Wiki Selling TSLA Options - Be the House

[EV forever]

I'm honestly beginning to wonder, if I continue to do BPS / IC long term, if the old adage "cash is king" might be right.

Don't get me wrong, I love my TSLA shares, but even conservatively, my math is showing BPS can destroy the returns on HODL. It's almost a no-brainer in tax-advantaged accounts.

Maybe for some of the people here with different goals than mine - this is a good possibility.

For me personally, I prefer to have all 3 - TSLA shares, TSLA call options and recently the IC/BPS strategy. As you can see, I am fully diversified in TSLA .

If I was to switch completely to cash and focus only on BPS / IC, then I would miss days like yesterday when in one day, my IRA gained value greater than my total yearly income. My goal with the BPS / IC is to make some income on a portfolio when the stock is not moving much. With that strategy, the max profit is always limited, and you would have to be executing perfectly to do really well vs. a stock like TSLA that still has strong growth prospects. Yes, it is painful to watch the drop in portfolio value when the stock is down, but when it does take off, the best way to take advantage of it is the HODL shares and calls. Just my 2 cents - I am sure other's have a different perspective.

 

[doddiozil]

On the stock price closing between long and short puts without you acting… if you notice shortly after Friday close, you would always have the option to execute the long put, right? So let’s say it’s a 600/700 and SP ends the week at $650. Max Loss is $10k. When the 700 gets executed, you are $70k in the hole but have 100 more shares. If you waited until Monday and the opening price was similar, you could sell the new shares for ~$65k for a total $5k loss (and I assume a tax loss, if relevant).

But let’s say the stock price plummeted Friday, was down more initially in after hours, and you fear a gap down to below $600 for Monday. You could instruct your broker to execute your $600 put and force the seller to pay you $60k for 100 shares, thus limiting your loss to the max $10k loss.

That assumes you notice in time to put in the instruction to execute. If it comes to your attention on Sunday, I guess you get what you get. Hopefully your broker would notify you the instant the other party executes theirs, though.

We had a post recently about someone‘s broker forcing a transaction at 3:45 Friday — I wonder if there’s a chance they auto-execute your long put at that time to limit the loss?

Bottom line there are many reasons to pay close attention and close the spread for a loss manually (or roll it or whatever) before market close, but I think there could still be limited options when surprised.

Great point. That is not bad at all

 

[bkp_duke]

A few folks here have mentioned about the inconvenience on Fidelity where we have to enter the closing trade as individual legs. So far, that is how I have been doing this. A little annoying since it means we have to enter the correct information, the strike price, expiration date etc. Well, yesterday I discovered a feature on the Fidelity account that I had not tried before and allows me to place a closing trade for the entire spread. Now, you folks may have known about this already and I may be only one entering trades the hard way all this time - In that case, feel free to have a laugh at my expense.

Anyways, when you open the "positions" tab on any of your portfolio accounts, there is a small link underneath that says "option summary". When you click that a new tab opens with all the underlying positions and options listed. Uncheck the "show unpaired positions" on the top and viola! All the spreads appear perfectly matched with the long and short legs together! None of the weird pairings with some of the long puts being defined as protective puts and short positions shown as Naked puts. It shows exactly how much margin is being used for the spread, the cost basis, current profit on the spread etc. Further, if you click on the tiny down arrow next to the credit spread, you can choose to close the entire position and a trade ticket opens up already populated correctly!
(Well now only if they would allow us to analyze this spread by exporting directly to P/L tab, that would be hugely convenient).

Here are screenshots.
View attachment 722380
View attachment 722383

Maybe the desktop app Active Trader Pro already does this, but I don't use it because it is glitchy and useless on my Mac. This was so convenient to set up GTC closing orders for these positions via the web based tools. I thought I would share incase there are some people like me who are not aware of this feature.

You can also "add leg" on those trades if you want to do a roll, although I have found that I get better prices by separating them and not trying to have Fidelity do a roll automatically for me.

And as you surmised, you can also do this in Active Trader Pro, although I prefer the web interface in this case over that one.

 

[gabeincal]

You can also "add leg" on those trades if you want to do a roll, although I have found that I get better prices by separating them and not trying to have Fidelity do a roll automatically for me.

And as you surmised, you can also do this in Active Trader Pro, although I prefer the web interface in this case over that one.

Interesting. I never thought of investigating whether I’m getting good prices on a ‘roll’ order with e*trade. Though of course I set limit roll orders, I’ll next time check out the alternative (as in btc and then sto separately on naked puts)! Thanks for the heads up.

 

[juanmedina]

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)?

You can place a conditional order if you are going on vacation: if the SP hits this price then BTC the trade.

At least in my case I will watch my trades 20-10 times after that I will be at 100% profits and I will limit my BPS to only profits so if I loose it all it will not hurt that bad.

 

[bkp_duke]

You can place a conditional order if you are going on vacation: if the SP hits this price then BTC the trade.

At least in my case I will watch my trades 20-10 times after that I will be at 100% profits and I will limit my BPS to only profits so if I loose it all it will not hurt that bad.

Going on a cruise for Xmas to New Years. I can't imagine being without internet just to check on spread prices.

Do I need to seek out therapy?

 

[ZeApelido]

Going on a cruise for Xmas to New Years. I can't imagine being without internet just to check on spread prices.

Do I need to seek out therapy?

No you just need Starlink

 

[bkp_duke]

No you just need Starlink

It's not ready for boats in 9 weeks, unfortunately. That's when I need it.

But yes, I'll be that guy on his laptop on the cruise every morning. Fortunately my wife is a late sleeper.

 

[ReddyLeaf]

It's not ready for boats in 9 weeks, unfortunately. That's when I need it.

But yes, I'll be that guy on his laptop on the cruise every morning. Fortunately my wife is a late sleeper.

Thankfully you are on the West coast. Cruising in the Caribbean……though…..

 

[bonk3125]

A few folks here have mentioned about the inconvenience on Fidelity where we have to enter the closing trade as individual legs. So far, that is how I have been doing this. A little annoying since it means we have to enter the correct information, the strike price, expiration date etc. Well, yesterday I discovered a feature on the Fidelity account that I had not tried before and allows me to place a closing trade for the entire spread. Now, you folks may have known about this already and I may be only one entering trades the hard way all this time - In that case, feel free to have a laugh at my expense.

Anyways, when you open the "positions" tab on any of your portfolio accounts, there is a small link underneath that says "option summary". When you click that a new tab opens with all the underlying positions and options listed. Uncheck the "show unpaired positions" on the top and viola! All the spreads appear perfectly matched with the long and short legs together! None of the weird pairings with some of the long puts being defined as protective puts and short positions shown as Naked puts. It shows exactly how much margin is being used for the spread, the cost basis, current profit on the spread etc. Further, if you click on the tiny down arrow next to the credit spread, you can choose to close the entire position and a trade ticket opens up already populated correctly!
(Well now only if they would allow us to analyze this spread by exporting directly to P/L tab, that would be hugely convenient).

Here are screenshots.
View attachment 722380
View attachment 722383

Maybe the desktop app Active Trader Pro already does this, but I don't use it because it is glitchy and useless on my Mac. This was so convenient to set up GTC closing orders for these positions via the web based tools. I thought I would share incase there are some people like me who are not aware of this feature.

Wow, thanks for this. Did not know about it. I enter my trades almost exclusively through the phone app and I haven’t seen an option summary link in it yet. Maybe I’ll submit a request to Fidelity to add that feature to their app.

 

[bonk3125]

For me personally, I prefer to have all 3 - TSLA shares, TSLA call options and recently the IC/BPS strategy. As you can see, I am fully diversified in TSLA .

Looks like we have the same definition of diversification.

 

[adiggs]

Looks like we have the same definition of diversification.

That's my definition. Apparently birds of a feather do indeed flock together.

So far everything else is diworsification.

 

[UnknownSoldier]

So about a 4.2% return for a 2 week trade? Or 109% annualized?

I guess. I don't really want to claim "109% annualized" because once I close one spread and open another one, I'll naturally have a different risk/return profile for the new spread. Plus right now all the premium is on the put side, if the stock actually tops and starts heading down for any reason, and premium switches to the call side, then we'll all end up running bear call spreads instead and God knows what that will look like with a declining SP.

 

[InTheShadows]

Last week was my first significant loss week in a couple of years of selling options.

I got a bit greedy, not allowing for that much of a rise and was overloaded with BCS c/w BPS with the BCS C- legs 820, 830 and 835. I was also expecting/hoping that there would be some defence of the Call walls when I got up in the early hours to sort everything about an hour before the close. What I found was the stock price climbing again and by the time I'd sorted out what to do, all the C- were well in the money and the loss rapidly increasing. I ended up closing everything out but didn't get time to STO any rolls or replacement positions. While the loss was significant it still equates to just 2 weeks worth of premiums, so shouldn't take too long to recover.

I aim to be a little more conservative and less complacent around events in future. I also need to listen to the danger signs and be prepared to close out positions earlier if needed to mitigate the risk of a larger loss. This was also the first week in ages I can recall seeing Call walls on the Open Interest get ignored on relatively modest volume. Perhaps the presence of all those massive 700 to 750 put walls gives the MM enough wins not to bother with the call walls. Whatever the case we should be more cautious about how much MM or others are prepared to defend call walls in future.

Yashu has been saying for a few weeks about interviewing this guy. I think it’s a must for all of us. Shed some light on max pain theory for me.

 

[charlesgres]

So about a 4.2% return for a 2 week trade? Or 109% annualized?

4.2% every two weeks is actually 199.45% annualized, because you have to compound, i.e. the gain of the first week contributes to the result of the next week, and so on..

So, not 4.2 times 26, but 1.042 to the power of 26, minus 1.

 

[AquaY]

4.2% every two weeks is actually 199.45% annualized, because you have to compound, i.e. the gain of the first week contributes to the result of the next week, and so on..

So, not 4.2 times 26, but 1.042 to the power of 26, minus 1.

The flaw in your math you can't invest your profits until they are equal to a round lot investment

 

[AquaY]

IRA 'margin' to make use of unsettled funds is how it works at Fidelity.

With Fidelity in my retirement accounts, I needed Level 2 with Spreads Trading to be able to sell these spreads we're having such success with. Without the Spreads Trading privilege I was restricted to covered calls and cash secured puts.

That's what IRA margin is at any broker because of legal requirements.
I believe Level 2 is standard as well but I'm not 100% sure. A broker can make rules stricter but not more lenient.

 

[ninpb]

The trend is your friend. This is why I have been 95:5 puts:calls sold the last month or so. If TSLA starts going down and it seems sustaining I will adjust in the other direction. I know I am sometimes giving up profit by not selling both puts and calls but my number 1 priority in these strategies is to avoid losses. That’s the only way I see myself being able to do this for years.

In the last 20 weeks, I only have one week with a loss and that amount was <50% of my average profits of all the other weeks. I also have a few weeks with <$1K profits. I definitely don’t hit the super-high profit weeks (>$100K) like others here, but I prefer to be the turtle rather than the hare. I’m not trying to sound preachy or all-knowing, I just want to provide a perspective to newcomers that it is fine to be safe and conservative with these strategies and not feel the need to fly to close to the sun in order to maximize long-term profits.

I'm a newcomer that you're talking about. Much appreciate your advice. I'm using cash from my wife's condo sale that's just been sitting in a savings account. I just want to beat the banks rate for now and see how I sleep at night. Ok maybe I'm not gonna be that conservative but you know what I mean.

 

[charlesgres]

The flaw in your math you can't invest your profits until they are equal to a round lot investment

The power formula would be correct if your gain is a multiple of your margin requirement, i.e. multiple of $5k if spread width is $50, or multiple of $10k if spread width is $100..

 

[PastorDave]

I had some time to do a little research this morning that I wanted to share with the group. I also want to share my plan for the week and results from last week, but I'll do that in another post.

Last week Gary Black had a tweet that really piqued my interest:

https://twitter.com/x/status/1448290245229809667

If institutions BMed to the SP500 are underweight TSLA, that could cause a ton more institutions to increase their positions if it looks like TSLA will be sustainably over the latest balancing price and consistently growing. Could there be a ton of institutions entering TSLA soon? I remembered some old Tesla Daily videos that covered the amount of the TSLA float that needed to be purchased as part of the inclusion being about 36%:

Here's a link to that part of the video, although there were several that covered this:

As I'm sure we all remember, this was a major driver of the stock price back in January. And I assume that BMed institutions getting out of TSLA was a major part of the subsequent fall, but I have no evidence for that. If retail has been buying all this time, but institutions are down or flat, then this might be a catalyst for the SP.

So according to the NASDAQ, here are the figures for institutional ownership for TSLA as well as other megacaps:
(see https://www.nasdaq.com/market-activity/stocks/tsla/institutional-holdings)
TSLA: 40.98%
AAPL: 57.85%
MSFT: 70.88%
GOOG: 66.15%
GOOGL: 78.72%
NFLX: 80.90%
FB: 79.58%
NVDA: 65.46%
V: 95.04%!
JPM: 71.02%

And NIO is 34.77%, just for an EV comparison.

40.98% is pretty low compared to other megacaps, so there looks like there's a ton of room to grow. Interesting that AAPL is the next lowest %; I assume this is from extreme retail interest in the stock? I'm a PC guy, so I have no clue.

But what's TSLA done this year for institutional holdings? Have they gone up or down since the huge run earlier this year?

According to this pretty cool website I found, they've pretty much stayed the same:

TSLA Tesla Institutional Ownership History and 13F Data

Tesla (TSLA) institutional ownership from 13F data. See current and past ownership by hedge funds and others.

docoh.com

I also redid Rob's math from the spreadsheet above based on current values to check and see how far off we are.

Current S&P500 Market Cap: 40,300B

Friday's TSLA MC:
834.61B

Friday's TSLA Float MC (Rob's Float value is the "real" float; float - shares Elon and other insiders own and are unlikely to sell. I did not update this figure and have no idea how accurate it currently is.):
640.3B

TSLA Weight:
2.07%

TSLA Float Weight:
1.59%

According to Google, total value indexed and BMed to S&P500 was 13,500B as of 12/31/20. Multiply this by YTD 19.04% return (I'm not confident of this, because BM funds could under or over perform, but this is the data I've got):
16,070B

TSLA Weight:
332.65B

TSLA Float Weight:
255.51B

Current institutional ownership:
342B

Given that there are lots of institutions that own TSLA for reasons other than benchmarking, I think Gary's theory holds water, but it's not a really huge effect like back in the middle of 2020 (see graph above). Also, Gary mentioned in another tweet that growth funds who are benchmarked to the R1000G may also be underweighted:

https://twitter.com/x/status/1448294486992474126j

No clue how many assets are under management BMed to that, but it may be significant.

Anyway, I found this interesting. Maybe someone who's more knowledgeable can pick this thread up and figure out how much institutional buying is likely in the next few months as TSLA starts looking less risky.