Ok. Someone talk me out of this. Looking at selling Jan 2024 CC against my shares for 1500 strike. Let's assume 100 contracts. Get $1,080,000 now for BPS. Start selling 200 $50 Iron Condors/week. Assume conservative $1.75/condor = $35k/week to start. In one year, easily get to $3.5M as I will sell more spreads as the money grows. I expect the SP to hit 1500 in the next year (maybe sooner). I would buy them back at that point - So I will have to close the CC at a loss. Current 920 strikes (for Jan 2024) are $250, so I assume if the stock gets to 1500, they will cost something in that range, for a tax deductible loss of $1.5M to close them ($2.5M - the $1M I get now), leaving me at least $2M in net income. Seems like a nice "loan." What am I missing?
I've thought about something along these lines at a much smaller scale but after going through this past year...
Not advice and definitely no expert I've made a lot of painful mistakes maybe worth sharing.
1. TSLA could reach 1500 before Jan 2024, and if that happens your effective time with the upfront premium for bps play will be shortened. So even in a good scenario of 3.5m/year assuming growing # contracts, what if TSLA reached 1500 in 6 months? 9 months? Etc. You'd have to calculate realistic returns for various time periods and then assign some probabilities of reaching 1500 at those intervals.
2. TSLA has potential to still make wild swings as evidenced this year. I guess maybe very smart people will have a better sense of stabilization of the stock moving forward as fewer unknowns remain unknown and whatever impact macro has, but I think these ultimately price into volatility.
3. Volatility directly impacts option prices. So all else equal, high IV = more expensive options (or more premium).
I think the worst case scenario maybe that TSLA skyrockets to 1500 during a high IV setting that gets you thinking hard about closing out the CCs. I don't know how to calculate a theoretical call price in this situation - any mathematicians around? but there is potential for it to be more expensive than when you first sold it so if you do decide to buy back, it might cost you more than you originally netted from upfront premium.
Though this is not part of your plan, something I experienced recently: I had 10/29 750CCs up until yesterday (the result of multiple rolls to get out but I executed too poorly and slowly, one of my worst trades of the year). I never got early assignment even when sp was ~850. $100 itm and I'm hanging onto these crazy loss making CCs wondering how come my shares didn't get called away. They were bad psychologically and bad for margin/cash. I ended up closing them after the Q3 call for an enormous loss...yes I was one of those expecting / "hoping" for a sp decline, IV crush, or whatever, which never came. I guess had I held onto them, next week could prove differently. Nonetheless if my shares had been simply called away at say 25 or 50 itm in the preceding days, the overall management would have been way better and less stressful. In your scenario if TSLA goes to 1600 (if SP reaches 1500, 1600 is only ~6.6% away which could happen in 1-2 big up days)...or even 1700 which would be a closer equivalent to my example (750 -> 850: 13%, so 1500 to 1700 maybe over a week), and you're expecting shares to be called away to free everything up depending on your cash or margin situation, it may not happen and then you will be effectively forced to decide to buy back your cc's at an unfavorable rate or risk continued SP appreciation.
In summary - if shares skyrocket, IV explodes, and you become paralyzed like me or get caught off guard while SP rockets beyond 1500, and expect a pullback, or theta decay to get to a more manageable CC repurchase premium, or for shares to get called away to free cash, know none of those may happen and you may be closing out your CCs at a higher price, sooner than expected, and possibly for an overall loss depending on how much you made from your BPS until that point in time. If you are proactive not a dummy like me you will of course manage much sooner and avoid these travesties.
If you're gonna do it, I believe to maximize your probability of success - execute the plan when both SP and IV are high super high much like early this year, so that the upfront premium you collect has a better chance of buffering whatever comes down the road and minimize the worst case scenario above.
) but morning appointment and stuff came and went, and the trading day was over.
. 5500 in 2025.
