Wiki Selling TSLA Options - Be the House

[adiggs]

What will you do if stock goes to 500 and stays there? will you sell cc against the buy-write at lower strike than you bought the shares for?

This is the big capital loss risk on a buy-write. In reality this risk is no different from any share purchase / call sale circumstance (share price goes so low that you want to stop selling calls at all until the share price rebounds).

The simple answer to your question - yes. Down at $500 - I probably take a break at -that- point

This risk is no different from selling CSP - the share price drops so far, so fast, that the puts go DITM and you're just rolling month to month (or whatever) waiting for the share price to recover. Or BPS for that matter.

In that sense, nothing different from what I would otherwise be doing. For me that mostly means that I don't buy shares using margin, so I can just hold the shares forever (which is generally what I plan around anyway).


But this particular trade and circumstance - I've been thinking more about that. Here in the 600s and 700s I'm not particularly worried. I'll be selling really aggressive cc's, steadily becoming less aggressive should they never have an OTM (or close) break even or profitable exit as the shares go down. Eventually (at 500 and stays there) I probably stop selling cc at all so I don't get caught out on the rebound. This is a risk, at this share price, that I'm fine with; its not any different from risks I'm already taking on. At such a low price there just isn't much room to drop.


But what if the share price was relatively high? If shares were 1100, do I open a new buy-write at that level? The answer I came up with is 'yes', but the structure will start different. I might buy shares at 1100 and sell the 1050 strike call (making up #s for the idea). Collect say $60 in up front premium with $50 of it ITM. If share price is flat to up, then I bought at 1100, sell at 1050, and collect a net $10 (a fantastic result for me).

If the shares came down to 1070 then I'd still be ITM and close the position. The net would be a short call with $60 entry, $20 exit, or $40 profit (wow!!!!). And if the shares dropped a lot - say 1100 down to 1000, then I keep the $60, and can sell something like the 1000 for another big credit. So I have a good start on rolling down with the shares if needed (credits offset unrealized share losses, to a large degree at least).

Then again I have that same risk with CSP - its just that I handle it differently on this side. I might even go really conservative and sell the 950 strike call for a $153 credit (again, made up example), as I'd be doing with a CSP. If I get a big drop then the income from this buy-write is going to explode - $ for $ for a pretty big window to the downside, while still earning the $3 if the shares are above $1100. H'mm - now I'm wondering if I'm doing something wrong in my math.


I guess the big negative (which will be a positive for me) is that these buy-writes will tend to be held to expiration, waiting for that time value to decay. Or a big move up that shrinks the time value.

 

[samppa]

This is the big capital loss risk on a buy-write. In reality this risk is no different from any share purchase / call sale circumstance (share price goes so low that you want to stop selling calls at all until the share price rebounds).

The simple answer to your question - yes. Down at $500 - I probably take a break at -that- point

This risk is no different from selling CSP - the share price drops so far, so fast, that the puts go DITM and you're just rolling month to month (or whatever) waiting for the share price to recover. Or BPS for that matter.

In that sense, nothing different from what I would otherwise be doing. For me that mostly means that I don't buy shares using margin, so I can just hold the shares forever (which is generally what I plan around anyway).


But this particular trade and circumstance - I've been thinking more about that. Here in the 600s and 700s I'm not particularly worried. I'll be selling really aggressive cc's, steadily becoming less aggressive should they never have an OTM (or close) break even or profitable exit as the shares go down. Eventually (at 500 and stays there) I probably stop selling cc at all so I don't get caught out on the rebound. This is a risk, at this share price, that I'm fine with; its not any different from risks I'm already taking on. At such a low price there just isn't much room to drop.


But what if the share price was relatively high? If shares were 1100, do I open a new buy-write at that level? The answer I came up with is 'yes', but the structure will start different. I might buy shares at 1100 and sell the 1050 strike call (making up #s for the idea). Collect say $60 in up front premium with $50 of it ITM. If share price is flat to up, then I bought at 1100, sell at 1050, and collect a net $10 (a fantastic result for me).

If the shares came down to 1070 then I'd still be ITM and close the position. The net would be a short call with $60 entry, $20 exit, or $40 profit (wow!!!!). And if the shares dropped a lot - say 1100 down to 1000, then I keep the $60, and can sell something like the 1000 for another big credit. So I have a good start on rolling down with the shares if needed (credits offset unrealized share losses, to a large degree at least).

Then again I have that same risk with CSP - its just that I handle it differently on this side. I might even go really conservative and sell the 950 strike call for a $153 credit (again, made up example), as I'd be doing with a CSP. If I get a big drop then the income from this buy-write is going to explode - $ for $ for a pretty big window to the downside, while still earning the $3 if the shares are above $1100. H'mm - now I'm wondering if I'm doing something wrong in my math.


I guess the big negative (which will be a positive for me) is that these buy-writes will tend to be held to expiration, waiting for that time value to decay. Or a big move up that shrinks the time value.

Very interesting idea, never really thought about intentionally selling ITM calls.

Meditate more on this I must.

 

[adiggs]

Very interesting idea, never really thought about intentionally selling ITM calls.

Meditate more on this I must.

Please do, and let me know what you come up with. Even if its about the same as I'm coming up with.

When I start thinking that something sounds too good to be true, my next reaction is that it is, and therefore I really don't understand it. And therefore, bringing to this thread and group of people is a good way to figure out what I'm missing.


I wonder if DITM call sales carry roughly the same time value as DOTM put sales (same strike)? H'mm..... - that's sort of what I'm thinking right now.

 

[vikings123]

Please do, and let me know what you come up with. Even if its about the same as I'm coming up with.

When I start thinking that something sounds too good to be true, my next reaction is that it is, and therefore I really don't understand it. And therefore, bringing to this thread and group of people is a good way to figure out what I'm missing.


I wonder if DITM call sales carry roughly the same time value as DOTM put sales (same strike)? H'mm..... - that's sort of what I'm thinking right now.

I tried this strategy back in Feb:Mar and it works well when the stock is not swinging wildly.

At these levels I believe it makes a lot more sense and is lower risk IMO.

So for next week I bought 200 shares @755 and immediately sold 2X 6/3 765 calls for about 20$. My max profit is limited to 3K per contract so about 6K for the original investment of 151k. If for any reason we drop on Tuesday I’m OK to hold these for more weeks and sell close to ITM calls.

One caveat is this strategy might not work in a taxable account where you cannot pick specific lots. I have heard some brokers will always do a FIFO.

 

[CHGolferJim]

I tried this strategy back in Feb:Mar and it works well when the stock is not swinging wildly.

At these levels I believe it makes a lot more sense and is lower risk IMO.

So for next week I bought 200 shares @755 and immediately sold 2X 6/3 765 calls for about 20$. My max profit is limited to 3K per contract so about 6K for the original investment of 151k. If for any reason we drop on Tuesday I’m OK to hold these for more weeks and sell close to ITM calls.

One caveat is this strategy might not work in a taxable account where you cannot pick specific lots. I have heard some brokers will always do a FIFO.

I switched into buy-writes after selling all my bonds several years ago. Even at $975/$1075 purchase price, I expect to get a 20% annual return which sure beats bonds and cash. Would like to exit the holdings asap though, and try to figure out a way to stay more liquid.

 

[vikings123]

I switched into buy-writes after selling all my bonds several years ago. Even at $975/$1075 purchase price, I expect to get a 20% annual return which sure beats bonds and cash. Would like to exit the holdings asap though, and try to figure out a way to stay more liquid.

Did you do the buy write when shares were trading at 975$? If so, how did you handle the volatility and the subsequent drop to 620$? Did you continue to sell weekly calls?

I remember my lot of 300 shares that I bought when SP was at 900$ were in the red obviously and I decided to “roll” them to slight ITM puts 3 months out.

 

[WattsHappening]

Employees can buy Tesla stock at a moderate discount during certain periods of the year. Elon and the board would want the split to be completed before that window closes, in order for each share to be lower in price.

I.e. a line worker may not buy a single share at $1200. But they might consider 3-4 shares if they are $120 each after a split.

Exactly. And @bkp_duke implied it with his post, but just in case, ESPPs allow purchases of full shares only, not fractional shares.

So imagine an employee who has $1,000 withheld for the ESPP in the six month window 3/1/2022 - 8/31/2022. If the lowest stock price was $600 during this window (I don't know what the lowest SP was, just an example), the employee would only be able to purchase 1 share prior to the split, for $510 (85% of $600). After a 10 for 1 split. the lowest price would be $60, and the same $1000 would be able to purchase 19 shares, almost double taking into account the split.

 

[CHGolferJim]

Did you do the buy write when shares were trading at 975$? If so, how did you handle the volatility and the subsequent drop to 620$? Did you continue to sell weekly calls?

I remember my lot of 300 shares that I bought when SP was at 900$ were in the red obviously and I decided to “roll” them to slight ITM puts 3 months out.

I wrote about it above if you want to search for an earlier post. Initially, I wrote b-w ATM on these shares, which became less and less lucrative as the SP dropped, so I thought to switch classification of these and some lower cost “core” shares. Now I think of the cost basis of these b-w shares as being much lower, and have started writing 1-week $100 OTM CC on those. Ha, no problem!

 

[adiggs]

Have you b-w pros ever opened a position with an ITM call? Like selling a 1050 call against $1100 shares that you just bought?

 

[saniflash]

I wonder if DITM call sales carry roughly the same time value as DOTM put sales (same strike)? H'mm..... - that's sort of what I'm thinking right now.

Normally puts are more expensive than calls because puts are generally in higher demand (all these institutions buying insurance). Might be different with TSLA, with all these speculators....

 

[BornToFly]

Have you b-w pros ever opened a position with an ITM call? Like selling a 1050 call against $1100 shares that you just bought?

I think if you believe the SP will drop, this is a great play. You make a killing if the SP drops under 1050. If it doesn't, you still made the time premium.

 

[mongo]

I think if you believe the SP will drop, this is a great play. You make a killing if the SP drops under 1050. If it doesn't, you still made the time premium.

If b-w is buy shares, write call, then isn't it the case that they only gain the time premium and if the stock goes below strike by more than time premium it's more loss? Stock is Delta of 1. Gains are capped by call.

TSLA Covered Call calculator

 

[adiggs]

If the shares came down to 1070 then I'd still be ITM and close the position. The net would be a short call with $60 entry, $20 exit, or $40 profit (wow!!!!). And if the shares dropped a lot - say 1100 down to 1000, then I keep the $60, and can sell something like the 1000 for another big credit. So I have a good start on rolling down with the shares if needed (credits offset unrealized share losses, to a large degree at least).

Thinking about buy-write dynamics, I think I've found where the free money came from (which doesn't exist - it means my math was wrong ).

In the example above I somehow arrived at a $40 profit if the share price moves towards the ITM call price. What I missed is that I also still own 100 shares, and those are still priced at 1100. I really end up with a $10 profit after also selling the shares I bought for 1100, losing $30 when I sell shares for 1070 that I bought for 1100.

If I were to keep the shares, then I retain $40 as a realized gain (BTC the short call for $20 that I STO for $60). I also retain a $30 unrealized loss. I end up with a $10 net profit regardless.

 

[treb]

I think if you believe the SP will drop, this is a great play. You make a killing if the SP drops under 1050. If it doesn't, you still made the time premium.

Why not just do a buy-write and sell an ATM call for the same price you bought the shares? June 3 ATM call premium is about $24. If the shares get called away on friday, there's very little capital gain or loss on the sale (depending on how close to the strike price you bought), and you keep the $24 premium. If the share price tanks before friday, then either hold the shares until the price recovers, or keep selling aggressive calls on it.

 

[BornToFly]

If b-w is buy shares, write call, then isn't it the case that they only gain the time premium and if the stock goes below strike by more than time premium it's more loss? Stock is Delta of 1. Gains are capped by call.

TSLA Covered Call calculator

If you buy shares at 1100 and immediately sell a 1050CC, the premium will be more than the $50 difference. If the SP drops below 1050, you keep the entire premium and the shares. Anything above that, your shares are called away but any loss is covered by the original premium. Yes, gains on an SP climb are capped to the time premium, but it is essentially a no-risk trade.

 

[mongo]

If you buy shares at 1100 and immediately sell a 1050CC, the premium will be more than the $50 difference. If the SP drops below 1050, you keep the entire premium and the shares. Anything above that, your shares are called away but any loss is covered by the original premium. Yes, gains on an SP climb are capped to the time premium, but it is essentially a no-risk trade.

Right, but you also have a loss on share value. Say premium is (based on $50 delta), $58. So you're up $8 dollars to start. Stock drops to 1050 at expiry, you keep the shares (or cash) worth $1050 each and the $58 = $1108, still only up $8.
Stock drops to $1000, you have $1000+$58 = $1058, better than just $1000, but not as good as the $1100 a share you paid to begin with. So there was a loss of $42 on the position. Gets worse the lower the stock price drops.

 

[adiggs]

Right, but you also have a loss on share value. Say premium is (based on $50 delta), $58. So you're up $8 dollars to start. Stock drops to 1050 at expiry, you keep the shares (or cash) worth $1050 each and the $58 = $1108, still only up $8.
Stock drops to $1000, you have $1000+$58 = $1058, better than just $1000, but not as good as the $1100 a share you paid to begin with. So there was a loss of $42 on the position. Gets worse the lower the stock price drops.

Yep. Definitely not risk-free. But the further ITM that you sell the cc at (for a buy-write), the more likely that you'll finish ITM, thereby earning the time value on the original sale.

I think the followup transaction would be to also close the original shares so all of the results are realized. Then do a new buy-write at the new (lower) share price.


closest to advice I have:
If these buy-writes sound interesting, then do some thinking about them, but also do a single (or at least small) position to get to know the dynamics.


I see something that behaves an awful lot like csp, but I think that I might like better. More likely it'll be something I put in the same basket (csp, bps, and now buy-write) and decide in the moment which one I like the best.

 

[mongo]

Yep. Definitely not risk-free. But the further ITM that you sell the cc at (for a buy-write), the more likely that you'll finish ITM, thereby earning the time value on the original sale.

I think the followup transaction would be to also close the original shares so all of the results are realized. Then do a new buy-write at the new (lower) share price.


closest to advice I have:
If these buy-writes sound interesting, then do some thinking about them, but also do a single (or at least small) position to get to know the dynamics.


I see something that behaves an awful lot like csp, but I think that I might like better. More likely it'll be something I put in the same basket (csp, bps, and now buy-write) and decide in the moment which one I like the best.

Yah, ITM return is fixed down to the strike, whereas OTM drops from stock purchase price (but increases up to the strike)
Sadly, the more ITM, the less the time value...

 

[CHGolferJim]

Have you b-w pros ever opened a position with an ITM call? Like selling a 1050 call against $1100 shares that you just bought?

I haven’t done it, but am thinking about it after this discussion. You could do multiple strikes say $50 ITM/ATM/$50 0TM, might be a way to improve liquidity, but it would also moderate/reduce returns.

 

[blckdmp]

Yep. Definitely not risk-free. But the further ITM that you sell the cc at (for a buy-write), the more likely that you'll finish ITM, thereby earning the time value on the original sale.

I think the followup transaction would be to also close the original shares so all of the results are realized. Then do a new buy-write at the new (lower) share price.


closest to advice I have:
If these buy-writes sound interesting, then do some thinking about them, but also do a single (or at least small) position to get to know the dynamics.


I see something that behaves an awful lot like csp, but I think that I might like better. More likely it'll be something I put in the same basket (csp, bps, and now buy-write) and decide in the moment which one I like the best.

I'm not sure there's any advantage to the ITM buy-write, when compared to a CCP. If my math below is correct, it looks like a worse risk to me.

Quick example using Friday close info and assuming total liquidation of the position at expiry.
1)
$100 ITM buy write for June 10th
- pay $76000 for 100 shares
- sell 660c Jun 10 for $10800

At expiry:
If SP > $660, shares are called away, you keep $800. Liquidation P/L: $800
If SP < $660, you keep $800, but your shares are at least $10000 underwater.
With closing SP of $660, Liquidation P/L: -$9200
With closing SP of $600, Liquidation P.L: - $15200


2)
$100 ATM CCP for June 10th
- sell 660p Jun 10 for $800
At expiry:
If SP > $660, you keep $800: Liquidation P/L: $800
If SP < $660, you keep $800, but you now have to buy shares for $66000.
With closing SP of $660, liquidation P/L: $800
With closing SP of $600, liquidation P/L: -$5200