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Wiki Selling TSLA Options - Be the House
- Thread starter adiggs
- Start date
now I have March 22nd BPS with both legs in the money. I hope we get a bounce because I think I need to roll those at least to June.
scubastevo80
Member
I'm waiting until tomorrow - today seems like a lost cause. By my tally, we're down 18.5% in the last 4 days. Thankfully, I have nothing expiring this week.
I may keep rolling my current BPS out until they get down to a 750 range given the current action. This is getting ridiculous, but on a side note - I started moving money out of ARKK/ARKG into TSLA shares at around $785.
corduroy
Active Member
STO 3/4 -640/540 @$4.10 I'm going down with the ship. Ladies and gentleman, it's been an honor.
ChefBoyardee
Member
Tbh it looks like we’re in a full bear trend now that the channel, 200d, and previous low were taken out. I’m looking at the 720 level (bottom of declining channel) if we don’t bounce here, but there are a lot of horizontal resistances you can draw from last year.
It’s not as clear cut as when we were in the rising channel though. I feel like it’s less about price levels and more about time right now. How much more bad news can we pile on? I’d say it’s more likely we start getting less bad news in the next few weeks. Thinking the rate hike in March is a buy the news event
IMHO the #1 macro issue to be tracking for short term traders, as we are, is the economic stimulus the US Federal Reserve (Fed) has been providing since the beginning of the pandemic and how it is being changed (reduced) this year. I don't know the details for the rest of the countries in the world - I just know that the Fed isn't the only one doing stuff of this sort.
Very early on in the pandemic, among other stimulus programs, the Fed began buying $120B each month in the bond market. This amount was split up $80B treasuries and $40B mortgage backed bonds. Some of that combined purchase was expanded to investment grade bond funds at some point, and then further expanded to investment grade corporate bonds (individual companies rather than a basket of many companies). Companies, knowing that there was a buyer of their bonds (lender), were able to borrow money (issue bonds) as needed to continue business operations.
That's been going on for more than a year and is, mostly this year, tapering down to 0 purchases. With no intention to return to that extraordinary measure. Strong demand for bonds = lower interest rates on those bonds = keeping interest rates down in the overall market, all to fight unemployment (objective #1 of the Fed) and to support the economy through the pandemic (not a primary objective, but strongly supportive of the primary objective). All of these activities - 0% overnight interest rates plus a high volume of bond buying are tools the Fed has, and are subject to primary objective #2 - the 2% long run inflation target.
As long as inflation has been ~0%, as it has been for awhile, low interest rates and massive injection of new money into the economic system worked just fine. With inflation now well above the long run 2% target, its time to raise interest rates and stop injecting new money into the system by the truckload (stop buying bonds, or more accurately tapering down the purchase of bonds).
Sitting behind this is the economic view Modern Monetary Theory. Just as we all need at least a high level understanding of accounting concepts (debits / credits, double entry bookkeeping, income statement / balance sheet / cash flow statement and how the three are different and all important to understanding a businesses financial state), we also need a conceptual understanding of MMT and other / counter economic theories.
Mechanism by which the bond buying creates new money and supports economic activity
The simplistic view of MMT is that the US Government especially, as well any country in the world that issues their own currency, can issue as much of their currency as they desire to pay their debts. Put another way there is no amount of money that is too much for the government to spend. With some very important caveats and restrictions.
The first is that those debts need to be payable in the government's currency. As long as US debt is denominated in US dollars then it can always be paid in full - the government just issues adequate currency to make the payments. If that debt is denominated in some other currency that the government can't issue, then this doesn't work. This is an important component of the Greek financial crisis a few years back - the government debt load became overwhelming and couldn't be paid via this mechanism because the debt was in Euros, not Drachmas. The Greek's didn't have the right / ability to issue new Euros to pay their debt.
This is also a constraint on state and local governments, as well as companies and households in the US. Our debts are denominated in US $ and we don't have the right to issue US $ to pay those debts. It's called counterfeiting when we try
The second constraint is the inflation constraint. The US Government can issue as much currency as it likes as long as inflation is under control, whatever 'under control' means to the US Government. Via the Fed that is currently a 2% long run inflation level.
Like all macroeconomic approaches MMT is subject to abuses and misinterpretations. The big one is that for politicians this sounds like a theoretical framework why they can spend any amount of money they like and its all good. Its not (a reason they can spend any amount they want).
(to be continued)
Very early on in the pandemic, among other stimulus programs, the Fed began buying $120B each month in the bond market. This amount was split up $80B treasuries and $40B mortgage backed bonds. Some of that combined purchase was expanded to investment grade bond funds at some point, and then further expanded to investment grade corporate bonds (individual companies rather than a basket of many companies). Companies, knowing that there was a buyer of their bonds (lender), were able to borrow money (issue bonds) as needed to continue business operations.
That's been going on for more than a year and is, mostly this year, tapering down to 0 purchases. With no intention to return to that extraordinary measure. Strong demand for bonds = lower interest rates on those bonds = keeping interest rates down in the overall market, all to fight unemployment (objective #1 of the Fed) and to support the economy through the pandemic (not a primary objective, but strongly supportive of the primary objective). All of these activities - 0% overnight interest rates plus a high volume of bond buying are tools the Fed has, and are subject to primary objective #2 - the 2% long run inflation target.
As long as inflation has been ~0%, as it has been for awhile, low interest rates and massive injection of new money into the economic system worked just fine. With inflation now well above the long run 2% target, its time to raise interest rates and stop injecting new money into the system by the truckload (stop buying bonds, or more accurately tapering down the purchase of bonds).
Sitting behind this is the economic view Modern Monetary Theory. Just as we all need at least a high level understanding of accounting concepts (debits / credits, double entry bookkeeping, income statement / balance sheet / cash flow statement and how the three are different and all important to understanding a businesses financial state), we also need a conceptual understanding of MMT and other / counter economic theories.
Mechanism by which the bond buying creates new money and supports economic activity
The simplistic view of MMT is that the US Government especially, as well any country in the world that issues their own currency, can issue as much of their currency as they desire to pay their debts. Put another way there is no amount of money that is too much for the government to spend. With some very important caveats and restrictions.
The first is that those debts need to be payable in the government's currency. As long as US debt is denominated in US dollars then it can always be paid in full - the government just issues adequate currency to make the payments. If that debt is denominated in some other currency that the government can't issue, then this doesn't work. This is an important component of the Greek financial crisis a few years back - the government debt load became overwhelming and couldn't be paid via this mechanism because the debt was in Euros, not Drachmas. The Greek's didn't have the right / ability to issue new Euros to pay their debt.
This is also a constraint on state and local governments, as well as companies and households in the US. Our debts are denominated in US $ and we don't have the right to issue US $ to pay those debts. It's called counterfeiting when we try
The second constraint is the inflation constraint. The US Government can issue as much currency as it likes as long as inflation is under control, whatever 'under control' means to the US Government. Via the Fed that is currently a 2% long run inflation level.
Like all macroeconomic approaches MMT is subject to abuses and misinterpretations. The big one is that for politicians this sounds like a theoretical framework why they can spend any amount of money they like and its all good. Its not (a reason they can spend any amount they want).
(to be continued)
The only thing positive about this unhinged plunge in TSLA value is being able to escape faster from call option bets, long and covered. Today I closed $80 OTM monthly CC's sold 9 days ago at $31 for 82% profit. Looking to sell more on the next up day -- probably 2- or 4-week CC ~$60 OTM range. Also need to roll some long 0520C1200 calls, but dithering while value plummets.
IMHO the #1 macro issue to be tracking for short term traders, as we are, is the economic stimulus the US Federal Reserve (Fed) has been providing since the beginning of the pandemic and how it is being changed (reduced) this year. I don't know the details for the rest of the countries in the world - I just know that the Fed isn't the only one doing stuff of this sort.
Very early on in the pandemic, among other stimulus programs, the Fed began buying $120B each month in the bond market. This amount was split up $80B treasuries and $40B mortgage backed bonds. Some of that combined purchase was expanded to investment grade bond funds at some point, and then further expanded to investment grade corporate bonds (individual companies rather than a basket of many companies). Companies, knowing that there was a buyer of their bonds (lender), were able to borrow money (issue bonds) as needed to continue business operations.
That's been going on for more than a year and is, mostly this year, tapering down to 0 purchases. With no intention to return to that extraordinary measure. Strong demand for bonds = lower interest rates on those bonds = keeping interest rates down in the overall market, all to fight unemployment (objective #1 of the Fed) and to support the economy through the pandemic (not a primary objective, but strongly supportive of the primary objective). All of these activities - 0% overnight interest rates plus a high volume of bond buying are tools the Fed has, and are subject to primary objective #2 - the 2% long run inflation target.
As long as inflation has been ~0%, as it has been for awhile, low interest rates and massive injection of new money into the economic system worked just fine. With inflation now well above the long run 2% target, its time to raise interest rates and stop injecting new money into the system by the truckload (stop buying bonds, or more accurately tapering down the purchase of bonds).
Sitting behind this is the economic view Modern Monetary Theory. Just as we all need at least a high level understanding of accounting concepts (debits / credits, double entry bookkeeping, income statement / balance sheet / cash flow statement and how the three are different and all important to understanding a businesses financial state), we also need a conceptual understanding of MMT and other / counter economic theories.
Mechanism by which the bond buying creates new money and supports economic activity
The simplistic view of MMT is that the US Government especially, as well any country in the world that issues their own currency, can issue as much of their currency as they desire to pay their debts. Put another way there is no amount of money that is too much for the government to spend. With some very important caveats and restrictions.
The first is that those debts need to be payable in the government's currency. As long as US debt is denominated in US dollars then it can always be paid in full - the government just issues adequate currency to make the payments. If that debt is denominated in some other currency that the government can't issue, then this doesn't work. This is an important component of the Greek financial crisis a few years back - the government debt load became overwhelming and couldn't be paid via this mechanism because the debt was in Euros, not Drachmas. The Greek's didn't have the right / ability to issue new Euros to pay their debt.
This is also a constraint on state and local governments, as well as companies and households in the US. Our debts are denominated in US $ and we don't have the right to issue US $ to pay those debts. It's called counterfeiting when we try
The second constraint is the inflation constraint. The US Government can issue as much currency as it likes as long as inflation is under control, whatever 'under control' means to the US Government. Via the Fed that is currently a 2% long run inflation level.
Like all macroeconomic approaches MMT is subject to abuses and misinterpretations. The big one is that for politicians this sounds like a theoretical framework why they can spend any amount of money they like and its all good. Its not (a reason they can spend any amount they want).
(to be continued)
Milton Friedman is not amused.
It appears that when something is too good to be true it usually is. I am sure many people, including me are burned badly after getting introduced to BPS through this thread. When people were talking about 2-5% risk free returns in a week selling BPS that should have rang some bells. Now the people that spoke of the incredible returns of BPS seem to have turned to selling straight puts/calls or simply holding. The end result is most likely that most of the readers of the thread now have less shares than before. But oh well, you live and you learn.
Back to our short term trading - the issue that mostly gets covered in the press and that people are talking about is the imminent increase in short term interest rates. That will have impact but it will be delayed and I expect relatively small compared to what has already happened - the Fed has stopped creating $120B each month in new money. The primary impact is that to the degree that money was being lent to companies, companies no longer have that lender directly available. Corporate bond rates are going up, companies won't be able to borrow as much, ...
The back side of the purchase program and the taper of new purchases is that, most likely, the day will arrive when the Fed will start selling off those bonds its been buying. I actually don't think that will be the mechanism used to shrink the balance sheet as its such a huge # and taking that much money out of the system will be difficult. Rather just holding the bonds to expiration will be enough of a drag on the economy to let that happen. As bonds expire the companies that issued them will need to borrow new money from the private economy, not from the government / Fed.
Anyway - the last 2 years have been a relatively unprecedented increase in stock market valuations at least partially due to the multiple trillions of new $$ in circulation. That money isn't going to be removed immediately, but the flow of that new money is stopping (pretty much has stopped). We're about to find out how robust the economy is without that massive and ongoing increase of money.
What will that mean / how will it play out? I really don't know.
Except that I do know that ignoring it, or viewing it as a non-issue, is probably a bad idea for short term investors. One interpretation, in the context of Tesla, is that we're heading back to the share price at roughly the start of the pandemic. That doesn't seem right to me, not because Tesla has made a lot of forward progress since then, but because we DO have multiple trillion of $$ sloshing around that we didn't have then.
But could it cut in half? Could it overreact and go lower, and then snap back relatively quickly?
I strongly believe that Tesla will perform better than the market overall as the Tesla story outweighs the macro economic story. But to be extreme if Tesla is off 80% from recent 12 month high, while the rest of the market is off 90%, that is still a share price of $240. I made up the numbers but the market did drop 90% in the early 1930s with the Great Depression. The one big difference I see today is that unemployment was really bad then, and is really good now, and that's a biggie.
But markets down 50% as in 07/08? Somehow a drop on part with something that has happened less than 2 decades ago doesn't sound outrageous. If Tesla outperforms that market and only drops to $700 that is still a ways to go. Maybe the market and overreacts down to $550 - about the bottom of the most recent serious drop (and fairly fast recovery).
NOT-ADVICE and all that - I really don't know how much, how far, how bad this all can get. I don't see any significant positive catalyst that can cause the Tesla Story to outweigh the Macro Story for any significant amount of time (enough to reverse the slide) outside of Q1 financials. And what if the Q1 financials are merely good, or even *shock* bad? What if environmental groups in Germany are successful in effectively delaying GigaBerlin indefinitely, or even turning it into a stranded asset?
This is a big downside to the continuing drum beat of FUD - if they get something meaty to work on ...
In the end we can believe what we like to believe about the value of the company. Without a truly long term position, not just view on things, we have to be more concerned about how investors / buyers will react to the stories - not what the stories are. I've seen plenty of great quarterly results over the last several years that were great for progress against the long term mission of the company. The shares were still down afterwards, and not just the few days afterwards. Some of times the shares were down for quarters afterwards.
This is a mistake I make repetitively when I buy speculative calls - I have my long term investor hat on, but the speculative call is on a clock. I will eventually be right about the share price if I wait long enough, but that can be 5+ years.
Stuff to think about.
The back side of the purchase program and the taper of new purchases is that, most likely, the day will arrive when the Fed will start selling off those bonds its been buying. I actually don't think that will be the mechanism used to shrink the balance sheet as its such a huge # and taking that much money out of the system will be difficult. Rather just holding the bonds to expiration will be enough of a drag on the economy to let that happen. As bonds expire the companies that issued them will need to borrow new money from the private economy, not from the government / Fed.
Anyway - the last 2 years have been a relatively unprecedented increase in stock market valuations at least partially due to the multiple trillions of new $$ in circulation. That money isn't going to be removed immediately, but the flow of that new money is stopping (pretty much has stopped). We're about to find out how robust the economy is without that massive and ongoing increase of money.
What will that mean / how will it play out? I really don't know.
Except that I do know that ignoring it, or viewing it as a non-issue, is probably a bad idea for short term investors. One interpretation, in the context of Tesla, is that we're heading back to the share price at roughly the start of the pandemic. That doesn't seem right to me, not because Tesla has made a lot of forward progress since then, but because we DO have multiple trillion of $$ sloshing around that we didn't have then.
But could it cut in half? Could it overreact and go lower, and then snap back relatively quickly?
I strongly believe that Tesla will perform better than the market overall as the Tesla story outweighs the macro economic story. But to be extreme if Tesla is off 80% from recent 12 month high, while the rest of the market is off 90%, that is still a share price of $240. I made up the numbers but the market did drop 90% in the early 1930s with the Great Depression. The one big difference I see today is that unemployment was really bad then, and is really good now, and that's a biggie.
But markets down 50% as in 07/08? Somehow a drop on part with something that has happened less than 2 decades ago doesn't sound outrageous. If Tesla outperforms that market and only drops to $700 that is still a ways to go. Maybe the market and overreacts down to $550 - about the bottom of the most recent serious drop (and fairly fast recovery).
NOT-ADVICE and all that - I really don't know how much, how far, how bad this all can get. I don't see any significant positive catalyst that can cause the Tesla Story to outweigh the Macro Story for any significant amount of time (enough to reverse the slide) outside of Q1 financials. And what if the Q1 financials are merely good, or even *shock* bad? What if environmental groups in Germany are successful in effectively delaying GigaBerlin indefinitely, or even turning it into a stranded asset?
This is a big downside to the continuing drum beat of FUD - if they get something meaty to work on ...
In the end we can believe what we like to believe about the value of the company. Without a truly long term position, not just view on things, we have to be more concerned about how investors / buyers will react to the stories - not what the stories are. I've seen plenty of great quarterly results over the last several years that were great for progress against the long term mission of the company. The shares were still down afterwards, and not just the few days afterwards. Some of times the shares were down for quarters afterwards.
This is a mistake I make repetitively when I buy speculative calls - I have my long term investor hat on, but the speculative call is on a clock. I will eventually be right about the share price if I wait long enough, but that can be 5+ years.
Stuff to think about.
With the continued drop in the share price today I closed out my 800, 830, and 850 strike cc for this Friday for 80-95% gains. I particularly liked those 800s - open yesterday for around $30, out today for around $6. Then again we would expect cc to perform well in the context of a downward moving share price.
What I'm hoping for is some sort of bounce tomorrow to reopen calls. New cc at this point will be for next week.
Bigger context - at the moment its looking like I'd have been better off selling the shares in the 870s when that was available and I decided I needed to sell the shares. The credits have been nice the last few weeks but they aren't keeping up with the drop in the share price. This is a subtle risk embedded within an option sales strategy and it comes out when the position has an external constraint that stops if from being a roll forever position. In my case its a tax bill due in a month(ish).
Of course if the shares turn around and I can keep my call strike up with the share price then I'll be well ahead, selling shares at a strike close to the share price and keeping all of the credits collected along the way.
What I'm hoping for is some sort of bounce tomorrow to reopen calls. New cc at this point will be for next week.
Bigger context - at the moment its looking like I'd have been better off selling the shares in the 870s when that was available and I decided I needed to sell the shares. The credits have been nice the last few weeks but they aren't keeping up with the drop in the share price. This is a subtle risk embedded within an option sales strategy and it comes out when the position has an external constraint that stops if from being a roll forever position. In my case its a tax bill due in a month(ish).
Of course if the shares turn around and I can keep my call strike up with the share price then I'll be well ahead, selling shares at a strike close to the share price and keeping all of the credits collected along the way.
Can we play either/or(or) here?
I've been rolling 1100 strike CSPs month to month that obviously have went further and further in the money. Expiration date is next week, and I can probably be assigned at any moment. So, given that my bias like most of us is that the price will eventually recover and march to ATHs, would you:
1) roll way out in time for a credit,
2) take the loss and BTC but put the remaining cash that was securing the puts to work by buying Jan'24 750 calls (with a break even at only $1000... really tempting)
Or 3) get assigned since I'm mainly a long term holder anyway and a few short weeks ago I told myself I was comfortable with that.
Wishing the best for everyone throughout these unpredictable short-term moves.
I've been rolling 1100 strike CSPs month to month that obviously have went further and further in the money. Expiration date is next week, and I can probably be assigned at any moment. So, given that my bias like most of us is that the price will eventually recover and march to ATHs, would you:
1) roll way out in time for a credit,
2) take the loss and BTC but put the remaining cash that was securing the puts to work by buying Jan'24 750 calls (with a break even at only $1000... really tempting)
Or 3) get assigned since I'm mainly a long term holder anyway and a few short weeks ago I told myself I was comfortable with that.
Wishing the best for everyone throughout these unpredictable short-term moves.
Had to close my -1025/+725 bps at a loss to free some margin. I had been rolling these for a while. Took about 200% loss here on these, could have been worse.
Closed all my ccs with nice profits, so that eases the pain.
I still have -750/+650 bps for this friday. I'd really rather not have to roll these.. but those are my only short term positions for now.
I have some -p1100 for december. And stock and cash. And a single -p1500 for jan 2024.
Closed all my ccs with nice profits, so that eases the pain.
I still have -750/+650 bps for this friday. I'd really rather not have to roll these.. but those are my only short term positions for now.
I have some -p1100 for december. And stock and cash. And a single -p1500 for jan 2024.
Your 3 choices aren’t necessarily mutually exclusive. I wouldn’t go too far out at local lows just because you’ll miss out if we get a quick rebound.
My plan is to just keep rolling week to week until I get assigned (your #3). Then if I get assigned and we’re still at these low prices, I can sell the 100 shares at market and take the loss and buy LEAPS (your #2).
Thanks for posting this. I was pondering this exact question for myself. Not sure if margin is a factor for you, but I'm almost thinking a split between 1/2. #1 is straightforward, defer this madness to a much later point in time, collect credit and wait on a recovery (but tying up capital). #2 would free up capital and limit your losses, still provide upside, and also allow you to write calls against.
Even though i'm not overleveraged, this drawdown has been exhausting and I can feel the impacts on other area's of life (work/family life/parenting).
When I look at the value of the Puts I have to buy back to free up some margin, I realize I should have bought Puts instead. Oh well, one year of salary threw in the garbage to learn that mistake. Not fun to view the total value of my portfolio collapse 50% in 1 month. The only way I see a way out is to roll as far as possible and slowly BTC losing Puts position to free up some margin and let the stock recover. However, this free fall with a bottomless barrel is not fun. Everyday I am closing 10% OTM CCs for 80% profit and selling new CCs. While my puts are drowning in the abyss. Starting to play some
when the titanic is sinking without hitting an iceberg.
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My NOT-ADVICE
It is sad to me (now) that my answer 2 months ago and today has changed.
Were I in this situation, today, with only the CSP at work, then I would either do 1 or 3. Because either way you continue having no leverage in the form of margin or call purchase. (2 months ago I might have been in favor of buying a Jan '24 call, though I even then I would have been closer to a $500 strike).
One idea I've begun toying with but haven't had the chance to play with yet, is using the proceeds from some rolls or option sales, to fund the improvement of a contract. Let's make up a situation ... If you have 10 of those, can you roll 9 of them straight out for a large enough net credit to improve the strike on the remaining contract? Maybe that's an approach that will start improving at least 1 of those contracts and is a net desirable idea for your situation. You'll still have a lot of capital tied up for who knows how long.
Or alternatively are you also selling covered calls? Maybe take some of those cc credits and use them to fund the put contract strike improvements.
But mostly these days I would be thinking #3. The mindset behind the scenes, at least for me, with CSPs has to be that I'm selling the contract at a strike I'm ready to be assigned at. I try to avoid assignment via rolls and possible using net credits from elsewhere to fund net debits to improve the strike and avoid assignment. But the underlying assumption - ready to take assignment. So run the wheel - buy the $1100 cost shares, and start selling cc using the shares and get a bit more per week in credits vs. the credits earned from DITM puts.
For that to work out overall you need to be on guard against a sharp run up in the shares trapping your cc at a low strike. Again this example - you take delivery of $1100 cost shares and sell $800 strike cc (shares in the 760s). The share price reverses hardcore though to $960, the $800 strike calls are unrollable and the shares keep going. Now you're looking at selling for $800 what you bought for $1100. That is the same loss you're looking at to BTC right now, so this is a form of roll that buys time and gives you more control over how it all turns out.
Again for myself in order to avoid this situation (I've been in it before), I sell both csp and cc, so I'm earning money on both sides as long as I avoid going DITM on both sides (inverted strangles - they are their own topic). I can use the earning on 1 side to pay for strike improvement on the other side. And then, to further improve my odds of long term success, I need to balance my actual income with risk of going too DITM (by paying for the strike improvements). Having a personal $/contract target lets me use all of the excess to pay for those strike improvement / risk mitigation rolls. So pay the piper on strike improvements, keep the credits rolling in, and stay close enough to the money that positions can be rolled in desirable ways.
Not to nitpick your post which includes many good points, but corporations constantly refinance debt by rolling it out or paying off with surplus cash, as Tesla has done and not unlike what we do here. Typically, the refinancings chase declining rates, so it will be different in a rising rate environment, but they will let only a small portion of long-term financings go full term. I assume there has been raising beyond near term needs in recent years as the interest rate pivot has been expected for years only to be delayed by various macro factors.
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I mentioned inverted strangles earlier and figured I'd post about this while its on my mind (cuz, you know, not enough treatises today).
Strangles are pairing up a short put with a short call somewhere OTM. These can be a balanced or an equal distance OTM. They can be unbalanced - a strangle is a short put plus short call and perform optimally in a sideways market.
The inverted strangle is a bad situation that can be arrived at via rolling on either side. It is what it sounds like - the put strike is higher than the call strike, so both are ITM. When the size of the inverted strangle is small enough, then for me at least its not a problem. Both sides will be rolling closer to the money and 1 side or the other will resolve - its inevitable.
Example - if I had a $100 inverted strangle with the share price exactly in the middle, then I have both sides $50 ITM. I can probably get a $30 strike improvement on each side and now I'm in a $40 wide inverted strangle.
The big problem here is to get into a wide enough inverted strangle that neither side can be rolled for a strike improvement, and THEN the shares decide to go sideways. Ask me how I know
The resolution to this problem that I have in mind right now, that I didn't do last time, is to use the credits on the winning side while its winning, to pay for strike improvements on the losing side. Those strike improvements are how I prevent a future bad position from arising in the first place, or at least minimizing its chance. I suppose that it would be more accurate to say that I'll be a lot more aggressive about using the winning side credits to improve the losing side strikes.
When I say "use the credits" my intent is to use the immediate credits, along with previous net credits in excess of my target income level, to fund those strike improvements / risk reduction rolls. The first claim on the credits I'm collecting is the income level; the secondary claim is on risk reduction strike improvements. That target income is also chosen to be at the very low end of what my family can readily adjust to without great pain. I chose this level based on what we've been living on for years (and living well), so any expansion to income and available lifestyle beyond this "minimal level" is in our personal context, not a world / country context. In the world or even country context we're doing .. really well, even after how this year has started.
Strangles are pairing up a short put with a short call somewhere OTM. These can be a balanced or an equal distance OTM. They can be unbalanced - a strangle is a short put plus short call and perform optimally in a sideways market.
The inverted strangle is a bad situation that can be arrived at via rolling on either side. It is what it sounds like - the put strike is higher than the call strike, so both are ITM. When the size of the inverted strangle is small enough, then for me at least its not a problem. Both sides will be rolling closer to the money and 1 side or the other will resolve - its inevitable.
Example - if I had a $100 inverted strangle with the share price exactly in the middle, then I have both sides $50 ITM. I can probably get a $30 strike improvement on each side and now I'm in a $40 wide inverted strangle.
The big problem here is to get into a wide enough inverted strangle that neither side can be rolled for a strike improvement, and THEN the shares decide to go sideways. Ask me how I know
The resolution to this problem that I have in mind right now, that I didn't do last time, is to use the credits on the winning side while its winning, to pay for strike improvements on the losing side. Those strike improvements are how I prevent a future bad position from arising in the first place, or at least minimizing its chance. I suppose that it would be more accurate to say that I'll be a lot more aggressive about using the winning side credits to improve the losing side strikes.
When I say "use the credits" my intent is to use the immediate credits, along with previous net credits in excess of my target income level, to fund those strike improvements / risk reduction rolls. The first claim on the credits I'm collecting is the income level; the secondary claim is on risk reduction strike improvements. That target income is also chosen to be at the very low end of what my family can readily adjust to without great pain. I chose this level based on what we've been living on for years (and living well), so any expansion to income and available lifestyle beyond this "minimal level" is in our personal context, not a world / country context. In the world or even country context we're doing .. really well, even after how this year has started.
Absolutely true.
Also true that the interest rate environment will be different than the interest rate environment now.
The point that I'm raising on this specific idea, is that at refinance time, the Fed won't be in the market as such a very large lender (purchase of bonds). Put another way - debt that has been funded by the Fed for the last 2 years, will need to be funded by the private market the next time around. There won't be a $120B / month buyer in the market any longer, over and above the usual bond buyers. And there isn't a large single private buyer of $120B worth of bonds in the market, month after month, with the capacity to keep it up seemingly forever.
That'll be true starting in March actually as it becomes time for each bit of debt to be rolled over.
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