Wiki Selling TSLA Options - Be the House

[ZeApelido]

interesting article about selling PUTW (put-writes)... is OTM better? DOTM? ATM? ITM?

Selling Puts: The Good, The Bad And The Ugly

What accounts for put-write strategies' under-performance. How to fix put-write underperformance.

seekingalpha.com

Something is very wrong with that guys simulation. No way selling ATM puts beats owning stock when there is significant appreciation.

Selling puts has fundamentally the same outcome as buy / write CCs (outside of out call price & volatility differences).

 

[intelligator]

I don't know what to make of this other than there's a considerable amount interest/gamma broadly clustered between 850 and 950, call heavy. Tuesday morning's MMD was short lived, the plan was to close out the -850CC as part of a buy-write on shares bought yesterday at 896. At 881 I could have closed out at 20%... will try again today. The net credit on these if called away are $8. @BornToFly , tell me about paper loss with regard to shares called away pls.

If MMD doesn't bring price down to 880ish, I am going to roll to next week for a $5 improvement or same strike. The way I am thinking about rolls when ITM and price climbing rapidly, if I can gain credit greater than the strike improvement, the roll is still worth it. Is that an okay mindset?

Also expiring Friday are -775 CC from another buy-write that I don't feel I'll be able to roll out much more before the shares are called away. Those shares, however, I've collected credit since May via CC ... now close to $70, they were purchased at 660. It wouldn't be terrible, just missed appreciation by not BTC the CC at a loss early on. But who knew we'd move up so fast.

 

[adiggs]

Also expiring Friday are -775 CC from another buy-write that I don't feel I'll be able to roll out much more before the shares are called away. Those shares, however, I've collected credit since May via CC ... now close to $70, they were purchased at 660. It wouldn't be terrible, just missed appreciation by not BTC the CC at a loss early on. But who knew we'd move up so fast.

An observation - definitely not advice.

For those shares purchased at 660 as part of a buy-write trade, missing out on the appreciation is explicitly a tradeoff of this strategy. It'd be the same thing with a cash secured put - you're looking to earn the premium / credit, while knowing that if the shares take off that premium won't come close to the value gain from the share price change.

The way I look at it - if those 775 calls can roll for a big enough credit, then keep 'em rolling. But if that credit isn't big enough then its time to put a wrap on it and enjoy the big win. Lessee - buy 660, sell 775, and collect 70 credit along the way. That looks like $185/share ($18k per contract) position. I'll have a dozen please


Anyway - the hard thing for me about a buy-write is to think about the income from the credit, and ignore the appreciation gain missed on the shares. I can explain logically why this is the case and is good for the long term success. The problem is that my brain is wired to buy and hold shares. Forever. I'm getting over that, and it mostly involves focusing on the income and owning long term shares / leaps outside of the buy-writes. Then there is plenty of upside being captured alongside of the nice income from the buy-writes.

Good luck getting that mindset right!

 

[dl003]

interesting IV play, brought to my attention by accident

Play: Buy 100 TSLA @ 904 closing price
Sell 1450C @ 65
Buy 1450P @ 587
Net cost: 904 + 587 - 65 = 1426

You are GUARANTEED to be able to sell 100s for 1450 in June 2023. $24 profit per share guaranteed at the end. How is this possible?

This is basically a long share & synthetic short combo. This combo usually will COST you money to open, meaning you net cost will approximate 1450, a bit higher in fact due to dealer's spread. So why is it only 1426 for a 1450 guaranteed payout right now? Look no further than the recent IV spike in calls after Q2 ER. This 1450C is supposed to be no more than $40 at stock price of 904. It is 65 now because apparently everyone and their dog is in TSLA calls now.

What's the long term risk? None. Doesn't matter where TSLA ends up in June 2023, you WILL get 1450 per share.

Short term? Call IV can keep climbing and you will incur paper loss but this won't last long. As soon as whatever event being anticipated has come to pass, call premium will drop back down to where they should be and you can close this for an instant $2k-$3k profit. Selling the shares and closing the synthetic short at the same time.

Not recommended for a regular margin account as it can take up a lot of buying power. For an advanced margin account it will cost ZERO buying power/collateral/margin. You can just keep this till 6/2023. Well you have to pay interest to your broker of course. Most likely in 1-2 months when IV has dropped back down you can close it for a quick profit.

Can someone poke a hole in this?

 

[saniflash]

Really interesting
I have been trying to sell ITM and hold the strike however it seem it his the 2nd best return of investment from his analysis

great article, thanks @Yoona for sharing! I suggest to make sure to read the comments below it though and do a backtest yourself before you execute it, especially covering a longer time horizon (would include the GFC).

 

[saniflash]

interesting IV play, brought to my attention by accident
View attachment 835996

Play: Buy 100 TSLA @ 904 closing price
Sell 1450C @ 65
Buy 1450P @ 587
Net cost: 904 + 587 - 65 = 1426

You are GUARANTEED to be able to sell 100s for 1450 in June 2023. $24 profit per share guaranteed at the end. How is this possible?

This is basically a long share & synthetic short combo. This combo usually will COST you money to open, meaning you net cost will approximate 1450, a bit higher in fact due to dealer's spread. So why is it only 1426 for a 1450 guaranteed payout right now? Look no further than the recent IV spike in calls after Q2 ER. This 1450C is supposed to be no more than $40 at stock price of 904. It is 65 now because apparently everyone and their dog is in TSLA calls now.

What's the long term risk? None. Doesn't matter where TSLA ends up in June 2023, you WILL get 1450 per share.

Short term? Call IV can keep climbing and you will incur paper loss but this won't last long. As soon as whatever event being anticipated has come to pass, call premium will drop back down to where they should be and you can close this for an instant $2k-$3k profit. Selling the shares and closing the synthetic short at the same time.

Not recommended for a regular margin account as it can take up a lot of buying power. For an advanced margin account it will cost ZERO buying power/collateral/margin. You can just keep this till 6/2023. Well you have to pay interest to your broker of course. Most likely in 1-2 months when IV has dropped back down you can close it for a quick profit.

Can someone poke a hole in this?

without in-depth analysis, you're binding at least $904 in capital to achieve a $24 profit ~2.65% annual return which is below the 1 year T-Bill with a risk-adjusted return (risk defined as volatilty) that is much much worse than just putting it in such instrument (assuming holding the bond to maturity)

 

[jeewee3000]

interesting IV play, brought to my attention by accident
View attachment 835996

Play: Buy 100 TSLA @ 904 closing price
Sell 1450C @ 65
Buy 1450P @ 587
Net cost: 904 + 587 - 65 = 1426

You are GUARANTEED to be able to sell 100s for 1450 in June 2023. $24 profit per share guaranteed at the end. How is this possible?

This is basically a long share & synthetic short combo. This combo usually will COST you money to open, meaning you net cost will approximate 1450, a bit higher in fact due to dealer's spread. So why is it only 1426 for a 1450 guaranteed payout right now? Look no further than the recent IV spike in calls after Q2 ER. This 1450C is supposed to be no more than $40 at stock price of 904. It is 65 now because apparently everyone and their dog is in TSLA calls now.

What's the long term risk? None. Doesn't matter where TSLA ends up in June 2023, you WILL get 1450 per share.

Short term? Call IV can keep climbing and you will incur paper loss but this won't last long. As soon as whatever event being anticipated has come to pass, call premium will drop back down to where they should be and you can close this for an instant $2k-$3k profit. Selling the shares and closing the synthetic short at the same time.

Not recommended for a regular margin account as it can take up a lot of buying power. For an advanced margin account it will cost ZERO buying power/collateral/margin. You can just keep this till 6/2023. Well you have to pay interest to your broker of course. Most likely in 1-2 months when IV has dropped back down you can close it for a quick profit.

Can someone poke a hole in this?

without in-depth analysis, you're binding at least $904 in capital to achieve a $24 profit ~2.65% annual return which is below the 1 year T-Bill with a risk-adjusted return (risk defined as volatilty) that is much much worse than just putting it in such instrument (assuming holding the bond to maturity)

It's even worse.

You're using $142,600 to gain $2,400 in one year = 1.68% guaranteed return on invested capital. (not 2.65%)

So there is no hole to poke in the trade. It does guarantee returns, which is great, but they are low. Low risk, low profit. Only useful if you want a very safe investment and you believe the markets and interest rates will crash.

(I looked it up to be sure: in the case of bankruptcy of the underlying stock, or the stock reaches $0, the options are still settled for the underlying shares. So you would receive $145,000 selling price for the 100 shares, which have a market value of $0 for the receiver. That must suck for them .)

 

[OrthoSurg]

I've been spending more time thinking about taking the loss on the cc, over closing the entire position for a small profit. The small profit in the overall position would actually be a pretty decent out come - about +$60 between the leap STC (gain) and the cc BTC (loss).

In this particular instance I'm not thrilled with just rolling - if my thesis is right about the split then closing the short calls is a loss ($25) that will be made up very quickly by a rising share price - given that I follow through and sell the calls anyway as the shares go up.


The net for me, right now, is I'm sitting and watching. Each day that goes by, the less and less time value remaining in the position and the better the roll. The loss might be bigger or smaller depending on actual movements in the share price.

Sitting and watching, so far this week, is tough.

I could roll my 950CCs to next week 1000 Strike price for a small credit or close for a loss and open a totally new position on Monday. I am still hesitating to continue to do nothing and wait they get ATM before rolling. Max pain is at 850 but I am scared
of the potential effect of stock split announcement that could send the stock price steam rolling any interesting short term roll.

 

[Yoona]

today's High = 923 = today's R1 ceiling
View attachment 835833

TSLA: today's Close is the same as the price @ 10:26
SPY: today's Close is the same as the price @ 10:26

today's R1 = 924 and PM High 921 almost went there

 

[phantasms]

~920 seems to keep having some level of resistance the past few days. I wonder if I take a bit of a loss on my call and roll my 900c to 925c still for this Friday. I'm just nervous that maybe come Friday the stock falls back to 750. lol

I'm of the mind that they're not going to actually announce the split details at the meeting right after they get approval.

 

[dl003]

It's even worse.

You're using $142,600 to gain $2,400 in one year = 1.68% guaranteed return on invested capital. (not 2.65%)

So there is no hole to poke in the trade. It does guarantee returns, which is great, but they are low. Low risk, low profit. Only useful if you want a very safe investment and you believe the markets and interest rates will crash.

(I looked it up to be sure: in the case of bankruptcy of the underlying stock, or the stock reaches $0, the options are still settled for the underlying shares. So you would receive $145,000 selling price for the 100 shares, which have a market value of $0 for the receiver. That must suck for them .)

Yes and no.

It depends on how you define "capital." If you have a regular margin account and your buying power is reduced by the full amount, then it's true.

However, if you have a portfolio margin account, your buying power will not be impacted. More importantly, your *at risk* capital is $0. At risk capital is the most important factor because if you have no risk of losing any of the money, a sophisticated broker will not subtract it from your buying power.

2nd, this play can be structured in a way that zero cash will be tied up, thus leading to zero interest paid to the broker.

The synthetic short will stay.
However, you will replace 100s with a monthly DITM short put (2000p 1 month out for example). You will be paid the difference between 2000 and the current stock price upfront. Its delta will be 0.98. You will also be paid a small premium enough to cover the dealer spread.

This way, you will shell out zero cash. You can keep replacing the DITM short put every month until the IV crush has played out. Your buying power will not be impacted, neither will be your margin requirement.

Illustration:

Sell a 2400p 8/19 exp
Buy a 900p 06/2024
Sell a 900C 06/2024

The 2400 itself gives $150000 upfront
The 900 synthetic short gives another $5k <- pretty insane for an ATM synthetic short.
This $5k is a direct result of the recent call IV spike. As soon as IV gets back to normal, I'll pocket $5k
Instead of spending money to initiate this position, you will instead get $155k.
And get this, each position only increases my margin requirement by $3k

 

[MP3Mike]

However, you will replace 100s with a monthly DITM short put (2000p 1 month out for example). You will be paid the difference between 2000 and the current stock price upfront. Its delta will be 0.98. You will also be paid a small premium enough to cover the dealer spread.

This way, you will shell out zero cash. You can keep replacing the DITM short put every month until the IV crush has played out. Your buying power will not be impacted, neither will be your margin requirement.

And what happens when your DITM short put gets exercised early?

 

[BornToFly]

I don't know what to make of this other than there's a considerable amount interest/gamma broadly clustered between 850 and 950, call heavy. Tuesday morning's MMD was short lived, the plan was to close out the -850CC as part of a buy-write on shares bought yesterday at 896. At 881 I could have closed out at 20%... will try again today. The net credit on these if called away are $8. @BornToFly , tell me about paper loss with regard to shares called away pls.

I'm not sure what you're asking. I don't know if your brokerage adjusts the costs basis of the shares with the sale of the ITM CC. Either way I believe is zeros out in term of short term capital gains. Lose $46 on the shares but make $46 on the CC (+additional $8 of extrinsic). In the end it should show as $8 profit on the whole thing.

 

[dl003]

And what happens when your DITM short put gets exercised early?

You buy 100s. Immediately sell them and replace them with another DITM short put.

 

[jeewee3000]

Yes and no.

It depends on how you define "capital." If you have a regular margin account and your buying power is reduced by the full amount, then it's true.

However, if you have a portfolio margin account, your buying power will not be impacted. More importantly, your *at risk* capital is $0. At risk capital is the most important factor because if you have no risk of losing any of the money, a sophisticated broker will not subtract it from your buying power.

2nd, this play can be structured in a way that zero cash will be tied up, thus leading to zero interest paid to the broker.

The synthetic short will stay.
However, you will replace 100s with a monthly DITM short put (2000p 1 month out for example). You will be paid the difference between 2000 and the current stock price upfront. Its delta will be 0.98. You will also be paid a small premium enough to cover the dealer spread.

This way, you will shell out zero cash. You can keep replacing the DITM short put every month until the IV crush has played out. Your buying power will not be impacted, neither will be your margin requirement.

Illustration:

Sell a 2400p 8/19 exp
Buy a 900p 06/2024
Sell a 900C 06/2024

The 2400 itself gives $150000 upfront
The 900 synthetic short gives another $5k <- pretty insane for an ATM synthetic short.
This $5k is a direct result of the recent call IV spike. As soon as IV gets back to normal, I'll pocket $5k
Instead of spending money to initiate this position, you will instead get $155k.
And get this, each position only increases my margin requirement by $3k
View attachment 836075

Thanks for the insight.

My broker is very strict with margin therefore I don't have the luxury of these types of trades. (And it explains why I'm stuck in my "gotta have margin for everything"-thinking pattern.)

If I want portfolio wide margin I have to upgrade to 'professional' status meaning higher tax bill and broker subscription fees.

Once I retire from my day job I think I'll go that route. Until then I'm happy to be a private/retail investor on their platform.

But again, great strategy to take advantage of IV spikes it seems.

 

[Oil4AsphaultOnly]

You buy 100s. Immediately sell them and replace them with another DITM short put.

But in your example, aren't you buying the shares at 2400 each? Selling them right away nets you an immediate $1500 loss per share doesn't it?

 

[samppa]

Yes and no.

It depends on how you define "capital." If you have a regular margin account and your buying power is reduced by the full amount, then it's true.

However, if you have a portfolio margin account, your buying power will not be impacted. More importantly, your *at risk* capital is $0. At risk capital is the most important factor because if you have no risk of losing any of the money, a sophisticated broker will not subtract it from your buying power.

2nd, this play can be structured in a way that zero cash will be tied up, thus leading to zero interest paid to the broker.

The synthetic short will stay.
However, you will replace 100s with a monthly DITM short put (2000p 1 month out for example). You will be paid the difference between 2000 and the current stock price upfront. Its delta will be 0.98. You will also be paid a small premium enough to cover the dealer spread.

This way, you will shell out zero cash. You can keep replacing the DITM short put every month until the IV crush has played out. Your buying power will not be impacted, neither will be your margin requirement.

Illustration:

Sell a 2400p 8/19 exp
Buy a 900p 06/2024
Sell a 900C 06/2024

The 2400 itself gives $150000 upfront
The 900 synthetic short gives another $5k <- pretty insane for an ATM synthetic short.
This $5k is a direct result of the recent call IV spike. As soon as IV gets back to normal, I'll pocket $5k
Instead of spending money to initiate this position, you will instead get $155k.
And get this, each position only increases my margin requirement by $3k
View attachment 836075

Interesting.
so when would you exit the trade? And at exit you'd buy back the ditm put, right?

I guess there's a risk if stock drops that you can't buy the put back for 150k, instead it will cost you more?

 

[Yoona]

 

[dl003]

But in your example, aren't you buying the shares at 2400 each? Selling them right away nets you an immediate $1500 loss per share doesn't it?

No, because when I first sold the put, I'd have collected $1500 in cash so I incur no loss other than that resulting from the movement of TSLA (if TSLA drops $50 after I have sold the put, I'd lose $50 with or without the puts assigned to me).

 

[dl003]

Interesting.
so when would you exit the trade? And at exit you'd buy back the ditm put, right?

I guess there's a risk if stock drops that you can't buy the put back for 150k, instead it will cost you more?

This strategy is a zero delta and zero theta play. The DITM short put is fully hedged by the synthetic short. Neither of them has any theta.
This is purely an IV play. I'll exit when the event which has caused recent massive call buying has come to passed. IV always crushes then. In this case, call IV will crush while put IV is not impacted so the synthetic short would gain value WITHOUT any movement in the underlying.