Wiki Selling TSLA Options - Be the House

[EVNow]

That's @adiggs and @EVNow for covering safety! This week I netted .14 out of a target of .50; position totals aim to be in a range of .60 to .75 . Instead of % OTM (may need to add that dimension too) I've been choosing .05 or less delta for weeklies and found that most my trades can be closed early with 90% gains. I did exactly that with an IC, each leg at .05 delta, being close to 220, I had to move it up by $15 and out to 11/17 for credit.

I was selling IC for a while - but that’s actually taking a lot more risk. My current plan is to sell CC against shares and CSP against cash. So, that I’d have no actual capital losses - only on paper if assigned.

With as much insight that we gain through our own sharing, what seems to be safe eventually fails to be. As has been said by many, close on sharp momentum shift, reset with another position or sit out.

Yes, with any return there is risk. What I’m trying to figure out is how to manage it. One important aspect of that is to figure out when the momentum shift happens and how to manage options.

So, how do you figure out when the momentum shifts ? For eg. this week in hindsight it was on Wednesday. But it could have easily reversed on Thursday or Friday. But didn’t! That is the crux of the matter - how do we know it’s a sustained momentum shift vs a one day shift. Ultimately it is unknowable, I guess.

 

[EVNow]

at this point in the cycle, the next mk crash probably is not gonna be caused by yield. I dont follow US10Y that closely but it was peaking for sure. In recessions, mk bottoms *after* rate cuts, which means in the later stage, US10Y and SPY *both* go down at the same time. If we truly have a soft landing, then lets revisit.

Yes, this is what the TA guy they bring on CNBC was saying as well. Yield down, SPY down.

 

[dl003]

Interesting. I feel like the current macro situation is tied to rates hand in hand. The longest bull run in history was tied to there being no good alternatives to equities and the availability of cheap money. The volatility introduced to the market for the past 2 years were tied directly to the fact that this is reversing in one of the most violent way possible. The actual economy is kicking a lot more ass than expected because this trauma of having one of the fastest rate hikes in history is not even bringing down gdp growth or the job market. There's a good portion of rates that is just speculation and bond shorting which would result in a short covering unwind if you truly feel that rate hikes are done. This actually is very bullish for the market as there's incredible pent up demand when real rates for mortgages/cars drop 2%.

So TA on treasures I feel is required for any future predictions on spy.

I've never had to look at the SPY or US10Y chart to predict on TSLA and I seem to be able to figure it out alright.
I trade with people who consistently make money on SPY no matter up, down, sideway or choppy. They don't really care about future prediction. Everyday they trade the chart and then go home, figuratively.
Don't get paralyzed by the notion that the future is hard to predict. It's easy if you know what you trade very well. If the market is really tied at the hip to US10Y, then one can deduce that they can make prediction on US10Y by looking at the SPY or TSLA chart. It's a 2 way street.
TA on treasuries is not required to predict TSLA. Maybe it'll help you go to sleep at night, thinking you've got the future all figured out.
In trading, knowing more or thinking you know more is not always better. Knowing a few things very very well is.

 

[EVNow]

I feel like the current macro situation is tied to rates hand in hand.

Yes - in the sense stock market has been unreasonably strong and reacted to bond markets recently. Infact so many were even predicting rate cuts this year a few months back !

We now have 3 or 4 things all tied together - inflation, recession, fed rates, treasury yields and stock market. They will all react to each other in predictable ways but at unpredictable times. We still have not seen real estate shock because of mortgage rate increase. We don't know if and when that might happen.

 

[FlamingPIG]

I've never had to look at the SPY or US10Y chart to predict on TSLA and I seem to be able to figure it out alright.
I trade with people who consistently make money on SPY no matter up, down, sideway or choppy. They don't really care about future prediction. Everyday they trade the chart and then go home, figuratively.
Don't get paralyzed by the notion that the future is hard to predict. It's easy if you know what you trade very well. If the market is really tied at the hip to US10Y, then one can deduce that they can make prediction on US10Y by looking at the SPY or TSLA chart. It's a 2 way street.
TA on treasuries is not required to predict TSLA. Maybe it'll help you go to sleep at night, thinking you've got the future all figured out.
In trading, knowing more or thinking you know more is not always better. Knowing a few things very very well is.

I see that Bruce Lee have taught you too
"I fear not the man who has practiced 10,000 TA once, but I fear the man who has practiced one TA 10,000 times."
- Finance Lee

 

[adiggs]

Couple of questions before we get to other things. What delta / % OTM do you write options ?

I used to use .16. I've evolved to the point that I mostly don't look at delta / %POP / %OTM - its more of a feel thing. That being said I prefer the emotions from being further OTM (.08 to .13 delta?) over the higher premiums from being closer.

Sounds like a good plan. So, if the SP goes against you and comes close to strike (say with 1% or 2%), you would roll it. In this week's example, would you roll 220 calls on Thursday when we can to 218 / 217 or even 215 ?

In the specific instance of 220 calls and my situation, yes. For me I've got shares that selling at 250 would be just fine. But selling at 220 - its well worth rolling at least to 250 before letting them go, so I'd roll those really early at a hint of challenge. Probably not as early as 215, but definitely 218-219. Of course later as well, but I prefer rolling while still a bit OTM.

As a different example I had 200 strike puts expiring this Friday. They were ITM early / mid week and I didn't consider rolling them, even for a moment. In their case I wanted to buy shares at $200 if they were offered, and I'd accept the put premium as income for that opportunity. Shares could have fallen to $160 and I wouldn't have attempted a roll - just take the shares.

So a big part of my roll decision making is how close I am to my guard rails. I've got $200 as a particularly low share price, so I've got a bias towards selling puts when the share price is in that neighborhood AND a bias against selling calls. Similar for $250 - a bias towards selling calls, and away from selling puts. Here at $225 might be an ideal time for selling both (in my trading 'plan'). Whether puts or calls I would have a strong bias towards an early and aggressive roll, as I'd be trying to get my strike out to a guard rail before getting run over.


As a for-instance, and not-advice
First off - I'm only selling options that are fully cash backed. That means csp and fully owned (not margined) shares. I AM buying leaps but those are a 6-18 month capital appreciation play to augment the income generation. My income is a lot lower today than a couple of years ago. Interestingly I sleep just as well (might say something about me). And I know I'm taking on dramatically less risk.

Here at 220 ish, if we open flat on Monday (so I can use the weekend option chain), I like the 205 for this Friday, and probably 195 for a week from Friday. These would be CSP - I'm not confident enough yet for BPS, though I continue to evaluate the opportunity. BPS would be particularly appropriate if the share price gets particularly low. I would sell 1 of the 2 CSP on Monday and then sell the other one as early as Tuesday if the share price is down.

On the call side - I think the 235 for this Friday would be my choice, and not touching the following Friday (too little premium, and I can't get as far back from the share price as I'd like. This is the side I would be most worried about, and would be rolling by 1 or 2 weeks if the share price were over 230 even if that happened on Tuesday.

And I don't bother evaluating call spreads - they might work really well, but I'm an emotional wreck while these are open, so I just don't bother. That mostly means that I don't do IC.


My own situation - I'm in the neighborhood of 75% cash when I'd rather be 50% at this share price. So I'm looking to buy, and is another influence in how I am presently treating calls and puts. Though I'm ok selling at 250, I don't presently has as much exposure to the upside as I'd like so selling it off is really unpalatable. Very strong bias right now to buy, yet still somehow being patient for where I want to buy (sure hope I'm right).

Yes - but what do you do - say when you sell a call on Monday and on Tuesday SP has gone up already ? Do you roll or .... wait and roll the dice?

See above, but the decision will include these other factors that matter to me. So if I sold the 235 call for this Friday, and then the shares moved up to 230, then I'd be very likely to roll that immediately for as much strike improvement as I could get - ideally 250, but maybe only 245.

On the other side - if I sold the 205 and then later that day we were trading at 207 I'm pretty sure I'd do nothing AND not be worried about it. Not because I expect it to finish OTM but because I sort of want it to be ITM (so I get the shares).

The call side decision making - that's because I don't have shares I'd be happy selling at 235 AND I don't like sitting out all the time on the call side. If the share price is flat to down then I'll be earning from the 235s. But if the share price goes up then I'll just go a few weeks without cc income - which I'll be doing anyway if I'm not in.

And 235 is close enough to 250 that I can roll there pretty easily. The problem on the call side is if the share price is (for example) 150 and I'm happy to sell at 250. I'm going to be selling more like a 170 or 180, and that's easy to run over on the way back to 200-250. I'm still really stressed about it because I know we can get back to what I consider a reasonable share price and run those calls over badly, and avoiding stress or mental anguish is an important component of my decision making.

In both cases its what I would to happen to the shares at that strike price that also informs my decision making.


This might be a lazy wheel view of things. My trades are primarily focused on income, but they also secondarily consider capital appreciation and I look to swing back and forth between cash and shares. At the sort of premiums I've been getting lately a $20 capital appreciation along side of the income options would be 15 to 20 weeks of income, and a $20 move in the share price isn't all that hard to come by.

With as much insight that we gain through our own sharing, what seems to be safe eventually fails to be. As has been said by many, close on sharp momentum shift, reset with another position or sit out.

As much as I would like to have a mechanical trading system I know that (a) I won't be able to build one and (b) more importantly - if there WERE a mechanical trading system, then somebody else with a lot more money / time / resources would be using it, removing its value.

So anything can go haywire, and we've people get run over in both directions. Anything can go against you. But - its also my belief that my understanding of the company is an important advantage in my trades. It is, if you will, my edge in the market. That, and this thread and the insights being contributed by everybody, all the time.

 

[Max Plaid]

On the subject of writing calls for this Friday and what's safe, a very clear and present risk right now is the pending CyberTruck delivery, not so much the delivery event itself, but the the specs are pricing that are could potentially be released in advance - maybe if all the deliveries are to Tesla staff then it won't be until the 30th, but you never know

That information could pop or sink the stock, good range and a competitive price and a +10% wouldn't surprise me, I think less downside risk, but that's just my opinion. And this info will almost certainly be published outside main trading hours, so also a strong risk of being gapped

I made many mistakes recently that I've spent time understanding and hope to avoid in the future, although I'm sad to say it's not the first time in some cases:

- Holding -p220, SP drops below 200, close the -p220's, SP closes the week 220! Classic case and I made a poor choice in selling and taking the loss, should have either rolled or sold the underlying +p200's to recuperate the losses. This was fear/greed clouding my judgement, thinking the SP was dropping further and I could scoop-up lots of shares at a low price funded by huge profits on the +p200's ->as already discussed a couple of days back, I could have offloaded the +p200's at $195 for and bought shares with an effective net price of $60

- Buying March +c240's sub 195 and writing weekly +c200, very smart and very stupid... SP was clearly too low to sell -c200's, regardless of how juicy the premium, wait for a bit of recovery would have been much better

- Following on from that, then letting those -c200's go dITM overnight Wednesday to Thursday was a dumb as it gets. Was clear the FOMC flipped the sentiment, albeit temporarily, and I should have closed out the calls immediately for a load of around $3, but sat on them untilThursday open for a loss of $10, why? Hopium that it would reverse mostly, but also have to admit that I was more focused on trying to sell some puts after FOMC because I thought the SP was going up - all well and good, but I would have made far more money closing out the calls than writing the puts!I can only put this down to a certain amount of "wrong-footedness" after the FOMC, really didn't expect that rally (thought the rate-hold was priced-in), and got caught off guard, then was looking the wrong way basically

 

[OrthoSurg]

I found a new efficient way to trade.

I work and accumulate cash in my account.
When Chicken Genius Singapore tweets he has a SP target $69 I start buying LEAPS.
Then when @dl003 posts he closed his longs I close them.

Rince and repeat.

I went from an option seller to an option buyer. I guess that’s how life revolved. I lost incredible amounts of money selling options at the wrong time and made incredible amount of money buying options at the right time.

 

[Max Plaid]

So, thinking of what to do in the coming weeks and after writing 50x 11/10 -p220 on Friday, still having 150x available put writes sitting there doing nothing... how to balance the risk and reward...

Given that I'm more inclined that the SP has more upside than down at this moment, thinking to already write 50x 11/17 -p220 & 110 11/17 -p200

I see little risk in these positions, secured as they are against March +p200's and already having 200x -c230's in play for this week, which are beginning to feel like they may need to be rolled up sooner rather than later

Edit: just watching Cory and I admit that I didn't realise SPY has moved back to the local top, so may possibly be entering a sell area or at least consolidation, something to take into account...

 

[juanmedina]

I found a new efficient way to trade.

I work and accumulate cash in my account.
When Chicken Genius Singapore tweets he has a SP target $69 I start buying LEAPS.
Then when @dl003 posts he closed his longs I close them.

Rince and repeat.

I went from an option seller to an option buyer. I guess that’s how life revolved. I lost incredible amounts of money selling options at the wrong time and made incredible amount of money buying options at the right time.

Same here but I think that opportunity of making crazy money buying options with Tesla is gone. Tesla went up 20-15x between 2019 and the begining of 2021 and lots of us made insane money then. I hope that one day I can make crazy money again maybe with Starlink or a different company. By crazy money I mean 20x +.

One thing that annoys me is that we could have made an incredible money shorting EV companies heavily. There were and are so many EV companies that have gone down an insane amount and with some going into bankruptcy. I am a really and optimistic person and it's hard for me to play the other side.

 

[Jim Holder]

Summarizing a few more points on options selling from follow up posts the past week by @Max Plaid and @adiggs :

• When selling long +C or +P at the end of each cycle, use some or all of the proceeds to buy shares and another set of +C and +P. This can help with building a position for long term financial security and income generation. This doesn't mean not to withdraw cash to the bank, that comes from the conservative $0.50-$1.00 weeklies against the long puts/calls.

• Avoid aggressive puts on the way up/calls on the way down. Play both sides safe with low weekly premiums targets (i.e., $0.50-$1.00) and you'll avoid most of the sharp reversals. It's the N/A/IITM bets that wipe us out and those moves come randomly when we least expect them.

• As the SP drops you could take slightly more risk with put premiums, less so with calls; the converse for the trip back up.

• Under no circumstances should one sell naked puts or calls.

• Roll or BTC before options go NTM/ATM/ITM.

• Try to BTC those contracts with less time-value first.

• In general, it's ideal to roll for a credit if possible, however small. If not possible, BTC at first opportunity even for a loss as the losses often only grow during a sharp reversal. Wait for an opportunity to sell again once the trend is clearer.

• Conceptualize lousy rolls as a temporary break from earning income. Don't chase or get greedy.

----

Feel free to add more -- perhaps at the end we can generate a simplified reference for us and those who join in the future. Happy to help put it together.

 

[tivoboy]

Yes, this is what the TA guy they bring on CNBC was saying as well. Yield down, SPY down.

As $$ flows into bonds for protection or to capture current yields. $$ flow out of stocks. It’s pretty predictable. Only thing that helps is lower $

 

[EVNow]

Summarizing a few more points on options selling from follow up posts the past week by @Max Plaid and @adiggs :

I’d not combine what they said. @adiggs is way more conservative than @Max Plaid - infact I’d say different philosophies / strategies altogether.

What I’d like to do is to take these posts and come up with a “thumb rule” that can be back tested. Something along the lines of
- Sell cash or stock secured OTM calls with a “low” chance of going ITM say .05 to .15 delta (5 to 15% chances of going ITM)
- Do not bet on the direction of the SP movement. If you do - it’s no longer “be the house” strategy.
- Close for a set profit (2/3 or 3/4). Don’t wait for expiration day.
- If SP gets close to strike price, roll for a small credit.

Other things like price target objectives to convert cash to stock or the other way are subjective and difficult to backtest.

BTW, does anyone know of a website/app where we can backtest this ?

 

[EVNow]

As $$ flows into bonds for protection or to capture current yields. $$ flow out of stocks. It’s pretty predictable. Only thing that helps is lower $

Rethinking this - not sure what he said. Did he say rates down, spy down (recession, basically) or yield down, spy down (continued inflation) … I’ve check.

 

[EVNow]

So a big part of my roll decision making is how close I am to my guard rails. I've got $200 as a particularly low share price, so I've got a bias towards selling puts when the share price is in that neighborhood AND a bias against selling calls. Similar for $250 - a bias towards selling calls, and away from selling puts.

My plan is to acquire shares at around 180 - but I don’t have a particular price I want to let go of the shares at this point. I should note - I’m all cash in my taxed account and all shares in my IRA. So, sell puts in taxed and calls in IRA.

But what I’m also looking at is how to avoid getting in to the kind of mess we got into when the SP went from $400 to $100. Playing for a range can be troublesome when black swan events happen - which seem to happen with Tesla every other year

 

[ninpb]

One thing that annoys me is that we could have made an incredible money shorting EV companies heavily. There were and are so many EV companies that have gone down an insane amount and with some going into bankruptcy. I am a really and optimistic person and it's hard for me to play the other side.

I bought Nikola puts a few years ago mostly based off Trevor's interviews. Then GM bought into them and I thought surely GM has smarter people than me and know something. So I got out of the puts. One positive I got out of it is to never put trust in any GM leadership.

 

[adiggs]

I’d not combine what they said. @adiggs is way more conservative than @Max Plaid - infact I’d say different philosophies / strategies altogether.

What I’d like to do is to take these posts and come up with a “thumb rule” that can be back tested. Something along the lines of
- Sell cash or stock secured OTM calls with a “low” chance of going ITM say .05 to .15 delta (5 to 15% chances of going ITM)
- Do not bet on the direction of the SP movement. If you do - it’s no longer “be the house” strategy.
- Close for a set profit (2/3 or 3/4). Don’t wait for expiration day.
- If SP gets close to strike price, roll for a small credit.

Other things like price target objectives to convert cash to stock or the other way are subjective and difficult to backtest.

BTW, does anyone know of a website/app where we can backtest this ?

I found a website / app a year or 2 back that enabled me to design a trading system, with rules, that would run that back over 10 years worth of TSLA data. I found a couple of problems implementing my testing. I went looking for the website and name, but I think I've gotten rid of that info

The biggest problem was that it was complex to write the rules in such a way that it would run. They were conceptually easy but came with enough corner cases that needed handling that I finally gave up.

The site needed a pretty expensive subscription to get access to hourly data to run the rules against. Without that it was end of day prices that were executed against, and of course that's got problems. Just using closing price misses out on intra-day possibilities. It really misses the emotions of a day that starts off up 5%, then turns around and ends -2%, and those emotions are an important element of what I'm managing with my trading choices.


An important learning from that experience is that while I like the idea of backtesting as a concept, trying to push it all the way into a rules based trading strategy is something I've given up on. Doesn't mean it can't be done - only that I have built a group of rules of thumb and preferences, all of which go into the soup, and which yield different answers given seemingly identical inputs. Short on testable science if you will

Like closing for a set profit - I don't watch things closely enough to have a set amount. This is an area where I consider both % and absolute gains, including whether there is enough remaining money to earn in a position to be worth continuing the position. There are two primary benefits to the early close that drive me - the obvious is realizing the profit, and thereby eliminating the risk of the position immediately reversing and turning a nice win into a loss.

The 2nd isn't as obvious - the early close means the backing is now available to open a replacement position. Such as what opens up on an immediate reversal that turns a win into a loss. I got the win, and then I get another win when I can reopen a similarly desirable position (maybe even the same position I just closed).

But the easy one - absolute value left to gain. If I've got .10 left on 12 puts (a reasonably common position size for me), then there is $120 left for me to earn. That might mean waiting 1 additional day, but even if its expiration day, I take it off the table. I've had winning positions turn into big losers REALLY fast, and just how much risk do I want to take for $120? If I avoid 1 sharp reversal and bad move every other year (1 time, 100 weeks, 1% occurrence), then I pay $12k over 2 years. If I avoid a single bad situation that goes to $10/share then I've broken even, and gained all of that emotional benefit of not waiting around for small positions to give up their last little bit of value. The problem with assessing the trade off is that the cost is pretty determinant - but the impact of the risk is open ended. Kind of like insurance!

 

[adiggs]

My plan is to acquire shares at around 180 - but I don’t have a particular price I want to let go of the shares at this point. I should note - I’m all cash in my taxed account and all shares in my IRA. So, sell puts in taxed and calls in IRA.

But what I’m also looking at is how to avoid getting in to the kind of mess we got into when the SP went from $400 to $100. Playing for a range can be troublesome when black swan events happen - which seem to happen with Tesla every other year

That sort of big move is thankfully rare, but is very much something to be prepared for.

I made a huge mistake when shares went to $400 - I only saw the moon in my sights, and didn't think about "what if we reverse to $300". My trading rules / guidelines wouldn't have kept me out of this particular mess, but they would have lowered the damage significantly. At $400 and ATH, there's a lot more risk and pain to the downside (where risk and pain = actual loss of capital, not just opportunity loss). So maybe DON'T open new puts, snugged up tight to the share price to maximize the premium, on the same day that the shares gap up bigly. Yeah - I won't do that again At bare minimum wait for the day after a big move up, and really wait for a noticeable move down before opening puts.

And be really conservative with the puts when the share price is at ATH (or top of guard rail). Meanwhile - I'd get more aggressive with call sales (at top of guard rail), where more aggressive might mean .16-.20 delta calls instead of .10 to .13 delta calls. I.e. not a lot more aggressive.


THere's also a huge contextual component to all of this. I am retired now with zero plan to work for a paycheck (or start a business) for the rest of my life. I'm also pre-social security. So avoiding big changes in account balance from big share price moves is important to me now, where it wasn't important from roughly 2012 to 2021 (and really, before 2012, but my TSLA experience starts in 2012).

My context has changed and therefore the way I invest in Tesla has changed. Previously it was easy - I bought and owned shares with little regard to my entry price. My only focus was whether the investment thesis had changed in an important way, and whether that change had altered my risk / reward assessment. It still hasn't changed btw - I still want to own the company for the next 10+ years, with a reasonable expectation that I'll continue owning the company until I give my ownership interest to a charity when my wife and I pass.

 

[adiggs]

Rethinking this - not sure what he said. Did he say rates down, spy down (recession, basically) or yield down, spy down (continued inflation) … I’ve check.

It's a supply / demand observation. If we simplify the investing world down to bonds and stocks, then the observation is that the total amount of money invested between the two is somewhat stable, and significant movement of the money in bonds over to stock will lower bond prices and increase stock prices. That movement means there is less appetite / demand for bond ownership (less demand, lower prices) and more appetite / demand for stock ownership (more demand, higher prices).

In the background is quantitative easing, and now tightening. The Fed was pushing new money into the system in a big way during the pandemic. The Fed has been removing money from the system (decreasing the balance sheet) in a big (though smaller) way for a year or more now.

As that money was added to the system a lot of it went into stocks and bonds, increasing demand and prices for both.

With money being drained out of the system, that leaves less to make demands on stock and bonds, lowering prices for both. Or at least that's the fear, and its a macro headwind that I try to keep an eye on.

 

[EVNow]

It's a supply / demand observation. If we simplify the investing world down to bonds and stocks, then the observation is that the total amount of money invested between the two is somewhat stable, and significant movement of the money in bonds over to stock will lower bond prices and increase stock prices. That movement means there is less appetite / demand for bond ownership (less demand, lower prices) and more appetite / demand for stock ownership (more demand, higher prices).

I agree with the overall thesis.

What increases the weekly or even monthly volatility is the shorting. I believe on the bond side there is a lot of shorting as @Singuy (?) noted earlier (something I didn't even know was possible a couple of days back). We all know about shorting on the stock side.