Wiki Selling TSLA Options - Be the House

[Matias]

Even "buy and hold share" is such a bet. You bet the company does not go bankrupt and will have an addressable market that will still generate income and makes it worth something. There is no safe investment. Even if you put the money under your pillow it will wither away from inflation.
There is only different degrees of risk - and a fair risk/reward, because markets are efficient.

Stock market is a random game of imperfect information. Akin to poker. Mathematically poker is also zero-sum. But yet still people make a living with playing it. There is a saying: you don't play the cards, you play the table.

Stock market is the same. If you have an information edge over others (because you love things and research like crazy) you can capitalize on that. Or you get insider information directly.. i.e. look into the others cards at the poker table

This is true. But stocks have returned an average of 6.5 percent to 7 percent per year after inflation over the last 200 years. So, one can be rather sure, that a well-diversified stock portfolio over several decades will yield something like that.

Poker example is actually very good regarding the option market. It is true, that some particularly skilled player may constantly earn in poker, but when we look at the players in the poker table as a whole, it is a zero-sum game, actually the total sum for the players is negative as house takes its rake on every deal, akin to a broker, who takes its share of every option trade.

So yes, it is possible to get constant gains with the options trade, but in order to do that, one has to be better at predicting stock movements than market participants in general.

 

[Knightshade]

I don’t have any problem with the zero sum if I’m the player collecting the 1 dollar more than 50% of the time. My point is, why would one player more than 50% of the time be the one getting the one dollar? Because stock market is random walk, eventually profits and losses with this kind on trades should cancel each other out?

So others have touched on some points here, but there's 2 others I want to mention:

1) Sometimes these transactions end up with more than player A or B involved.

For example on Monday I (player A) sell someone (Player B) a 20% OTM put for $1 a share, collecting my weekly 1% ROIC that I hope adds up to >50% annually.

On Wednesday some bad econ data comes out, dropping the share price 10% from Mondays open. That put is still OTM, but its value has gone up measurably from when I sold it. Player B might choose to -sell the existing put- to Player C (who might be buying it for a number of reasons- more on that in a minute- or might be a market maker with an obligation to buy it for liquidity or hedge reasons).

It may well change hands multiple additional times throughout the period to expiry.

When that happens- it doesn't change the $1 I got at all. I don't care who holds the put-(and it's not even "really" tied to me, assignments are random at the end if they get assigned)-- so I only care that it ends OTM.

But assuming only the 1 extra hand change, you still end up with TWO people who made a profit, and 1 who lost. (arguably more than 2, since the brokers involved collected fees with each transaction)



2) Sometimes people are buying those options from you NOT specifically as a bet in a vacuum. It might be that when you sell a 20% OTM put and buy a 30% OTM put to make a spread....someone else is buying that 20% OTM as the long half of THEIR more aggressive spread where they also sold a 10% OTM put as the other half-- which if it works out for them nets them MORE than the $1 they paid you. Or it's someone doing it as a hedge or it's an MM doing it for that or because they're required to provide liquidity. Not everyone is paying you that $1 specifically to try and make more than $1 off just that transaction.

This is true. But stocks have returned an average of 6.5 percent to 7 percent per year after inflation over the last 200 years. So, one can be rather sure, that a well-diversified stock portfolio over several decades will yield something like that.

You might wanna read what Warren Buffett has said about Diworsification.

It's a hedge against ignorance.

The best strategy to his mind is- find a very small # of great companies. Own them for a long time.

Only if you're unwilling, or unable, to do that should you go to the second best option- which is just buy a low-fee index fund and not worry about understanding anything. Returns will be measurably worse, but it is easier.


As to the gambling analogies- there's a reason for the thread title here

 

[saniflash]

options are not zero sum. MM's earn the spread between the bid and the ask and, at least in theory, are completely hedged.

So, in other words, they manufacture the financial product by means of abstracting the complexity (including the compute power, mathematical models, raising and retaining the capital required for the hedge, etc.) behind it, and for that they charge a margin that is calculated as ask-bid

 

[phantasms]

Query.

I recall that the last time I was selling calls before earnings I had sold them on the Friday before in hopes of capturing as much time value as possible. Then, I was very surprised that even though the stock price stayed about the same, the call option value went way up a day or two before the call due to IV increase. I would have though that such an IV increase would have been baked into the following week as it's no suprise that they were going to release results and have the call. What's up with that?

Getting to the point, do you professionals agree it's best to not sell the calls now and instead wait until Tuesday or so, time value be damned?

Much appreciated!

 

[saniflash]

Query.

I recall that the last time I was selling calls before earnings I had sold them on the Friday before in hopes of capturing as much time value as possible. Then, I was very surprised that even though the stock price stayed about the same, the call option value went way up a day or two before the call due to IV increase. I would have though that such an IV increase would have been baked into the following week as it's no suprise that they were going to release results and have the call. What's up with that?

Getting to the point, do you professionals agree it's best to not sell the calls now and instead wait until Tuesday or so, time value be damned?

Much appreciated!

I have made the same observation, anecdotally, around the P&D report, that IV continued to creep up substantially in the few days before the release despite the date already being known for a longer timeframe before.

 

[Chenkers]

Query.

I recall that the last time I was selling calls before earnings I had sold them on the Friday before in hopes of capturing as much time value as possible. Then, I was very surprised that even though the stock price stayed about the same, the call option value went way up a day or two before the call due to IV increase. I would have though that such an IV increase would have been baked into the following week as it's no suprise that they were going to release results and have the call. What's up with that?

Getting to the point, do you professionals agree it's best to not sell the calls now and instead wait until Tuesday or so, time value be damned?

Much appreciated!

You also have to factor in any FOMO and rising share price leading into earnings. This will typically increase the options value substantially above the Friday price, along with increasing IV.

 

[Matias]

You might wanna read what Warren Buffett has said about Diworsification.

It's a hedge against ignorance.

The best strategy to his mind is- find a very small # of great companies. Own them for a long time.

Only if you're unwilling, or unable, to do that should you go to the second best option- which is just buy a low-fee index fund and not worry about understanding anything. Returns will be measurably worse, but it is easier.


As to the gambling analogies- there's a reason for the thread title here

Of course the best strategy is to pick few stocks that will go up . But very few people are Buffets.

 

[Matias]

options are not zero sum. MM's earn the spread between the bid and the ask and, at least in theory, are completely hedged.

So, in other words, they manufacture the financial product by means of abstracting the complexity (including the compute power, mathematical models, raising and retaining the capital required for the hedge, etc.) behind it, and for that they charge a margin that is calculated as ask-bid

Also in poker table the house takes the rake in every deal. But to players it is zero-sum game.

 

[Knightshade]

Of course the best strategy is to buy stocks that will go up . But very few people are Buffets.

FWIW while that's true I think the reason for that is more most people are too lazy to put in the work than it is most people aren't magical stock picking geniuses.

The 3 great companies I've made the most on are AMD, Apple, and Tesla. I don't think any of those wins required being a super genius- Hell Apple near the bottom had a market cap that was basically equal to their cash on hand.... "the market" was valuing the actual company including everything they physically owned at basically 0 which made NO sense to me.... It just required putting in the work to understand the company and why it was a great place to put $ earlier than the general "market" did so.

Also in poker table the house takes the rake in every deal. But to players it is zero-sum game.

Zero sum in total-- but positive EV over time for the better players.

The guy who is paying attention to others at the table for example versus the guy who is just playing his own hand.

Or in these terms- the guy who knows the likely range of the stock in a given week versus the guy who is just YOLOing OTM options buys.

 

[Matias]

So others have touched on some points here, but there's 2 others I want to mention:

1) Sometimes these transactions end up with more than player A or B involved.

For example on Monday I (player A) sell someone (Player B) a 20% OTM put for $1 a share, collecting my weekly 1% ROIC that I hope adds up to >50% annually.

On Wednesday some bad econ data comes out, dropping the share price 10% from Mondays open. That put is still OTM, but its value has gone up measurably from when I sold it. Player B might choose to -sell the existing put- to Player C (who might be buying it for a number of reasons- more on that in a minute- or might be a market maker with an obligation to buy it for liquidity or hedge reasons).

It may well change hands multiple additional times throughout the period to expiry.

When that happens- it doesn't change the $1 I got at all. I don't care who holds the put-(and it's not even "really" tied to me, assignments are random at the end if they get assigned)-- so I only care that it ends OTM.

But assuming only the 1 extra hand change, you still end up with TWO people who made a profit, and 1 who lost. (arguably more than 2, since the brokers involved collected fees with each transaction)

If two people both earn one dollar and third person loses 2 dollars, sum is still zero.

 

[saniflash]

If two people both earn one dollar and third person loses 2 dollars, sum is still zero.

Ok agreed, in this sense it's a zero-sum game. I was referring to economical value generation contributing to GDP

 

[BornToFly]

At the open today I bought 1,000 shares at 723 and sold 700 strike CC for next Friday for $45. So I made a guaranteed $22,000, and it can increase to $45,000 if we close below 700 next Friday (where I keep the shares and then can sell anything above a 680CC to make more money). Covered Calls on shares you are willing to sell are the safest and easiest way to make money.

 

[BornToFly]

For the folks that bought shares at a higher strike and are now paying margin interest. I think the best option is too be patient (in other words not try to make the whole situation go away today), and instead sell safe covered calls (CC) on those shares to cover your Margin Interest payments (Which are tax deductible). So if you bought shares at 1,000 and are no longer looking to make money on those shares, the easiest thing to do is sell Jun 2024 Covered calls at $1,000 strike, and see if the premium covers your margin interest payments for the next 1.5 years. If you have the knowledge to roll, you can sell 800 strike CC with Jun 2023 expiration, and then roll up and out if they get In The Money (ITM) (but while this maybe more profitable, if you are new to options this could lead to an execution error that makes you lose money). Or, get even more aggressive and sell weekly CC (every Monday morning for Friday) against those shares that are only 20% Out of The Money (OTM = above the Monday morning stock price), but then you are trading and/or rolling every week, and can definitely make a mistake if you are new to the game.

 

[BornToFly]

Matias - You can definitely make money with little risk every week if you don't get greedy/make mistakes. I had a few bad weeks in the last 12 months where I got too aggressive because I accurately predicted Tesla earnings (with the help of the Accountant and others), but did not predict the markets opposite reaction to the news, was too close to the stock price, AND I did not take a small loss before it turned into a big loss (because I was stubborn and believed the market would be logical and reverse). It is a learning process and you will lose money a few times on "black swan" events before you learn your lesson. I am still sitting on some of those losing positions which now expire in December. But I have been making money every single week besides those few bad ones, and I will not make those same mistakes again in the future. Done correctly, we don't have to predict the stock movement. We just have to sell options to others, who think they can, that are far enough OTM to never become a problem.

 

[TheTalkingMule]

We just have to sell options to others, who think they can, that are far enough OTM to never "never" become a problem.

One slight emendation.

 

[adiggs]

At the open today I bought 1,000 shares at 723 and sold 700 strike CC for next Friday for $45. So I made a guaranteed $22,000, and it can increase to $45,000 if we close below 700 next Friday (where I keep the shares and then can sell anything above a 680CC to make more money). Covered Calls on shares you are willing to sell are the safest and easiest way to make money.

A few comments - mostly for others reading about buy-writes here and thinking "free money"!!

If shares stay above 700 and you full close the position (STC shares, BTC call) then you will earn $22 ($45 - $23 intrinsic at open; or the $22 extrinsic in the position at open). This result happens at all share prices above 700 (the call strike). You can see why I like buy-writes so much

For those wondering about how this is true, do the math on a closing share price of say 710 and 810. It's an interesting exercise.


However should the shares drop below 700 you do earn $45 on the calls as they finish OTM BUT you haven't earned $45. Well technically you have but you ALSO carry a $23 unrealized loss in the shares. You've got risk in the shares that aren't yet closed. I personally would love that outcome - sell more cc using those shares for a second round. But the position hasn't ended with a $45 gain instead of a $22 gain.


I like that position. Has me thinking of wrapping up my current buy-write and starting a new one...

 

[BornToFly]

However should the shares drop below 700 you do earn $45 on the calls as they finish OTM BUT you haven't earned $45. Well technically you have but you ALSO carry a $23 unrealized loss in the shares. You've got risk in the shares that aren't yet closed. I personally would love that outcome - sell more cc using those shares for a second round. But the position hasn't ended with a $45 gain instead of a $22 gain.

Correct, which is why I like Buy/Writes a lot more near the one year lows, and not so much near ATHs. I think I can earn a good premium selling 690 or 700CC the following week if we close under 700 next week.

 

[BornToFly]

MM are doing everything they can to keep us close to Max Pain today (715). Severely underperforming the NASDAQ right now, and EV leaders F and GM....

 

[JustMe]

MM are doing everything they can to keep us close to Max Pain today (715). Severely underperforming the NASDAQ right now, and EV leaders F and GM....

That makes sense

The VWAP at $719 now has been a resistance line. If we break above that, it would be bullish and we could have a decent run. It’s very close now.

 

[adiggs]

Closing up some buy-writes for this week, these are 705 share purchase and 680 call sale.

If I let these expire worthless then I'll get a credit of $680 to go with the opening debit of 667 (705 purchase and $38 call sale). Given that theoretical outcome and my strong desire to actively close rather than wait on expiration, I've tried out a couple of early closes.


I just learned that I can get a nearly instantaneous fill at 679.90 (paying .10 to close early). The early close frees up resources to start a new position for next week - like that one @BornToFly just opened.

At the same time the 679.95 has not filled and still hasn't after 15 minutes. Last week the .20 I offered also filled instantly. I could probably tighten down on that window - maybe .08 fills almost instantly? I like the .10 close - its part of opening the position and then ignoring it, for the most part, until nearly the end of the week.

Also worth noting - when I figure out my target income for each position, I assume that I give back $1 for an early close. I might close on a Thursday this way