to the TSLA stock in there - about 40% of the value, and I limit myself to 50% of available margin for selling options. In my IRA, I sold some of the LEAPS and stock to generate cash for selling options, but I am not planning to liquidate anything more. I prefer keeping a combination of both, long term stock and short term trading. My goals for selling options strategy are to learn to generate income from the available equity - while keeping majority of it for long term growth. I am still working full-time for reasons other than just getting a salary. I want to be comfortable with the trading strategies so in case I decide to retire, I will have means to generate alternate income.

 

[adiggs]

Regarding risk. Lets keep the math easy. You sell 100x BPS with $100 gaps between legs (600/700). Margin/cash needed is $1M. That is also the theoretical max loss if the SP drops below 600 and you were on vacation (did nothing). Now lets assume you sold them for $4. Income was $40,000 for the $1M in risk. However, the real risk is actually lower if you watch the SP. If the short leg you sold gets close to the Money, you can roll to lower strikes and later date with no additional money needed (you keep the same $4 price difference in the Put legs). If you were hopeful the SP was going to climb, so you didn't roll, and now the sold leg goes ITM, you can still roll, but it may start to cost you. Let's say things get really bad and the price difference between the legs is now $10. It will cost you $100,000 to save yourself ($60,000 if you take into account the $40k you made originally). So a lot less than the $1M you theoretically had at risk. The bottom line is with BPS you can't sell them and go to an island with no Internet or you risk maximum loss. If nothing else, at least set stock price Alerts that tell you the SP is getting close to your short leg. I think that as long as you stay on top of it, and roll aggressively when you need to (don't try to keep making money on a spread going south), you should be able to manage the situation without a huge loss. Anyone disagree (did I screw up)?

I think that the rolls might look better, in practice, than you're describing. Let's say that the shares go to $690, so now you're $10 ITM on the short leg. There is probably a 1 week roll that keeps the spread size ($100), adds 1 week to the expiration, and improves the strike by 1 or 2 (695 or 690), while yielding a small net credit.

That small net credit will be slightly larger than the cost to buy yourself out of that $10 ITM position. You might owe $12 on the spread while $10 ITM but you can roll into a spread worth $13 for a $1 net credit ($13 in, offset by $12 out). Continuing with your example, since you started with a $4 credit, you realize an $8 loss ($4 in minus $12 out) while starting a new $13 position. And you do so with no net reduction in your $1M backing. You DO end up with a much more aggressive position than you would otherwise start - this is typical with rolling for time. If you're playing along at home, you'll notice that your net credits are accumulating in your open position.

You could buy your way into an even better strike by paying a net debit. My own personal guidance (to myself) is that if I'm thinking about paying a debit to improve a position, then maybe its just time to pay the piper / take the loss. In this particular instance buying out the $12 loss for $120k sounds bad. But if you're earning $40k/week then you've broken even over 3 weeks.


In a previous paper exercise, I discovered that an 'effective' roll should be available all the way down to the midpoint in the spread. Using your example the $650 share price is the bottom of the effective rolls. An effective roll in my lexicon is a net credit that holds the strike steady or improves it. As you get close to that midpoint, it'll be a small net credit and no strike improvement. The midpoint is probably a small net debit due to bid/ask slippage.

Past the midpoint you'll be paying a net debit to hold the strike the same. Or as you get further and further below the midpoint, a larger and larger net debit and/or increase in the strike price. You're also into 60%+ loss territory at this point - hopefully you aren't here on margin

This is an important part of why I use these wide spreads ($100 when opening a new position). The 630/730s that I had open this morning - I figure I can manage them effectively down to $680, which is a lot harder to reach than 730. With a $20 wide spread, effective management ends at $10 ITM, and you cover the ground from max gain to max loss in a mere $20.


A different management choice (this is #2 on my personal list) might be to cut the spread gap in 1/2 (down to $50 in the example) and double the # of contracts. This will enable a really large strike improvement. Or cut the spread to $25 and quadruple the contracts. Or cut the spread to $30 and 3x the contracts, ... So many possibilities down this avenue - the idea is taking on more leverage, while still avoiding adding any capital at risk. The rate of loss will increase, but the rate of gain will also increase.


Yet another management choice (my personal #3) would be to bring additional capital into the position. Maybe expand the spread size from $100 to $120.


In all of these different management situations (1,2,3), my own choice is to willingly give up a week or more of income in exchange for the least risky position I can roll into (the lowest short strike). As a made up example if I were $10 ITM and rolling for a week, if the $690 strike was available for a small net credit, the $695 was available for $2-3 net credit, and the $700 strike was available for a $5-6 net credit, then I would take the 690 strike. The reason is that missing out on a week or three of income is a triviality, but the $10 strike improvement gets me the best chance at closing up the position successfully and is the least risky of the available effective rolls.

There are situations, and I've made use of one, where I rolled UP an ITM put and seen it go OTM. By rolling up I had a losing position turn into a big winner. With the more recent results with BPS, I'd rather take out the excitement and let a week or 3 of ~no income go by. Turns out that a loss of $0, or a few weeks of really low/slow gains, is a big improvement over losses to one's overall results.


I completely agree with the conclusions - don't try to keep making money on a spread going south, and don't put one of these on and then head for that remote island.

 

[deerfield]

Does anyone here have portfolio margin? I have been a boring indexer for as long as I can remember and I want to be able to put those shares to good use. If I cash them out, I would have a pretty big tax bill. With a regular margin account, you would still run into SMA limitation, which doesn't give me anything to work with. I'm thinking of moving these over to Tastyworks and go for portfolio margin. I don't see any downside yet, but want to see if these are managed differently somehow. Worse situation if I need cash, I'll just sell the ETF and take the tax hit then. I just don't want to do unless I'm forced to. Plus looking at the fees, tastyworks looks like a substantial savings over etrade (free FSD anyone?).

 

[adiggs]

I want to be comfortable with the trading strategies so in case I decide to retire, I will have means to generate alternate income.

This was me last year. Then I went and earned more doing this part time in 2/3rds of the year, than I earned over the whole year from the paycheck. But mostly I developed the skill of doing this - I like being paid to learn. I don't need this income to be retired, but it sure does open up a lot of otherwise unavailable possibilities.

 

[BornToFly]

Wow - what an ending to this week - closing at 843 and up another $6 in after-hours!
Just catching up with all the posts from today - lots of new folks joining and plus we get @The Accountant joining in too! Yes, we definitely are playing in the big leagues now!

For those of you like @ammulder mentioning that this feels like buy the rumor sell the news, I have to disagree. To me this has the feel of October 2019 - just prior to the ER. At the time, folks on the main thread, with all the excellent analysis done by folks on the Near-Future Quarterly Projection thread, were predicting a massive beat - plus we had China Gigafactory close to completion...the expectation was that the stock was poised to take-off. I feel we are in a parallel situation now - MMM are underestimating TSLA, TMC folks are expecting a strong ER with a significant beat of expectations, and we are on the verge of 2 new Gigafactories starting production. We may still have plenty of red days, but in general FUD is having less impact. I just went back and looked through @Papafox's thread - $TSLA shot up almost 20% in after-hours after Q3 2019 ER. After that, it never came back down to those levels again.

So, I am not opening any BCS or CCs for a while from now, the premiums are not worth the risk. I am also staying a bit conservative on the BPS side - just being gun-shy after the pain with margin calls in Feb-Mar this year. My biggest worry for downside is the possibility of an FSD related accident - even if Tesla is not at fault, the FUD headlines will do some damage.

This week was not bad, although not as profitable for me as last week - still made about 30K, so no complaints here. I closed out most of my positions early - about 70% profit and opened positions for 10/22. Many of my orders for today did not go through, and I was busy at work and did not monitor enough to change the ask price. If there is a drop on Monday or a good IV jump, may open more.

Brokerage (Margin account): +p665/-p715 @$4.5 and +p675/-p725 @$5
IRA (Cash secured): +p680/-p730 @$5 and +p700/-p750 @$4.5
Roth IRA (Cash secured): +p700/-p750 @$4.5

My brokerage and IRA accounts are very heavy in $TSLA stock and Calls - these are all long term HODL so this week was excellent for my overall gains. The margin available in my brokerage is due to the TSLA stock in there - about 40% of the value, and I limit myself to 50% of available margin for selling options. In my IRA, I sold some of the LEAPS and stock to generate cash for selling options, but I am not planning to liquidate anything more. I prefer keeping a combination of both, long term stock and short term trading. My goals for selling options strategy are to learn to generate income from the available equity - while keeping majority of it for long term growth. I am still working full-time for reasons other than just getting a salary. I want to be comfortable with the trading strategies so in case I decide to retire, I will have means to generate alternate income.

I think next week could go either way. Wall Street Ah-HA! moment might be another 1-2 quarters away when earnings really take off (Per The Accountant) and the new factories are actually putting out cars. But maybe they are seeing the obvious a little sooner than before. I too have stayed away from selling calls or BCS for fear of a big climb in SP that doesn't stop. That will change in 2 weeks time if it becomes clear that Wall Street needs another 1-2 quarters to figure things out.

 

[adiggs]

Does anyone here have portfolio margin? I have been a boring indexer for as long as I can remember and I want to be able to put those shares to good use. If I cash them out, I would have a pretty big tax bill. With a regular margin account, you would still run into SMA limitation, which doesn't give me anything to work with. I'm thinking of moving these over to Tastyworks and go for portfolio margin. I don't see any downside yet, but want to see if these are managed differently somehow. Worse situation if I need cash, I'll just sell the ETF and take the tax hit then. I just don't want to do unless I'm forced to. Plus looking at the fees, tastyworks looks like a substantial savings over etrade (free FSD anyone?).

I'm still in the thinking about it stage (tastyworks). The commission savings will be rather large (much more than beer and sushi money).

But I'd be moving IRA account(s), so I think no portfolio margin for me.

 

[BornToFly]

I think that the rolls might look better, in practice, than you're describing. Let's say that the shares go to $690, so now you're $10 ITM on the short leg. There is probably a 1 week roll that keeps the spread size ($100), adds 1 week to the expiration, and improves the strike by 1 or 2 (695 or 690), while yielding a small net credit.

That small net credit will be slightly larger than the cost to buy yourself out of that $10 ITM position. You might owe $12 on the spread while $10 ITM but you can roll into a spread worth $13 for a $1 net credit ($13 in, offset by $12 out). Continuing with your example, since you started with a $4 credit, you realize an $8 loss ($4 in minus $12 out) while starting a new $13 position. And you do so with no net reduction in your $1M backing. You DO end up with a much more aggressive position than you would otherwise start - this is typical with rolling for time. If you're playing along at home, you'll notice that your net credits are accumulating in your open position.

You could buy your way into an even better strike by paying a net debit. My own personal guidance (to myself) is that if I'm thinking about paying a debit to improve a position, then maybe its just time to pay the piper / take the loss. In this particular instance buying out the $12 loss for $120k sounds bad. But if you're earning $40k/week then you've broken even over 3 weeks.


In a previous paper exercise, I discovered that an 'effective' roll should be available all the way down to the midpoint in the spread. Using your example the $650 share price is the bottom of the effective rolls. An effective roll in my lexicon is a net credit that holds the strike steady or improves it. As you get close to that midpoint, it'll be a small net credit and no strike improvement. The midpoint is probably a small net debit due to bid/ask slippage.

Past the midpoint you'll be paying a net debit to hold the strike the same. Or as you get further and further below the midpoint, a larger and larger net debit and/or increase in the strike price. You're also into 60%+ loss territory at this point - hopefully you aren't here on margin

This is an important part of why I use these wide spreads ($100 when opening a new position). The 630/730s that I had open this morning - I figure I can manage them effectively down to $680, which is a lot harder to reach than 730. With a $20 wide spread, effective management ends at $10 ITM, and you cover the ground from max gain to max loss in a mere $20.


A different management choice (this is #2 on my personal list) might be to cut the spread gap in 1/2 (down to $50 in the example) and double the # of contracts. This will enable a really large strike improvement. Or cut the spread to $25 and quadruple the contracts. Or cut the spread to $30 and 3x the contracts, ... So many possibilities down this avenue - the idea is taking on more leverage, while still avoiding adding any capital at risk. The rate of loss will increase, but the rate of gain will also increase.


Yet another management choice (my personal #3) would be to bring additional capital into the position. Maybe expand the spread size from $100 to $120.


In all of these different management situations (1,2,3), my own choice is to willingly give up a week or more of income in exchange for the least risky position I can roll into (the lowest short strike). As a made up example if I were $10 ITM and rolling for a week, if the $690 strike was available for a small net credit, the $695 was available for $2-3 net credit, and the $700 strike was available for a $5-6 net credit, then I would take the 690 strike. The reason is that missing out on a week or three of income is a triviality, but the $10 strike improvement gets me the best chance at closing up the position successfully and is the least risky of the available effective rolls.

There are situations, and I've made use of one, where I rolled UP an ITM put and seen it go OTM. By rolling up I had a losing position turn into a big winner. With the more recent results with BPS, I'd rather take out the excitement and let a week or 3 of ~no income go by. Turns out that a loss of $0, or a few weeks of really low/slow gains, is a big improvement over losses to one's overall results.


I completely agree with the conclusions - don't try to keep making money on a spread going south, and don't put one of these on and then head for that remote island.

Good stuff. I seem to see that rather than do a 630/730 that needs managing below 730, just start with 2x 630/680s and have more safety/headroom from the start.

 

[pz1975]

(I must make a confession. I bought calls before close today. $950 for next week expecting an ongoing climb into Monday. I am very sorry and will take penance and promise to close them Monday after open to lock in profits. Please do not expunge me from this thread. Enjoy your weekends.)

 

[ammulder]

Does anyone here have portfolio margin? I have been a boring indexer for as long as I can remember and I want to be able to put those shares to good use. If I cash them out, I would have a pretty big tax bill. With a regular margin account, you would still run into SMA limitation, which doesn't give me anything to work with. I'm thinking of moving these over to Tastyworks and go for portfolio margin. I don't see any downside yet, but want to see if these are managed differently somehow. Worse situation if I need cash, I'll just sell the ETF and take the tax hit then. I just don't want to do unless I'm forced to. Plus looking at the fees, tastyworks looks like a substantial savings over etrade (free FSD anyone?).

What is the SMA limitation? I have observed that I can buy fewer put spreads based on the SMA calculation than based on the excess margin calculation, but it’s on the order of 80%, not a massive difference. Certainly much more than ”not anything to work with.”

I have heard portfolio margin can be punishing if you’re too concentrated, but maybe that’s not an issue if you’re “concentrated“ in an index fund?

 

[M3Rider]

See my post 30 minutes ago. The amount needed in reserve isn't dependent on OTM or ITM. It is the size of the spread, and how much margin you will still have if the SP drops if your collateral is all TSLA shares.

Right. My collateral is all TSLA.
If SP drops, so drops the margin. If there was no reserve and 100% of margin is used by bps, then I assume your margin becomes insufficient and you get a margin call.

In my case I also still have couple dozen of long-dated naked puts that may put additional pressure on margin if they become less OTM.

 

[BornToFly]

(I must make a confession. I bought calls before close today. $950 for next week expecting an ongoing climb into Monday. I am very sorry and will take penance and promise to close them Monday after open to lock in profits. Please do not expunge me from this thread. Enjoy your weekends.)

Ouch. We breached the Upper BB today. It might climb more Monday, but I actually expect flat or slightly down Monday before a little more climb Tuesday or Wednesday. I hope I'm wrong. Fingers crossed for you. Maybe someone here made money off of you today, by being the house and selling you that call....

 

[ammulder]

For those of you like @ammulder mentioning that this feels like buy the rumor sell the news, I have to disagree. To me this has the feel of October 2019 - just prior to the ER. At the time, folks on the main thread, with all the excellent analysis done by folks on the Near-Future Quarterly Projection thread, were predicting a massive beat - plus we had China Gigafactory close to completion...the expectation was that the stock was poised to take-off. I feel we are in a parallel situation now - MMM are underestimating TSLA, TMC folks are expecting a strong ER with a significant beat of expectations, and we are on the verge of 2 new Gigafactories starting production. We may still have plenty of red days, but in general FUD is having less impact. I just went back and looked through @Papafox's thread - $TSLA shot up almost 20% in after-hours after Q3 2019 ER. After that, it never came back down to those levels again.

I would love love love for that to be the case.

But by now, everybody has to know Tesla is executing like crazy — deliveries up 77% while others down 20-30%. We literally got video tours of Giga Berlin. Anybody who can‘t see Tesla’s progress just has their head in the sand! I can’t see how there are any surprises left.

Sure, if consensus stays at $1.55 and Tesla reports $2.19 (or whatever Rob Maurer came up with) I think there’s more room to run up. But Tesla could report $1.70, still a clear beat, and everyone may think “meh, that fell short of all the bull cases” and sell the news. On the call they may say they’re only delivering to employees from Berlin and Austin this quarter, only expecting 2000 Model X this quarter (see S in Q2), only delivering Cybertruck in 2023 and specs removed because they’re rethinking the configurations… there may not be a short-term blockbuster coming out of the call either. I don’t think continued upward progress in the stock price is a short-term given.

Even if the pessimistic possibility comes to pass, we’ll just be doing this dance again in three months, so long term I have no worries. I am just really reluctant to bet on short-term moves. (It doesn’t help that I’ve bought calls around events before, and it’s been… really unreliable.)

But as I said up top… if this time REALLY IS different, I’ll do the happy dance all the way to the bank.

 

[deerfield]

What is the SMA limitation? I have observed that I can buy fewer put spreads based on the SMA calculation than based on the excess margin calculation, but it’s on the order of 80%, not a massive difference. Certainly much more than ”not anything to work with.”

I have heard portfolio margin can be punishing if you’re too concentrated, but maybe that’s not an issue if you’re “concentrated“ in an index fund?

Simplistically, a regular Reg T margin account mandates that you have to have 50% of your holdings be covered in cash. The combination of your shares/cash could create an amount that's greater than this 50% requirement, which is the SMA. SMA is usually less than the house excess (I've never seen it the other way in my account (not enough cash?)). This is where the fed calls that are mentioned above come from. For example, even in a margin account, if I have absolutely no cash and just stocks, I won't have any buying power because I do not meet this 50% requirement even though I have plenty of house excess margin.

 

[MP3Mike]

Simplistically, a regular Reg T margin account mandates that you have to have 50% of your holdings be covered in cash.

That isn't true. I've used way more margin than I have cash in the account. Like 1500% more.

 

[ammulder]

Simplistically, a regular Reg T margin account mandates that you have to have 50% of your holdings be covered in cash. The combination of your shares/cash could create an amount that's greater than this 50% requirement, which is the SMA. SMA is usually less than the house excess (I've never seen it the other way in my account (not enough cash?)). This is where the fed calls that are mentioned above come from. For example, even in a margin account, if I have absolutely no cash and just stocks, I won't have any buying power because I do not meet this 50% requirement even though I have plenty of house excess margin.

This can’t be correct. I have a very small amount of actual cash in my account and can still buy plenty of put spreads backed by margin without getting a Fed Call.

 

[EV forever]

Were your puts naked or spreads?
What percentage of your margin did you have in reserve that didn‘t save you from the margin call?
I ask because Ive been trying to figure out what is a good percentage of margin to hold in reserve while not leaving too much on the table

The question was not for me, but wanted to add my experience which was similar.

In my case as well, it was naked puts. I had made very good returns in the 3Q and 4Q of 2020 selling naked puts, and continued that into this year. I was overconfident and had used almost 80-90% of available margin to sell the naked puts. All my available margin in the brokerage account is from $TSLA stock and DITM LEAPS. When the stock started dropping, my naked puts went in red, but just like @M3Rider, I kept thinking this was artificial and the SP would recover. As SP dropped, my available margin also dropped rapidly and I got my first ever margin call. Having no experience in this situation, it was a struggle to figure out how to get out of it. Once you get a margin call, there is very little you can do except add cash in some way - often by liquidating stock, but now you are selling the stock at low price. Then I saw posted here that one way to resolve the problem is to buy some cheap puts - effectively creating a spread. Well, you cannot buy anything if there is a margin call - so I sold some of my stock to cover the margin call and bought cheap puts. Thanks to my lack of experience, the spread created was $500 which did not help much as the stock kept dropping. One week later, I had another margin call. The story goes on in a similar way for a few more weeks. Finally, I got fed up and closed out all the puts at a loss. Overall loss was about 300K which just stayed as margin debit. After that, I stayed out of trading deciding that I needed more knowledge before trying again.

The absolute worst part of this whole situation, Fidelity keeps sending you letters, actual physical paper letters, every time you get a margin call - which often reaches you well after you have already covered the call. Then, you have to reassure your husband who understands very little of the options scene that don't worry, it is already taken care of and no one is coming after us to collect on the debt

As painful as that experience was, it was good learning. At no point was I stretched beyond my means and could have closed the positions without much pain. The main reason being that I have been investing and continuously adding $TSLA stock since 2014 - so the gains are quite substantial.

This time around, I am trying to keep discipline in the trading.

1. Keep plenty of open margin - in my case, I am comfortable with 50%. So, if I am selling 50X BPS with $50 spread, that is 250K max loss. So I want to have a minimum of another 250K of unused house surplus in my account.
2. In my IRAs, my comfort level is different. Here, I have plenty of equity, but <10% of the account is cash. So, I am using every bit of available cash to cover the sold BPSs. My reasoning is that I can always sell some of the stock without tax consequences if needed.
3. No super-aggressive positions. Which means only OTM BPSs and BCSs - even though closer to the money is so tempting. I have been trying to keep the BPS short strike 10-15% below the SP
4. If a position starts going bad, get out quickly, even if at a loss. Hence not selling any BCS at this time, premiums are not worth the risk of sudden spike up in SP. A few weeks back I took 20K loss on a BCS position that would have netted <1K of max profit in premiums.
5. Only weekly or at most 10 DTE positions. It is easy to get tempted by the higher premiums of longer DTE options, but equally easy to get deep in red if the stock price goes in the wrong direction.

I think all these rules can be summarized into one sentence - DON'T GET GREEDY!

 

[MP3Mike]

With all the talk of margin usage and large BPS positions I have to suspect that the tax man is going to love of lot of the participants in this thread come tax time... Make sure to keep enough of your winnings around to deal with that, and consider, if you are in the US, if you need/want to file quarterly tax payments...

 

[BornToFly]

With all the talk of margin usage and large BPS positions I have to suspect that the tax man is going to love of lot of the participants in this thread come tax time... Make sure to keep enough of your winnings around to deal with that, and consider, if you are in the US, if you need/want to file quarterly tax payments...

I'm not filling quarterly. Penalty in the past has been small, and having the extra cash for the year helps make a lot more money in the end. But yes, I'm paying way more than my fair share to support all the government spending with my 7 figure tax bills. I would much rather give it to medical research, Children's hospitals, after school programs, etc.

 

[BornToFly]

The question was not for me, but wanted to add my experience which was similar.

In my case as well, it was naked puts. I had made very good returns in the 3Q and 4Q of 2020 selling naked puts, and continued that into this year. I was overconfident and had used almost 80-90% of available margin to sell the naked puts. All my available margin in the brokerage account is from $TSLA stock and DITM LEAPS. When the stock started dropping, my naked puts went in red, but just like @M3Rider, I kept thinking this was artificial and the SP would recover. As SP dropped, my available margin also dropped rapidly and I got my first ever margin call. Having no experience in this situation, it was a struggle to figure out how to get out of it. Once you get a margin call, there is very little you can do except add cash in some way - often by liquidating stock, but now you are selling the stock at low price. Then I saw posted here that one way to resolve the problem is to buy some cheap puts - effectively creating a spread. Well, you cannot buy anything if there is a margin call - so I sold some of my stock to cover the margin call and bought cheap puts. Thanks to my lack of experience, the spread created was $500 which did not help much as the stock kept dropping. One week later, I had another margin call. The story goes on in a similar way for a few more weeks. Finally, I got fed up and closed out all the puts at a loss. Overall loss was about 300K which just stayed as margin debit. After that, I stayed out of trading deciding that I needed more knowledge before trying again.

The absolute worst part of this whole situation, Fidelity keeps sending you letters, actual physical paper letters, every time you get a margin call - which often reaches you well after you have already covered the call. Then, you have to reassure your husband who understands very little of the options scene that don't worry, it is already taken care of and no one is coming after us to collect on the debt

As painful as that experience was, it was good learning. At no point was I stretched beyond my means and could have closed the positions without much pain. The main reason being that I have been investing and continuously adding $TSLA stock since 2014 - so the gains are quite substantial.

This time around, I am trying to keep discipline in the trading.

1. Keep plenty of open margin - in my case, I am comfortable with 50%. So, if I am selling 50X BPS with $50 spread, that is 250K max loss. So I want to have a minimum of another 250K of unused house surplus in my account.
2. In my IRAs, my comfort level is different. Here, I have plenty of equity, but <10% of the account is cash. So, I am using every bit of available cash to cover the sold BPSs. My reasoning is that I can always sell some of the stock without tax consequences if needed.
3. No super-aggressive positions. Which means only OTM BPSs and BCSs - even though closer to the money is so tempting. I have been trying to keep the BPS short strike 10-15% below the SP
4. If a position starts going bad, get out quickly, even if at a loss. Hence not selling any BCS at this time, premiums are not worth the risk of sudden spike up in SP. A few weeks back I took 20K loss on a BCS position that would have netted <1K of max profit in premiums.
5. Only weekly or at most 10 DTE positions. It is easy to get tempted by the higher premiums of longer DTE options, but equally easy to get deep in red if the stock price goes in the wrong direction.

I think all these rules can be summarized into one sentence - DON'T GET GREEDY!

Next time don't sell stock to get cash to buy the protective put. Just call them and they will help you buy the Put even though you are in a Margin call, because they know that buying the Put will make your margin call go away. Unfortunately, I had to deal with similar margin calls several years ago before I learned my lesson as well, so I know this from experience. Also, don't just pick a random number for margin (like 50%). Use the margin calculator tools and see how much margin you will actually have if the stock drops to 620, or what ever low number you worry about.

 

[EV forever]

Next time don't sell stock to get cash to buy the protective put. Just call them and they will help you buy the Put even though you are in a Margin call, because they know that buying the Put will make your margin call go away. Unfortunately, I had to deal with similar margin calls several years ago before I learned my lesson as well, so I know this from experience. Also, don't just pick a random number for margin (like 50%). Use the margin calculator tools and see how much margin you will actually have if the stock drops to 620, or what ever low number you worry about.

That is a great suggestion - I never even considered calling fidelity to help purchase the protective put. Hopefully, there is never a next time, but if there is, I will remember that this is an option.

Also good suggestion about margin calculator - didn't think about that either. That's why this group is so great - learning things that you didn't think of. Just tried the margin calculator - looks like I could tolerate a drop to 500 without getting in negative with house surplus!