Wiki Selling TSLA Options - Be the House

[adiggs]

I agree, a lot of this comes down to risk appetite, and more importantly what is backing the puts. I prefer not to sell my core shares due to tax implications in my regular account, and my bps are mostly margin backed, with very wide room to roll / split / flip. You on the other hand are doing cash backed spreads and obviously it makes sense to be substantially more aggressive. I'd probably be doing something similar in your shoes.

NOT-ADVICE. LIKE REALLY.
This is an instance of why I don't use %OTM as a primary or particularly important criteria for selecting my strikes. A couple of weeks ago I was more worried about a 700/900 put spread than I am today about a 750/1050 put spread. What's different?

A couple or 3 weeks ago the quick run up turning into a quick run back to 900 didn't seem all that difficult to imagine. Today (for me) even dropping below 1000 seems very unlikely. So now I've got some put spreads that are slightly ITM (though those are on a roll, so they don't count - rolling positions for time will leave one in an abnormally aggressive position). But I've also got put spreads that are $66 OTM I'm comfortable with, where $200+ OTM spreads a couple of weeks ago were uncomfortable.


That's also a function of where I think support for the share price (for puts / put spreads) are at and how much support that I think will show up at each of those strikes. It's a function of the delta at those strikes, though I've been finding that I've been using delta less and less in my decision making. And it's a function of max pain, and more importantly the put and call walls. And of course what my gut tells me is going to happen.

%OTM is something that needs to be adjusted constantly based on the IV, news upcoming, and other stuff. All of this stuff combined probably doesn't prepare people for that sharp and fast rise to $1250, but its a starting point.

For risk management the combination of the wide spread that causes the short puts to behave like naked puts, at least within a fairly wide range ($75-$150 on these $300 wide spreads), also means that I've got a fair bit of leeway in how far ITM I can go and still roll effectively. The present instance - I rolled $1150 strike puts for this week expiration down to $1120 strikes and collected a $22ish premium for the privilege. I could have rolled down to $1100 for a lower premium - probably $5-7, but decided that my upward bias is strong enough to give myself a week and see.

And if the shares go back down, I'm confident that I can get a good roll even down at $1050. That good roll might only get me to $1100. If I'm particularly wrong and the shares are more like $1000 then the next roll might be for 2 weeks and will in either case be for a maximum strike improvement. The point is that I believe I've got a great backup / management choice on deck and ready to go, with more behind that (including a straight out roll for time and minimal net credit down to around $900 share price). Too much good news coming for a $900 share price to last long.

All of this stuff goes into the soup, at least for me, when deciding on the strike I want to open.


Related to this - I believe that my most profitable month or two was over the summer when the shares were in the low 700s and then up in the mid / upper 700s with low IV. We'd been in that range long enough that I was selling the 700 strike puts over and over, and then the 730s, even though not far OTM, collecting premiums that were yielding 7-10% on open. My target is 1-3%, so 7-10% was bonkers good.

In a lot of ways I wish we were still trading in that 730-790is range at low IV. My portfolio value would be a lot lower but the cash would be pouring in a lot faster. And I wouldn't be selling calls as the premiums were too low to justify being in front of a share price pop that could come any time

Right now I have a similar feeling about where we're at. Namely that we're reasonably close to a bottom of the range where the shares will trade. Acting on that belief - I'll be able to sell puts that are much closer to the money than I'd be selling if we wake up next week and the shares are $1250. I'll probably still be selling the 1050s at that point, or I might come up to 1100. I'll need to see that 1250+ share price for a few weeks before I think that's become a new low / support price.

 

[juanmedina]

Elon to the rescue. I have 1090 puts and 1220cc's for Friday.

This has aged well, I closed all the covered calls and most of the puts and waiting for a run either way to open more. I decided to get a little risky for next week and sold some BPS 990/940 for a 13% return but not too many.

 

[ammulder]

Sadly, we’re not as influential as we like to think:

TikTok Full-Time? Survey Shows Europeans Not Done Quitting Jobs

Quit a day job to do TikTok full-time? Why not, say some Europeans.

www.bloomberg.com

While it says people are leaving their jobs for trading platforms, it later explains they mean trading NFTs, not trading options. (Hard for me to imagine making a living trading NFTs, but there you go.)

 

[ZeApelido]

Okay I know this is the selling options thread, but lately I have been more curious in understand bull call vertical spreads. I bought some LEAP spreads when the stock was around 700 and got a nice return in a month.

Spreads don't make sense if you are uber bullish - your max return is capped. They also don't make sense if you expect a lot of downside risk - you can lose more than if you just held the stock or of course even worse you could loose it all.

But if you think the stock is prepped for solid growth but not 4x'ing or greater in 2 years, call spreads can amplify your returns.

Take this Jan 24 600/1200 call spread:

If the share price ends up above 1200, you get a 2.4x return.

On the downside, if the stock price stays above ~$780, you will lose less money than if you just held the stock. This is where have some sense of valuation matters - by 2024 Tesla should be generating at least $20 EPS and I find a P/E of 40 way too low while still growing, so this seems like a decent floor on share price (recession excluded).

For holding pure stock to perform better, share price would need to get above ~ $2700 by Jan 24.

My favorite part is that for this spread where the long leg is ITM, there is essentially... theta decay? I guess I never really noticed that before. If the share price stays right around $1100 for 2 years, the premiums will appreciate to double your money. I really like this play if I think share price growth is going to slow (depends on FSD progress IMO).

Of course this is just one example. And your mileage will depend not only on the spread points, but what your expectation of the future is. To that I end I made a quick script that allows me to design a probability distribution of future TSLA prices, and it looks at the set of possible call spreads and what their performance would be in a Monte Carlo simulation of that price probability distribution.

OptionsTracking/BullCallSpreadProbabilityAnalysis.ipynb at main · JMunaretto/OptionsTracking

Track relative options pricing over time and volatility, send notification when above thresholds - JMunaretto/OptionsTracking

github.com

For example if your 2 year share price expectation looks like this:

The outcome surface looks like this (in my python env I can rotate this 3d plot):

The blue plot is the average return of all possible price outcomes (probability weighted), and the yellow is the average return MINUS 1 standard deviation. You'll see the higher spread midpoints are more volatile (higher chance to end long leg OTM). Shorter spread widths give better returns more downside risk. Both of these are obvious statements, but you can at least get a sense of what short/long leg prices you should choose for an specific probability distribution.

The key is the design of your probability distribution. I basically am just playing with combining a few gaussian distibutions with different means and standard deviations to get the final distribution I like.

Anyways, just some interesting observations and maybe some of this code could be useful to you.

 

[st_lopes]

Okay I know this is the selling options thread, but lately I have been more curious in understand bull call vertical spreads. I bought some LEAP spreads when the stock was around 700 and got a nice return in a month.

Spreads don't make sense if you are uber bullish - your max return is capped. They also don't make sense if you expect a lot of downside risk - you can lose more than if you just held the stock or of course even worse you could loose it all.

But if you think the stock is prepped for solid growth but not 4x'ing or greater in 2 years, call spreads can amplify your returns.

Take this Jan 24 600/1200 call spread:

If the share price ends up above 1200, you get a 2.4x return.

On the downside, if the stock price stays above ~$780, you will lose less money than if you just held the stock. This is where have some sense of valuation matters - by 2024 Tesla should be generating at least $20 EPS and I find a P/E of 40 way too low while still growing, so this seems like a decent floor on share price (recession excluded).

For holding pure stock to perform better, share price would need to get above ~ $2700 by Jan 24.

My favorite part is that for this spread where the long leg is ITM, there is essentially... theta decay? I guess I never really noticed that before. If the share price stays right around $1100 for 2 years, the premiums will appreciate to double your money. I really like this play if I think share price growth is going to slow (depends on FSD progress IMO).

View attachment 737224

Of course this is just one example. And your mileage will depend not only on the spread points, but what your expectation of the future is. To that I end I made a quick script that allows me to design a probability distribution of future TSLA prices, and it looks at the set of possible call spreads and what their performance would be in a Monte Carlo simulation of that price probability distribution.

OptionsTracking/BullCallSpreadProbabilityAnalysis.ipynb at main · JMunaretto/OptionsTracking

Track relative options pricing over time and volatility, send notification when above thresholds - JMunaretto/OptionsTracking

github.com

For example if your 2 year share price expectation looks like this:

View attachment 737228

The outcome surface looks like this (in my python env I can rotate this 3d plot):

The blue plot is the average return of all possible price outcomes (probability weighted), and the yellow is the average return MINUS 1 standard deviation. You'll see the higher spread midpoints are more volatile (higher chance to end long leg OTM). Shorter spread widths give better returns more downside risk. Both of these are obvious statements, but you can at least get a sense of what short/long leg prices you should choose for an specific probability distribution.

View attachment 737230

View attachment 737231

The key is the design of your probability distribution. I basically am just playing with combining a few gaussian distibutions with different means and standard deviations to get the final distribution I like.

Anyways, just some interesting observations and maybe some of this code could be useful to you.

So, to dumb this down for us non-engineering types

You've bought synthetic leaps (e.g., sold a lower strike call to fund the buying of a higher strike call; making the bought call "free").

1. You lose more money than owning the stock outright if the stock price drops below 780 (i.e., given you have a bought call that will expire worthless and you will have theta decay on the sold call that you'll have to buy back for a loss);
2. You lose less money than owning the stock outright if the stock price stays within your spread range (i.e., as long as it doesn't drop below 780); because you get to keep some of the premium on your sold call, even though your bought call is now worthless;
3. You make more money than owning the stock outright if the stock stays between 1200 and 2700 by Jan 2024;
4. Your max gain is "locked" at your spread width plus premium received on the sold call;

 

[ZeApelido]

So, to dumb this down for us non-engineering types

You've bought synthetic leaps (e.g., sold a lower strike call to fund the buying of a higher strike call; making the bought call "free").

1. You lose more money than owning the stock outright if the stock price drops below 780 (i.e., given you have a bought call that will expire worthless and you will have theta decay on the sold call that you'll have to buy back for a loss);
2. You lose less money than owning the stock outright if the stock price stays within your spread range (i.e., as long as it doesn't drop below 780); because you get to keep some of the premium on your sold call, even though your bought call is now worthless;
3. You make more money than owning the stock outright if the stock stays between 1200 and 2700 by Jan 2024;
4. Your max gain is "locked" at your spread width plus premium received on the sold call;

It’s a call spread, or essentially a leap covered call. So the opposite, buy the low call and sell the high.


The estimation part sounds fancy, but really it is just the basis of any statistical estimation tracking algorithm, like GPS location tracking on your phone or car. There is an estimate of the probability distribution of where you are predicted to be, and this distribution is used to calculate what is the optimium guess of where you will go in the future. The reason this is done is that it produces the optimal result in the face of uncertainty.

In stock picking we do the same but maybe not with so many data points. We all pick what we think the most likely stock price is in a few years. Then if we pick what we think the worst case and best case prices are and assigned them relative odds vs the most likely case, we have made a crude distribution. This is a smart thing to consider so that we don't make any dumb bets that may totally blow up in our faces even if the worst case is met.

 

[Drezil]

Okay I know this is the selling options thread, but lately I have been more curious in understand bull call vertical spreads. I bought some LEAP spreads when the stock was around 700 and got a nice return in a month.

Spreads don't make sense if you are uber bullish - your max return is capped. They also don't make sense if you expect a lot of downside risk - you can lose more than if you just held the stock or of course even worse you could loose it all.

But if you think the stock is prepped for solid growth but not 4x'ing or greater in 2 years, call spreads can amplify your returns.

And in exactly this situation you should then play diagonals.
I.e. buy a jan 22 600c, sell 1200c 2 weeks out & roll every week as long as SP <1200. if SP >1200 close the thing. You nearly doubled your money on the 600c. Or keep on rolling the 1200c up/out for as little credit as possible as soon an the SP hits it. Rinse repeat.

Plus side:
- more Theta collected over time than with the vertical
- if SP rises you adjust your short-leg to increase max-gain & can let the short-leg expire on an SP dip to then enter the original position again, pocketing the difference in the meantime (although this also has problems with a prolonged dip!)

Negative side:
- if SP lingers below the half-point then collected Theta will be way less
- you need to "babysit" i.e. roll/adjust your position every week - no buy & forget.

Most of the models people do leave out the passing of time or the change in IV over time in their models and just use the current snapshot of the option-chain in their models. I looked into getting my hands on historic option-chain data.. but they are either not available or bundled into things like "all S&P500 Option-Data for the last 10 years" for extraordinary amounts of money.
I know IBKR can display historic Open-Interest/Volume-Data, but i have not seen historic Option-Chain. Neither in the client or the API

Guess i'll have to start scraping myself to do backtesting on parts of history.

 

[ABC2D]

I looked into getting my hands on historic option-chain data

Have you looked at "OnDemand" feature of ToS?

 

[EVCollies]

I.e. buy a jan 22 600c, sell 1200c 2 weeks out & roll every week as long as SP <1200. if SP >1200 close the thing. You nearly doubled your money on the 600c. Or keep on rolling the 1200c up/out for as little credit as possible as soon an the SP hits it. Rinse repeat.

Great info @Drezil. Just for clarification, sell 1200c 2 weeks out from jan 22 or 2 weeks out from now?

 

[Drezil]

Great info @Drezil. Just for clarification, sell 1200c 2 weeks out from jan 22 or 2 weeks out from now?

2 weeks out from now. Theta burns fast very close to expiration.

Don't take is as a hard rule. I usually look at theta for those things & compare. Theta at expiration-date should currently be around 0.4 or so per day. Thata 2 weeks out can be 4-5 times as much that you can compound as long is IV stays this high

 

[Dagger]

And in exactly this situation you should then play diagonals.
I.e. buy a jan 22 600c, sell 1200c 2 weeks out & roll every week as long as SP <1200. if SP >1200 close the thing. You nearly doubled your money on the 600c. Or keep on rolling the 1200c up/out for as little credit as possible as soon an the SP hits it. Rinse repeat.

Plus side:
- more Theta collected over time than with the vertical
- if SP rises you adjust your short-leg to increase max-gain & can let the short-leg expire on an SP dip to then enter the original position again, pocketing the difference in the meantime (although this also has problems with a prolonged dip!)

Negative side:
- if SP lingers below the half-point then collected Theta will be way less
- you need to "babysit" i.e. roll/adjust your position every week - no buy & forget.

Most of the models people do leave out the passing of time or the change in IV over time in their models and just use the current snapshot of the option-chain in their models. I looked into getting my hands on historic option-chain data.. but they are either not available or bundled into things like "all S&P500 Option-Data for the last 10 years" for extraordinary amounts of money.
I know IBKR can display historic Open-Interest/Volume-Data, but i have not seen historic Option-Chain. Neither in the client or the API

Guess i'll have to start scraping myself to do backtesting on parts of history.

You can buy historical option data for TSLA here CBOE - Historical Options Data

 

[generalenthu]

And in exactly this situation you should then play diagonals.
I.e. buy a jan 22 600c, sell 1200c 2 weeks out & roll every week as long as SP <1200. if SP >1200 close the thing. You nearly doubled your money on the 600c. Or keep on rolling the 1200c up/out for as little credit as possible as soon an the SP hits it. Rinse repeat.

Plus side:
- more Theta collected over time than with the vertical
- if SP rises you adjust your short-leg to increase max-gain & can let the short-leg expire on an SP dip to then enter the original position again, pocketing the difference in the meantime (although this also has problems with a prolonged dip!)

Negative side:
- if SP lingers below the half-point then collected Theta will be way less
- you need to "babysit" i.e. roll/adjust your position every week - no buy & forget.

Most of the models people do leave out the passing of time or the change in IV over time in their models and just use the current snapshot of the option-chain in their models. I looked into getting my hands on historic option-chain data.. but they are either not available or bundled into things like "all S&P500 Option-Data for the last 10 years" for extraordinary amounts of money.
I know IBKR can display historic Open-Interest/Volume-Data, but i have not seen historic Option-Chain. Neither in the client or the API

Guess i'll have to start scraping myself to do backtesting on parts of history.

I was looking at historical data, and ended up purchasing a slice from algoseek, which was not too expensive. It was 1k USD for minute level pricing for 28 months of historical data for 5 tickers. About 250 gigs compressed I think.

I was continuing to look, but you may want to check polygon.io which seems to be an all you can eat buffett for 50 or 100 bucks a month, with historical data access. I haven't subscribed because I am grabbing data from tradier.com, which has been very reliable and seems to be good quality. I put in 5k to open an account, but don't trade there.

DM me if you want a sample, but I think algoseek also has sample data on their website.

 

[corduroy]

With macros tanking, I have a feeling we might break through that $1,060s support level today. I'll be looking to open some more 12/3 BPS, but going to be very cautious not to be too early. Be careful out there.

 

[intelligator]

And in exactly this situation you should then play diagonals.
I.e. buy a jan 22 600c, sell 1200c 2 weeks out & roll every week as long as SP <1200. if SP >1200 close the thing. You nearly doubled your money on the 600c. Or keep on rolling the 1200c up/out for as little credit as possible as soon an the SP hits it. Rinse repeat.

Just so I am clear, short leg action no different than a covered call? Added benefit of diagonal is not having to be long 100 shares to play the call and an upside potential to close both with additional credit?

 

[Yoona]

With macros tanking, I have a feeling we might break through that $1,060s support level today. I'll be looking to open some more 12/3 BPS, but going to be very cautious not to be too early. Be careful out there.

if anyone's BPS/IC is in trouble, here's a way to adjust the put side:

How to Adjust an Iron Condor on the Put Side - Tradersfly

Detailed article coming soon…

tradersfly.com

 

[JustMe]

With macros tanking, I have a feeling we might break through that $1,060s support level today. I'll be looking to open some more 12/3 BPS, but going to be very cautious not to be too early. Be careful out there.

If that happens I’ll be looking for a hard bounce off $975 or so.

In these uncertain times, I’m favoring day trading BPS, BCS expiring the following week. It’s been a bit less stressful for me than holding positions over night with risk of after hours gaps up or down. When I miss the top or bottom of a big intraday move, I love to watch beautiful theta decay drift me towards profit.

Good luck folks

 

[ZeApelido]

And in exactly this situation you should then play diagonals.
I.e. buy a jan 22 600c, sell 1200c 2 weeks out & roll every week as long as SP <1200. if SP >1200 close the thing. You nearly doubled your money on the 600c. Or keep on rolling the 1200c up/out for as little credit as possible as soon an the SP hits it. Rinse repeat.

Plus side:
- more Theta collected over time than with the vertical
- if SP rises you adjust your short-leg to increase max-gain & can let the short-leg expire on an SP dip to then enter the original position again, pocketing the difference in the meantime (although this also has problems with a prolonged dip!)

Negative side:
- if SP lingers below the half-point then collected Theta will be way less
- you need to "babysit" i.e. roll/adjust your position every week - no buy & forget.

Most of the models people do leave out the passing of time or the change in IV over time in their models and just use the current snapshot of the option-chain in their models. I looked into getting my hands on historic option-chain data.. but they are either not available or bundled into things like "all S&P500 Option-Data for the last 10 years" for extraordinary amounts of money.
I know IBKR can display historic Open-Interest/Volume-Data, but i have not seen historic Option-Chain. Neither in the client or the API

Guess i'll have to start scraping myself to do backtesting on parts of history.

Maybe. The returns from the bought call portion is obviously much worse in the range of expected price targets.

At $800, you will lose 70% of your investment.
At $1100, you will lose 20%.
At $1400, you gain 25%
At $1800, you gain 90%

Based on some of my previous simulation studies, you could probably return on average an additional 20-30% per year in CC's. So let's say 50% over 2 years. Then the comparison is:

$800: Diagonal -20%. Vertical -15%
$1100: Diagonal 5%. Vertical 100%
$1400: Diagonal 75% Vertical 143%
$1800: Diagonal 115% Vertical 143%

So even with a decent return of 25% a year on Covered calls on your LEAPs (and a lot more work and uncertainty), you are still behind in this target price range. At ~ $1900, your strategy will begin to show superior results (though you will have to assume less CC returns as you go above $2000).

Agree with you on volatility assumptions. I've been working on a bull put spread rolling simulation like my covered call analysis and have added modeling for varied volatility. The hard thing is that we have to model what the actual price volatilty is and the perceived implied volatility of option prices - which will not be the exact same thing. Some times the IV will follow price movements, and sometimes precede them. Complicated!

 

[elasalle]

shuffeled some CC's - rolled up from Jan 23 1950s to 1800.
Bought ~ 200 shares with the credits and sold CC's against them as well.
Some more shares in pigg(CC)y bank added.

(+Have one life to roll to Jan 24 as backup, as well as breaking the pigg(CC)y bank - should the need arise.)

Done for the day

 

[jeewee3000]

Sold 12/10 920/1000 BPS @16.5 per contract. That's a 10% per week return on capital for two weeks straight. Insane.

 

[Drezil]

Just so I am clear, short leg action no different than a covered call? Added benefit of diagonal is not having to be long 100 shares to play the call and an upside potential to close both with additional credit?

exactly. And psychologically it is easier to let go of a call then of shares ..