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Wiki Selling TSLA Options - Be the House
- Thread starter adiggs
- Start date
Why would they execute a put instead of selling it and getting the time value? (Even if it is only a few cents per share.) They are throwing money away...
This is the part that does not make sense. Why exercise now if you are bullish? Wouldn’t you rather just sell the put?
The only thing I can think of is there must be a tax incentive. If the shares are held for over a year and you exercise your ditm puts you are realizing the gains from the puts and being taxed at long term capital gains. If you instead sold the puts they are taxed at short term capital gains even if they were held over a year
Agree with this but still not convinced how we make the conclusion that this is bullish.
There is a lot of talk about why executing a put is bullish. I don't think it is. It's a neutral / somewhat bearish outlook.
It's the same as taking profit on shares. All it means is the person who owns these shares has had enough one way or another and wants to exit the position. Either way they've made a profit. The contract was only 10 days until expiry. It's not that far away. There was a post on reddit about someone getting assigned shares from a put contract expiring in 2024. Now that one was weird.
As for the theory that they had no shares to begin with and are now short 100 shares. It's possible. That would represent a bearish outlook (Not neutral).
Either way, none of these are bullish in any way.
It's the same as taking profit on shares. All it means is the person who owns these shares has had enough one way or another and wants to exit the position. Either way they've made a profit. The contract was only 10 days until expiry. It's not that far away. There was a post on reddit about someone getting assigned shares from a put contract expiring in 2024. Now that one was weird.
As for the theory that they had no shares to begin with and are now short 100 shares. It's possible. That would represent a bearish outlook (Not neutral).
Either way, none of these are bullish in any way.
I don't think it's bullish. If anything the person exercising is possibly thinking the chance of a lower share price is not high enough to offset the tax benefit of exercising. In that sense maybe this is mildly bullish. More than anything I would see this as them seeing a better opportunity they want to put their cash into.
I'm in the camp of "early assignment of puts is not bullish".
I can see two reasons for the increased level of early put assignments:
- As long as there's time value in an option it makes more sense to sell the option in the open market to close it out, and sell the shares separately.
- HOWEVER exercising an option is free AFAIK so you as the exerciser could save money if the commissions for a sale of the shares are higher than the remaining time value in the option.
- It does not make sense to buy shares to exercise the put option -- why would you do that? Not only throw money away on the time value but also on the commissions on the share purchase? (*)
- If you as the holder exercise the put option in order to go short the underlying, then that's bearish because you expect the share price to drop further so you can buy back the underlying at a price lower than the price at which you went short.
I can see two reasons for the increased level of early put assignments:
- Longs getting margin called / those puts being auto-exercised by brokers.
- (I believe the following could be a major contributor). Too many people writing BSP's over the last months (when SP was at 900, 1000 and it looked unlikely we'd go down to the 600 handle again) and being underwater big time. Once enough early assignments happened to some of these folks, brokers might auto-exercise the BSP's long leg, and those assignments might flow through the system (from one BSP writer to the next) like dominos falling.
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After thinking about it my earlier guess that the stock was held for over a year doesn't make sense. Although possible I think it's unlikely.
I believe what they're doing is delaying taxes and maintaining a bearish trade. By exercising the puts they are deferring realized profits on the itm puts by opening a short position at the put strike price. This would not be a taxable event. If they believe the stock will trade lower in a year or longer they can eventually close out the short for a long term capital gain rather than simply closing out their previous put trade and paying short term capital gains.
I believe what they're doing is delaying taxes and maintaining a bearish trade. By exercising the puts they are deferring realized profits on the itm puts by opening a short position at the put strike price. This would not be a taxable event. If they believe the stock will trade lower in a year or longer they can eventually close out the short for a long term capital gain rather than simply closing out their previous put trade and paying short term capital gains.
If those puts were bought for protection, selling the put might create an instant margin call.
Thus you need to exercise it and sell the shares, cash gives more margin.
One possible reason to early exercise..
Thus you need to exercise it and sell the shares, cash gives more margin.
One possible reason to early exercise..
AquaY
Member
Not necessarily.
if you do the math of DITM puts with low extrinsic value you will see some will be at levels that exercising the put may be slightly more profitable than selling the stock in the market and selling the put.
All depends on execution, commissions and fees . The bid offer of the stock and the bid offer of the put.
you usually Cant get the offer price when you sell and often not even the mId point..
even short term interest rates matter
early assignment happens more on puts than calls because what happens with a put?
you get cash. So if you want the cash to invest in something else or even get higher short term interest you may give up Pennie’s of time value
corduroy
Active Member
Thinking more about legging into the buy-write. Why not take it one step further, sell an aggressive CSP, get assigned, then sell the CC - aaaand we are back to the wheel.
if sp drops too low and STO CC is no longer profitable, an alternative is to "repair the stock" by lowering the breakeven:
Stock Repair Strategy Guide [Setup, Entry, Adjustment, Exit]
Stock repair is an options strategy used to help recover losses from a long stock position. Learn more with Option Alpha's free strategy guide.
optionalpha.com
"
Stock Repair
Stock repair is a multi-leg options strategy used to help recover losses from a long stock position that has moved down in price.Stock repairs have limited profit potential, and while they do not define risk to the downside, the ratio spread-like structure lowers the break-even price on a long stock position held at a loss. The income collected from selling the spread helps increase the probability of recovering from the loss of the long stock position. A stock repair may be entered at no cost or for a credit.
Stock Repair Outlook
The stock repair strategy is utilized when an investor has incurred losses on a long stock position and wants to reduce the necessary price increase required to break even. The strategy limits future upside potential but is an alternative to simply holding the shares and waiting for the stock price to recover and/or adding shares to lower the original trade’s cost basis, which requires risking more capital. However, the best the stock repair strategy will do is break even on the original trade, but this comes at no further downside risk than already owning the shares of stock.Stock Repair Setup
Stock repair is a call ratio spread and consists of buying an at-the-money call and selling two out-of-the-money calls at a higher price for every 100 shares of stock owned. All three options have the same expiration date. The strategy is used on a stock position that has an unrealized loss in an attempt to reduce cost basis and increase the chances of breaking even."
for ex: buy underlying at 1000 then sp drops to 650; selling CC at 1000 is not profitable and selling CC at 750 is risky; then repair the stock
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Glad I learned from past mistakes and didn’t sell calls at the very bottom, now I’m trying really hard not to sell any on the first leg up.
I sold 8x $740 at $1.03 for tomorrow... hopefully I don't regret this 
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