Reminds me of the old joke - finally we see a light at the end of the tunnel and Elon orders the light switched off to cut costs.
If this thread and that thread say two opposing things I’m going with what was said on this thread ten times out of ten.
Medal for LONGEST POST EVERSome nuggets of wisdom from @dl003 over the years:
On TSLA Bull Runs
While it is true that TSLA can climb a lot more as it did in the past, it needs to do one thing first: retrace at least 50% of the initial spike up. If you go back, it happened every single time. I invite you to go over this post.
The reason for this is deeply rooted in human psychology. It's not manipulation or random occurrences. Wave 1 up from the bottom can be impulsive because it is fear driven:
a. Short sellers fear getting blown up
b. Bottom catchers fear missing out
Smart investors do not want to buy any stock that has just run up 80% in 4 weeks, regardless how low the starting point was. Why? Is it because they don't think TSLA is worth $180? No. They don't buy it here because they don't want to compete against short sellers and bottom catchers in chasing it at this price point. If anything, they want these people to buy every share they're forced to buy before taking their own profit on the stock. When the stock or the economy has some piece of bad news, as bad news tends to happen in a shaky global economy, reality is going to set in and people is going to flip "Tesla is still the same company as it was before the ER and a lot of the initial runup was just short covering", it will retrace deeply as 80% profit in a month is no joke. The stock should retrace at least 50% before deep pocket buyers say ok the price is attractive again. That's wave 2. Wave aka the retracement is simply a test of strength for the rally.
Wave 3 happens only after the stock has been tested at the bottom of wave 2 and that's when the real fun begins. That's the irrational spike you're probably thinking of. Those were wave 3, not wave 1. We are currently in wave 1. Actually we could already be in wave 2. The question is not if, but when it will retrace deeply.
On Option Selling Decisions
As an option seller, there are 3 kinds of probabilities I want to know before opening a position:
a) What's the probability of the current price being close to a local top / bottom?
b) If, in the off chance, the stock goes beyond my expectation, what's the probability of it re-visiting the current price during the next consolidation phase?
c) If I don't know the first 2, what's the probability of the stock never exceeding my strike before consolidating?
At 206 last week it was so close to my bottoming zone that I decided to wait on selling CTM calls until I get more information from the next leg up. Once the next leg up got rejected hard at 217, it helped me draw the levels: 227, 236, 248, and 260. As it got close to 248, I sold 250C expiring 11/24. There were still a risk of the stock going past 250, but the probability of the next consolidation dropping the stock below 250 was very high. I do these calculations whenever I'm mulling over what position to open/close.
Right now I don't expect the stock to drop hard which is why I'll be looking to sell puts once the next leg down has concluded within my bottoming zone. However, there is still a risk of a straight up crash from here. The only thing that swings me over to the "healthy pullback" camp right now is the fresh overbought reading on the 4H RSI but that, too, is not 100% guaranteed.
On the upside, it is favorable to sell calls right now until 226 has been violated. However, the closer it gets to 242, the safer it is to sell calls as the distance between your entry and the stop loss point gets smaller and smaller. It may not get to 242 at all so if you wait, your return may diminish. If it trades over 242, the bottom may have been made at 226 but that's not what I'm getting from the chart.
Many of your questions are outside of what's going on in my head. Questions such as what the closing price will be or how strong the move will be I can't answer. However, what I do say out loud like "I wouldn't be surprised to see 230 next week" are not said willy nilly. Even if you don't agree with it, it's better you understand why I say it.
Cycling contracts
It depends on the wave. For example, if you sell calls at top of wave 1, it's prudent to close them at the bottom. If you sell OTM calls at top of wave 3 and it's a major one, you probably can hold those calls all the way to top of wave 5. ATM calls you should always close at nice profits. Macroeconomic timing and OPEX also play a big role. If the stock reverses to the downside on Wednesday morning then might as well hold those calls all the way to EOD Friday. Reversal happening on Monday leaves more room for bottoming and subsequent upside reversal.
Using IV to track PP direction
I sell a lot of long dated TSLA calls which allow me to track their IV without being interfered by theta. The method is simple:
On Monday, TSLA closed up $2 and a group of 2025 calls I sold went up $1200
On Tuesday, TSLA closed down $4 but the same group of calls only went down $1400
it's telling me that even though TSLA closed down, demand for calls still ticked up which partially offset losses in value due to delta.
That and the levels drawn before hand helped to confirm each other
Today TSLA went up $5 but that same group only went up $1600. So, the opposite has happened. Call buyers were selling into strength.
When TSLA gets volatile
During Winter, what matter most is keeping yourself and loved ones safe and sound: Cash reserve, low margin usage, low expenses etc. Whatever mistakes we made during the good times, now is not the time to ponder the wouldas and couldas. Now is not the time to “make it back.” Bear market doesnt just go straight down. Bears can lose just as much money as bulls during a bear market. I know because I see it every day. Once we have ensure our survival through this dark time, we have to accept what we have right now is all we have to work with. It keeps us from taking unnecessary risk. Then, we need to find systems and methods that we have successes with.
Start small and slow.
Fail small and often.
Make those small losses back before betting larger.
Personally every day I try to answer these questions:
1) What are the important supports/resistance levels?
2) What is the large/medium/small degree wave count? Are we more likely to go up/down/sideway this day/week/month?
3) Is there a bullish/bearish divergence signal on the appropriate timeframe? If we drop 10% from high, I’m not going to look at anything lower than 1H for signs of reversal.
4) How is the market going to try and trap me today?
• If the trend is up LT and MT=I'm going to sell ATM puts aggressively
• If it is up LT but down MT=I'm going to try to find a ST bottom to sell OTM puts
• If it is down LT=I will not sell any puts
Bottoms can be called based on S/R, wave count and divergences.
Macro event timing is also a powerful tool. I don't know how CPI and FOMC is going to go, but I know the week before will be a "reversal to the mean" week. People will settle big bets before the week is over which means there's a limit to how low/high the SP can go.
Handling ITM short calls
An ITM call is not a death sentence. You don't have to let them call away your shares. You can roll them out, betting on a reversal to the mean if you think that's a reasonable expectation. That's your exit strategy.
The stock may break 180 in the next 6 days for a plethora of reasons. Maybe China sales number this week is going to be great. Maybe market rallies a lot more from here. Maybe maybe maybe. But for the stock to close 6/30 above 210, there must be some sort of significant development that compels market participants to allow TSLA to break out and hold above the breakout point right before a significant release which may turn out to be a dud. I'm a lot more confident this will not happen than I am about whether 180 will be broken next week. And -185C next week can be rolled to 210 for 6/30.
So really, for me, the question has never been "Will TSLA break x by date y?" but rather "if TSLA breaks x by date y, will it ever revisit x again in the future and if so, how long is that going to take?"
If you don't accept the possibility of your calls going ITM every once in a while, that means you can never be wrong in picking a strike and we all know that's impossible. All you can do is pick a good r:r play and have a solid exit strategy which may require a reasonable cost in term of money and time. That lowers my stress level. Life is unpredictable.
Breakouts/Breakdowns
First we need to see a clear rejection to the downside, then a few down days before spiking again. Judging by the strength of that spike, we can then tell if its the last spike or not.
When Selling longs
Do a synthetic short. Get an ATM -call and a +put at the same Strike. That should help cover losses, with volatility so high the put premium is pricey but so is the credit you are getting for the CC.
If you had sold your longs, you technically sell but don't receive any premiums for the sell. Here you receive a premium and then in turn use the premium to buy some downside protection. Worst case stock moves up and you lose your shares and the +P goes to 0. But you now have a 50% probability of the stock moving down and you benefitting, not only with a IV crush but also your ATM +P now being ITM. There is a risk of the stock just being flat, in that case you end up net 0, but you still keep your shares.
If you had sold your shares at what point do you consider it safe to move back into the stock? What if the stock moves up after earnings? So the question is are you willing to take a 50% probability of success that the stock moves lower post earnings?
If the stock moves up your -C can just be rolled out to a later in time expiry, you cut your +P at a loss (insurance) and you still possibly collect a little bit more premium by going our further in time.
By selling your shares outright you are 100% sure that the stock price will be lower.
On Averaging down
There's a science to averaging down and most people do it wrong. Averaging at the next strong support in hope it will do a DCB there. If that fails, look for the next strong support. This means you have to acknowledge that your first buy can be too early and have a plan to average down before you pull the trigger.
However, this means the very first buy has to make sense. If you buy just because its "low enough", chance are you will average down too early. If you do it right, it will feel less like averaging down and more like buying at supports that fail to hold - this is very common and an acceptable risk in trading. Best if you buy at supports AND have a SL for when your thesis doesnt work out. So instead of holding your first buy all the way down to the next support, you cut it early for a small loss then wait for the next support to try again, again with a SL. Setting SL IMO is one of the hardest things to get right that separate good traders from bad ones. If you set it too tight, you can get faked out. If you dont set it, you risk massive losses. A good Stop Loss is made possible by a good entry. If you enter with crappy R:R then it will be extremely hard to set your SL right. So you have to get both the entry and the SL down to a science, something very few people can do.
Averaging down is hard if:
a. You are too bullish on the fundamentals and think sooner or later it will go up.
b. You don't have a systematic approach to setting entry. "feeling" is not a reliable method. I like charts. Theres also dark pool, flow, etc...
c. You think in absolutes, that you cant be wrong so averaging down is always your plan B or C instead of plan A.
AFAIK, I'm the only one here that has been selling naked calls (there's no such thing as a naked CC - CC implies you have shares to back the call while naked means you don't). I have done risk assessment to death on this topic.
BW/BCS/CSP
A BW is simply a CSP. If you buy shares at 765 and sell calls at 740, with some discrepancy in premium due to interest rate, its the exact equivalence of selling a 740 CSP, only your head is tricked into thinking its not by the 2 separate transaction. So, keep it simple and think in term of CSP. If you are willimg to sell a 740 CSP, then proceed with the BW and vice versa.
Treat naked short calls as you would BCS, only with a longer leash if your aim is income. Naked calls mean you dont cover it with anything to maximize returns and reduce risk. The more net premium you receive, the less risk you have to take.
What do I mean treat it like you would a BCS? Do I mean always sell FOTM naked calls? No.
If you normally sell BCS as a directional bet, like some of my friends do. They would, for example, sell 715/720 NVDA BCS right now if they think it will go down more. However, if you are not into directional bet, like I deduce from your posts, then sell FOTM naked calls, same as your BCS. The difference is: further OTM than BCS. If you normally go with 6 SD on the BCS, then go with 7 or 8 SD on the naked call. Same entry (sell at resistance) as a BCS for maximizing R:R.
TL;DR:
Naked calls = BCS
Covered calls (even if DITM) + long shares = CSP
Keep it simple and know what you want to get into. Directional or nondirectional? Up or down? Capital in cash to earn interest or deployed in shares for higher premium?
On Bull Runs
Trying to predict this with a hard ceiling is the definition of standing in front of a train. Once the stock is confirmed to be uptrending, best thing to do is buy at pull back and ride it. Get out when momentum stalls through RSI & MACD divergence.
I said repeatedly that this week exp & 165+ only because 165+ would give enough wiggle room if it bounces hard. Look how many people still got stuck below 165. 165 was a good number as price action has shown post ER. Got 2 good dips below 160 from 165 but eventually it gave because the stock was too oversold. So nothing is 100%.
When Short Puts Go ITM
a) Sell 100s and then reopen a short leap put with some extrinsic left, hoping this one can stay opened long enough for the SP to recover. Do this in 100s increment to make sure you get a favorable fill on the puts (maximizing extrinsic).
b) Instead of trying to get back into a short put position, treat it as a BW (which it is). Keep 100s and then sell a leap CC against it. The extrinsic on the CC will be much more than the one on the same strike put because of the high interest rate environment we're in. See if this difference can make up for the amount of interest you're having to bear by holding the shares instead of the puts. For example, a 280 BW is going to have a $12 extrinsic while a short put only $4. $8 divided by $280 * 11 months / 12 months = 3.1%, less than the current rate on cash. Worth to notice that a BW is going to have slightly higher delta and higher theta than a short put so it's favorable if the SP keeps basing here for a while longer but less appealing if the SP reverses hard from here.
c) Start selling weekly CCs instead of a single leap cc against those 100s. The weekly premium when added up can go higher than 3.1% and are more flexible against sudden reversal in price, assuming you're not getting caught in a rip.
d) Do (a), but weekly lower strike puts instead of leap puts, collecting more weekly extrinsic.
The goal here, if you still want to hold on to this long position, is trying to collect premiums to pay for the interest given up in the exchange of cash for shares, or simply reverse that exchange.
On Choosing Safe Covered Calls:
The formula to find a new strike price is: New theoretical top x 0.618 - (minus) 87 =x.xx
If you wonder whether your roll is a good/safe roll, do this quick calculation: strike price / 0.618 - 141. The result will be the highest TSLA can go before correcting for your roll to be considered "safe." I know I've been harping on about the 50% retracement. However, to be "safe", give yourself only 38.1%. If the stock tops out at 287, it will pull-back to 265 minimum.
To choose a low, the retracement/consolidation that precedes it has to be a major one.
If you roll your CC to 197.5, the highest TSLA can go before correcting will be 260 before pulling back to 197.5. That's safe. As your CCs go ITM, don't just look at how far the stock can run, but also whether your CC will survive all the way to the bottom of the pullback. That's what matters. It keeps you from cutting losses prematurely. That's also the reason why when I have ITM CCs, I'd spend about 0.5 - 1 to roll them out every week, improving the strike $2.5 - 5 further than I would have without spending that $0.5 - 1. Since the pullback will be at least 38.1% of the runup, every $2.5 - 5 strike improvement you give yourself can work itself out to $5 - 10 added to the top.
On Selling CC's during volatile weeks
The chart screams short squeeze, structureless. It didn't get down to 159, invalidating the rising wedge. It strengthens the case for 265 later this year. Its is very dangerous to call the top right now as it has made fresh new highs on the daily RSI. Huge momentum on MACD that will take at least a week to cool down and possibly curl down. I'd sit back and wait for bearish divergence on the daily, or at least on the 4h, followed by a reversal candle, then a few follow through candles, then a weak retest before having conviction on CCs.
Fib and the psychology of choosing strikes
First, have a set of criteria for calling the bottom. For me it's a bullish divergence on a bigger timeframe, depending on the tenacity of the drop. For this previous drop, I was looking for at a minimum a divergence on the 4h timeframe. Luckily we got it on the daily as well. Once that's in place, I look for the SP to reclaim the 10 SMA, signaling a change of direction.
That's how I'm calling for 175 to be the bottom. If it's not, then we start over. I don't care what other people think unless they show me their method and I agree with it.
Fibs:
Once a bottom is in, the stock will ALWAYS at least reclaim the 0.236 fib level and MOST OFTEN will be rejected initially by this level. This level was 194.14, see how cleanly it went? Knowing this, pick your strike accordingly. If it's in the middle of the week, you can try to sell a 2-3 DTE call on these conditions:
1. The strike price is at least higher than the 0.236 level. That's my strike.
2. The stock price is at a point where the 0.236 level falls inside of the 1 SD from the SP. That's my entry. Quick way to do this is look at that 2-3 DTE strike. Add the ATM call & put premium then multiply that sum by 0.85. That's 1 SD. Add that to the SP and see if it exceeds 194.14. If it does, it means the SP will hit 194.14 first before fulfilling its quota - poised for a pullback soon. If it is lower than 194.14, it means the stock has room to run without exceeding its quota. You will incur greater paper loss before it pulls back.
Now, if you want to sell a 6-7 DTE call around this level, then take profit after it has hit 194.14 and pulled back because you don't know what is going to happen after the pullback. If 175 is the bottom and this is just a pullback, the next move will be up to take out 194.14. Since you're allowing the stock enough time to both pullback and go back up, take this into consideration.
The 0.381 level at 209 is a bit different. Since the stock dropped so aggressively both before and after ER, you can tell this is a serious move. As such, the 0.381 level will not only act as a super strong resistance, but also a boogeyman, preventing the stock from ever getting close. However, if the stock acted differently (dropped little before or after ER), then you can expect 209 to be taken out at some point before the next P&D and 219 gets challenged.
Therefore, once the stock has taken out 194.14, proving that 175 was indeed the bottom, you can make 209 your last stand for selling calls. Can go even lower to 205. If the stock runs past it, it will come back soon-ish.
The magnet:
Given how negative reaction went around this ER, no matter how far the stock runs up between now and Q1 P&D, I expect it to pull back just before as fear sets back in and people will want to be mostly out of the stock. The bottom remains, but the lowest fib level at 194.14 should act as the magnet.
If the stock can take out the 209 level & hold above it convincingly, we can be a bit more serious about much further upside. This is when I like to go with a 2 SD strike and using intraday exhaustion as my entry. If the stock exhausts at 210 and the 7 DTE 2 SD strike is at 225, I'll sell 225. Tomorrow if the stock runs up again, I'll calculate the 2 SD strike at the end of the day. If it has moved up to 227.5, then I'll roll my strike up to 227.5, prepping for a blow off top that can overextend past resistances.
On detecting a breakout:
As we're approaching the strong $209.3 resistance. Keep an eye out for a few things:
a) Yes, the stock has shown strength on the 2h, but will it show it on the 4h and take us up further? Meaning, once it has taken out $201.30 (closing over $201.3 on any 2h candle, not just breaking it intra-candle) will the next candles be green until it's reached overbought on the 4h?
b) On the day when it takes out $201.3, will the highest closing price far exceed $201.3, resulting in an even higher RSI reading on the 2h compared to the peak of 72.43 on Friday? If not, we're just going to have a bigger bearish divergence, now on the 2h, leading to another pullback which can morph into a full blown correction, possibly marking the end of this recovery.
Both are very closely related. If either one happens, the other often follows. However, we will be happy with just one. If none happens, then be very careful on that day and prepare for a steep correction.
I sure hope the stock can go further than just the 2h timeframe but we trade the chart, not what we wish to happen.
For the record, the 4h RSI is right now sitting at 60.8. To reach 70, I estimate it needs to reach 215 minimum. The good news is it had reached it in both of the big DCBs we had in 2023.
Momentum tips
a) Monitoring IV and rising call prices as one metric
b) Divergences and volume are very helpful.
c) Fib level where divergence develops tells a bigger story about what's coming next. From a potential bottom, if momentum stalls just above the 23.6 level, the bounce has no legs because it has to get above 38.2 for a bottom to be in. Stalling just above 23.6 is no good. This is just one of many things to look for.
Detecting Hidden bullish divergence
Lower rsi on higher SP at the TOP is bearish divergence, leading to reversal.
Lower rsi on higher SP at the bottom is hidden bullish, leading to continuation.
When to buy LEAPS
The time to buy LEAPS is when we're at the bottom, then buy close to the current share price - if you get in low and the SP takes off then they are greatly de-risked by a lot of the value flipping from extrinsic to intrinsic - write against them on the way up to increase profits, mostly I'd say a few months out at very OTM strikes.
On Selling Puts After Shares Assign On a CC:
Not much of an expert when it comes to selling puts as I've always been almost 100% all in and only sell naked puts for extra income. But if your goal is to get back in, treat a short put as a BW. When you think it's bottomed out, try to guess how far it's gonna run up and how far the pullback is going to be, before going up again. You have 2 choices: either get in at the bottom and ride it back up or sell some puts. If you sell puts at the bottom you won't be able to get back in at the bottom because that how bottoms work. Once it touches it, it's gonna rocket back up. If you sell puts at the bottom, you've determined to get back in at the pullback. Say it touches 235 and you think that's the bottom. Then you think it's gonna go up to 260 for the 2nd peak of the triple top pattern, before pulling back to maybe 240. At 235, you sell a 240P 1 week out. Fun fact: a 240P sold at 235 gives you the same amount of time value as a 230P. As the stock touches 260, you close this 240P and then use the profit to get back in when it pulls back to 240. If it sounds complicated, that's because it is. Nothing beats a good old fashion share grab at the bottom.
On Rolling
There's no use talking about strikes without looking at the chart. Generally speaking, I look at option premium as primarily made up of 2 components: theta and delta. If you think the stock is going to make big moves in 1 direction, triggered by some sort of signal, then better to exchange delta for theta, and don't half ass it. If you think the stock is going to reverse, do the opposite. This is not about how long you're gonna be tied up. It's about whether you have the information and conviction to do this dance. Done right, you can get a ton of room for the stock to run when it's about to run and then roll it back just in time before it reverses. Thinking "how long am I gonna be tied up?" is already accepting defeat. Stocks don't run up forever, when you only think about rolling it out, you're only dealing with one half of the journey without giving any thought to the second part. So if it breaks 258.08, roll it out to December 2025 at even credit. Then when you think it's topped out, roll it back in to 7 DTE for even credit, or better yet, close the calls and sell the shares. Now, my chart read can be wrong and it has been wrong enough times to make other strategies just as relevant if done right. This is just how I'd do it.
Assorted Notes (not sure who shared them)
- If you find yourself too desperate for the stock to go up or down, leverage up or down the other way accordingly.
- Can rescue ITM short calls by flipping some to puts using $$ from exercised short calls. You could salvage some or all of your 9/15s by doing that. That would then shift your risk to the downside, but you might be able to roll the puts back down a bit if that were to happen.
- I would either roll out weekly or accept assignment and then sell weekly puts at the same/similar strikes (again rolling weekly if wrong).
- Watch out flipping calls to puts
- Don't overreact by rolling sold puts higher to finance rolling sold calls higher
- To cover short calls which are ITM I would consider buying ATM calls on the short term. In this case you need to consider delta. You need to sell 100 shares in order to obtain 2 ATM calls. 100 shares is 100 delta and 2 ATM calls is also 100 delta. If you do this you trade gamma. If stock price goes up your 2 ATM calls will run faster than 100 shares. If stock price goes down your loss will run slower than 100 shares.
-You could sell farther OTM puts to raise the strike on your calls without buying them back completely.
-If your shares are called away, you will have a lot of cash to sell puts.
-You have equal chance of getting it wrong or right whatever you do.
-I try to stay away from making quick adjustments to my original position for a few reasons: 1) The psychological regret is more if you adjusted the position and then you were wrong. I’d rather be patient with my original position that I entered into and be wrong then to panic BTC at a loss and be wrong. 2) If you always buy back when it goes against you, you will be taking a lot of losses you don’t need to and then you still have the anxiety of when to resell. 3) If you’re OTM you have >50% chance of staying OTM, all things being equal. 4) You were okay with being exercised when you sold. That’s the only advantage I know of when selling options - to be okay with either outcome is really liberating. If you take a loss just because the market went against you, it means you weren’t really okay with being exercised. Ultimately, I’ve come to a place where I just try to psychologically balance my positions - if I find myself too desperate for the stock to go up or down, I leverage up or down the other way accordingly. I have a large long position, so selling weekly calls balances it out in that I either make a weekly income or my net worth goes up. At the end of the day, the mental stress is not worth it to make a few bucks, especially when you never know what’s going to happen, anyway.
-How to play catch up with a bullish channel: Roll for $0 or a small debit. If an ATM weekly roll is not affordable maybe it's worth exploring longer dated options and bet on an eventual reversal to the mean, which means there has to be something on the calendar that will compel the market to take a more cautious stand: Maybe a 1st quarterly GDP reading, a FOMC meeting, a monthly CPI release, the P&D report, etc... use these events as a potential temporary downward magnet for the SP and roll your calls to just before them. This is what you should do if something like a November 2020 or November 2021 happens again.
-If you're caught dead with a slightly ITM call, roll it out a few months or so.
- If you're caught with an ITM call within a bullish channel, identify its slope, then you will have an idea of how ITM you can afford to be and still be able to play catch-up.
- Be VERY careful with selling puts along these rallies. Don't assume it will go on forever. Once it reverses, it can reverse hard and you won't have time to react. Do still sell them as you should never fight the trend, but be conscious of the channel which will act as a magnet pulling the SP back down.
- Bullish channels have a limited shelf-life and the stock tends to gravitate toward the bottom of the channel overtime before eventually falling out of it and it takes a tremendous amount of energy to touch the top. Every time it touches the top, ask yourself what happened. Did something fundamentally change, like a massive ER beat, or is it something else? If TSLA rallies to the top all by itself then pls, for the love of God, don't stand in front of it. On the other hand, if it is simply responding to unexpected developments that don't really have a long term impact to the fundamentals, then it's more of a flash than a freight train. This is when one should expect a reversal to the mean.
- Can TSLA break out of a bullish channel? It sure can, but the market doesn't like it. Every time that happened in the past, the stock would eventually fall back to earth after a spectacular breakout. For example, the first time was inclusion in the S&P 500 followed by a gamma squeeze into Q4 2020 ER. The second time was a massive Q3-2021 ER beat followed by a massive short squeeze. But, eventually, the stock couldn't survive the high altitude and crashed back to earth weeks/months later.
- When TSLA is acting irrationally, especially after a fundamental change, get out of the way.
- I trade until my leap spreads are free. Then, because one side is short and the other is long, one side always has a loss. Because of FIFO, I can pick the side with a loss, day trade it, and have a tax loss even if the spread overall is profitable. 100% of my gains this year are in a bunch of 2025 leaps, so I won’t pay any taxes this year so far, even though I’m up a ton.
Bonus from user "BXR140"
Fundamentally, I never exit a -C/-P at a loss. That's my #1 rule. (My other #1, as noted above, is "don't ever roll for debit"). I'll simply keep rolling until I exit through expiring worthless (or at least getting close to worthless and then closing out)--even if it takes weeks or months--by slowing burning down the negative value through progressively more favorable strikes. I certainly wouldn't suggest that's the most profitable approach as it can tie up capital that could otherwise be earning profit, but it keeps me in check on the selling side. Selling options is almost inherently a long term losing game if you don't apply some strict rules for selective entry/exit (to be fair, that's all trading, but especially with selling options), and so "never close for a loss" is my approach to never getting too deep and, ultimately, never losing.
Next, if you're trading in a Fidelity IRA (and probably many other IRA platforms?) you're pretty limited in rolling. You can't do splits and flips like you can with a regular Level 4 account. Much to my chagrin you can't even sell a call against existing shares to back into a covered call position in a Fidelity IRA (To be fair, I haven't confirmed with Fidelity whether or not that's user error on my part...).
But to answer your question, generally when it comes to selling options and especially selling naked/cash covered, you're should be doing so at a strike where your analysis says the price won't go. So for instance on a put, if your original strike was (as it should be...) below a technical support price/zone and the price blew out the bottom of that support and now you're ITM, you'd want to identify the next area of support (using whatever method works for you) for your roll-to strike price. If that next area is pretty close and especially if its strong and especially if the stock is in general strong both technically a fundamentally, you can take your chances by just rolling outa week in expiration and down in strike or however far you can go on credit, based on the logic that your analysis suggests there could be a fairly quick reversal in underlying back into your favor. But...if the signs aren't as positive, you'd want to roll farther down and, preferably, not really farther out (you want to get out of this, after all).
So if things look really shitty you could just flip the -P into a -C. This one's a pretty agressive move and I definitely wouldn't recommend it as a go-to as it explicitly means you're getting yourself out of an ITM -P and into an ITM -C, but its also the most basic: All you're doing is buying to close the -P and selling to open an equivalent value -C, again at a strike that makes sense, and again, for credit. This is mostly useful in a major tanking scenario where the whole market is going south, but can be used around earnings too if it looks like a post-earnings dump is going to keep swirling.
Just to be clear, when I say always roll for credit, I'm talking cents on the contracts (or dollars on the position). I usually try not to go below $10 just so I know any fees and commission will be covered, but at some point the credit your taking could be used for a more favorable strike/expiration. Depending on the option B/A spread, I'm usually collecting maybe tens of dollars on the position.
The other thing you can do is a split--all this means is you buy your -P to close (or -C, or spread, or whatever--none of these strategies are just about puts) and sell multiple -P's to open, 'splitting' the value of the original -P over that number of -P's for the specific purpose of having a lower strike--ostensibly one below a strong support--and, if possible, a closer expiration. This can be a bit of a rabbit hole too so you really need to be careful about it. It ties up more capital/margin and increases your downside risk. But, in moderation and in the right scenario it can be a reasonably safe and fast way to get out of a red position.
As previously noted, my go-to is a combination of the two--a split-flip. I use it all the time to pull out of ITM covered calls when I don't just want to close the position (RSUs especially), but I'll also do it with diagonals (which are sort of the all-option version of a covered call) and vertical spreads, though rarely do I go long on a vertical spread... Anyway, in that scenario I BTC my ITM -C and STO a -C with a higher strike, and then also STO a -P (and as previously noted, usually a credit spread over a naked -P), and occasionally--especially for WAY ITM -C's--multiple -P's. This works no problem in a standard four-leg orders as it ends up looking like:
BTC ITM -C
STO less ITM -C
STO OTM -P
BTO farther OTM +P
The reason I like this strategy is that it splits the current value of the ITM -C across more contracts, giving me a more favorable -C (which is the primary thing I'm trying to get out of). It also flips some of the red value to the other side of the equation, so price movement in the unfavorable direction isn't all bad--if price keeps going up on underlying those -P's are going to lose value quickly, if price moves down that makes my ITM -C less ITM, and, assuming I was smart with where I chose my -P strike, they'll still expire worthless. Bear in mind that split-flip example was solving for an ITM -C, but you can imagine it working for an ITM -P too.
Somewhat related, I'll often sell ATM or even ITM CCs during earnings week to capture the mega high Vega. For instance, on Monday two weeks ago I sold a just-ITM ROKU weekly where the time value was (I think) something like 7% of my capital on the trade. So that meant that if earnings hit I'd make 7% on my capital in 5 (or less) trading days, and if earnings tanked I'd have something like 8% (or maybe more?) downside protection. Earnings ended up pretty shitty, but I still ended up with something like $100 profit.
Yeah its good to understand that, especially in context of The Wheel, a -P is NOT the inverse of a covered call, so you absolutely shouldn't be using the same logic on choosing strike prices and expirations. The inverse of a CC is if you shorted 100 shares and then sold a -P.
Insert same soapbox as upthread about ∆ having little to do with selling options, but again I appreciate that you're using ∆ to try and find some way to normalize risk. I just can't stress enough for folks that maybe don't fully understand that nuance that selling options to realize ∆ is a terrible way to try and make money.
Since it sounds like you're using Fidelity, look into the "Probability Calculator" and "Profit/Loss Calculator" in the options tab. In slightly different ways both of them provide a much more accurate normalization you're looking for, in a way that incorporates the whole picture of the contract and not the very small piece of the pie that's ∆. Picking a -C/-P based on ∆ is like picking a Tesla over XYZ car because you like the frunk. Yeah, no question its cool to have a trunk. But if the reason you pick a Tesla is because of the frunk....
Otherwise, monthly CCs really aren't a bad way to go. You get more Vega on the monthlies than the weeklies which is nice for profit, less maintenance than a weekly so that's always great, more room to run (you'd have a farther OTM strike with a monthly than a weekly), and more time to pull out of an ITM scenario if you're feeling YOLOey. And most importantly with a CC vs a naked/cash covered put, its really no big deal if you go ITM on a covered call. Being ITM basically just gives you downside protection until you can roll out of it. Obviously you get no income during that time, but each roll that moves the strike up you sort of 'unlock' more profit.
Yeah, its super sketchy to open a -C/-P position without an exit at some price target that makes sense. Basically, if you're actually letting an option expire worthless, odds are you're doing it wrong. A common value to close is $5, and some (many?) brokerages will actually waive fees when you're closing a contract that low since they don't want to deal with the hassle of potential assignment. And seriously, if you're at $5 contract value--especially if its not later in the day on Friday, its kind of insane to not close out.
But...IMHO a smarter, less aggressive price target is the way to go--say, closing out when contract value is 25% of what you sold it for. A potentially more practical method to implement this is to roll the value that's left to your next preferred expiration (next week, next month, whatever). WIth pretty much any OTM contract, and especially weeklies, its a better deal to roll before close on Friday and sometimes even Thursday, unless you're sufficiently OTM on that contract and have the capital/margin to open up a new position. Depending on how close to zero your current contract value goes, its very plausible that you can find a suitable contract for next week that has better theta.
So the rub with selling options is that one can easily fall into the too-good-to-be-true trap. Its easy for a trader to be a little lax on finding proper entry and exit points based on the perceived logic of "I don't have to be right, I just have to be not wrong". Unfortunately, that approach significantly increases the already unfavorable odds that one cycle will wipe out (or more) the profit collected from many previous cycles. Make no mistake, selling options still requires diligence with an entry, exit, and stop.
For a case study on the unfavorable odds, had one sold a 1450 weekly put on Friday close they would have collected a little less than ~$1k in time value--that would be for a contract that's ~$200 OTM and has a ~10% chance of being ITM. Assuming that's average collection (it won't be, but first order, that's not a problem with the case study), over 9 cycles one makes $9k on $145k worth of capital. First blush, 6% in two months ain't so bad, right?. The issue is that on the 10th cycle that's statistically ITM, the underlying drops $200, and at that point you're just hoping you found the bottom of a pretty major drawdown. If the underlying goes down more than $10 from there (equivalent to the $1k you collected on the current contract), you're eating into the past two months of profits. If the underlying goes another $100--equivalent to the $9k you collected previously plus the $1k from the current contract--your last 2 months are a wash. If it goes farther, you're progressively more and more in the hole. And of course if that statistical ITM happens sooner in the two months, it all gets more red.
Similarly, a more aggressive case using 1550 would have collected ~$2.1k on a ~25% probability ITM. Assuming 3 good weeks you're at ~$6.3k profit, but now the fourth week only needs a dip of $100 in underlying to go ITM, and a ~$184 drop in underlying to wash out the ~month's work.
The same math applies at any underlying price and any expiration timeframe, and the same math applies if you're allowing yourself to be put shares (and thus you're starting in the red). Its a tight line to walk to maintain profit with that kind of strategy, and the odds of staying on the right side of the line are SIGNIFICANTLY improved by having things like proper entry, exit, and stop targets.
Countering those case studies--and obviously a different strategy completely--for a comparison in profit, remember my "looks like we might see it drop down to high 1300's" from upthread? Had one bought an ATM call on the first drop down and back through $1400 on 7/24 (I'm using November for expiry as its a good rule of thumb to never buy calls/puts closer than ~3 months expiration), one would have laid out ~$25k in capital and would be sitting at ~$13-14k profit. In three weeks. (To be clear, that was before I made the statement). Had that same call been purchased the second time price dropped down and back out of the high 1300's, confirming that support, (that would have been on 8/10, so after I made the statement), one would have even more profit.
As it stands I bought calls a little too aggressively on that price target, risking a bigger drawdown in an attempt to beat the flag breakout. I bought near close of 7/31, which was around $1430 underlying--and I bought $1600 (Nov) calls to reduce my ∆ exposure a bit, so I'm "only" sitting at $9.4k/contract profit right now. Futures are looking good right now and while Asia-Pac is split, Shanghai is up like 2.3% (to be fair, TSLA seems to deviate from the market more than other stocks...but TSLA is increasingly heavy in China so seeing DJSH up can't be bad news), so there's a good chance I'll open to a nice jump in profit.
The point is that the level of effort is basically equivalent in the two strategies (I'm actively charting TSLA either way), the position I took basically waited for [what I deemed] a quality entry point, whereas the -P strategy relies on quantity over quantity to return results. And, since any kind of trading or investing is all about making money, it does seem to make sense to focus on quality of unbounded profit positions over quantity of bounded and limited profit positions...
Ditto.
LOLIf this thread and that thread say two opposing things I’m going with what was said on this thread ten times out of ten.
Great analysis and it is difficult for me to do, but i understood the logic and reasoning. i wish i have the knowledge and capacity to follow your dirstions. Anyway I am going toread this several times till i get something out of it. excellelent guidance and i greately appreciate your contribution. Thanks.Some nuggets of wisdom from @dl003 over the years:
On TSLA Bull Runs
While it is true that TSLA can climb a lot more as it did in the past, it needs to do one thing first: retrace at least 50% of the initial spike up. If you go back, it happened every single time. I invite you to go over this post.
The reason for this is deeply rooted in human psychology. It's not manipulation or random occurrences. Wave 1 up from the bottom can be impulsive because it is fear driven:
a. Short sellers fear getting blown up
b. Bottom catchers fear missing out
Smart investors do not want to buy any stock that has just run up 80% in 4 weeks, regardless how low the starting point was. Why? Is it because they don't think TSLA is worth $180? No. They don't buy it here because they don't want to compete against short sellers and bottom catchers in chasing it at this price point. If anything, they want these people to buy every share they're forced to buy before taking their own profit on the stock. When the stock or the economy has some piece of bad news, as bad news tends to happen in a shaky global economy, reality is going to set in and people is going to flip "Tesla is still the same company as it was before the ER and a lot of the initial runup was just short covering", it will retrace deeply as 80% profit in a month is no joke. The stock should retrace at least 50% before deep pocket buyers say ok the price is attractive again. That's wave 2. Wave aka the retracement is simply a test of strength for the rally.
Wave 3 happens only after the stock has been tested at the bottom of wave 2 and that's when the real fun begins. That's the irrational spike you're probably thinking of. Those were wave 3, not wave 1. We are currently in wave 1. Actually we could already be in wave 2. The question is not if, but when it will retrace deeply.
On Option Selling Decisions
As an option seller, there are 3 kinds of probabilities I want to know before opening a position:
a) What's the probability of the current price being close to a local top / bottom?
b) If, in the off chance, the stock goes beyond my expectation, what's the probability of it re-visiting the current price during the next consolidation phase?
c) If I don't know the first 2, what's the probability of the stock never exceeding my strike before consolidating?
At 206 last week it was so close to my bottoming zone that I decided to wait on selling CTM calls until I get more information from the next leg up. Once the next leg up got rejected hard at 217, it helped me draw the levels: 227, 236, 248, and 260. As it got close to 248, I sold 250C expiring 11/24. There were still a risk of the stock going past 250, but the probability of the next consolidation dropping the stock below 250 was very high. I do these calculations whenever I'm mulling over what position to open/close.
Right now I don't expect the stock to drop hard which is why I'll be looking to sell puts once the next leg down has concluded within my bottoming zone. However, there is still a risk of a straight up crash from here. The only thing that swings me over to the "healthy pullback" camp right now is the fresh overbought reading on the 4H RSI but that, too, is not 100% guaranteed.
On the upside, it is favorable to sell calls right now until 226 has been violated. However, the closer it gets to 242, the safer it is to sell calls as the distance between your entry and the stop loss point gets smaller and smaller. It may not get to 242 at all so if you wait, your return may diminish. If it trades over 242, the bottom may have been made at 226 but that's not what I'm getting from the chart.
Many of your questions are outside of what's going on in my head. Questions such as what the closing price will be or how strong the move will be I can't answer. However, what I do say out loud like "I wouldn't be surprised to see 230 next week" are not said willy nilly. Even if you don't agree with it, it's better you understand why I say it.
Cycling contracts
It depends on the wave. For example, if you sell calls at top of wave 1, it's prudent to close them at the bottom. If you sell OTM calls at top of wave 3 and it's a major one, you probably can hold those calls all the way to top of wave 5. ATM calls you should always close at nice profits. Macroeconomic timing and OPEX also play a big role. If the stock reverses to the downside on Wednesday morning then might as well hold those calls all the way to EOD Friday. Reversal happening on Monday leaves more room for bottoming and subsequent upside reversal.
Using IV to track PP direction
I sell a lot of long dated TSLA calls which allow me to track their IV without being interfered by theta. The method is simple:
On Monday, TSLA closed up $2 and a group of 2025 calls I sold went up $1200
On Tuesday, TSLA closed down $4 but the same group of calls only went down $1400
it's telling me that even though TSLA closed down, demand for calls still ticked up which partially offset losses in value due to delta.
That and the levels drawn before hand helped to confirm each other
Today TSLA went up $5 but that same group only went up $1600. So, the opposite has happened. Call buyers were selling into strength.
When TSLA gets volatile
During Winter, what matter most is keeping yourself and loved ones safe and sound: Cash reserve, low margin usage, low expenses etc. Whatever mistakes we made during the good times, now is not the time to ponder the wouldas and couldas. Now is not the time to “make it back.” Bear market doesnt just go straight down. Bears can lose just as much money as bulls during a bear market. I know because I see it every day. Once we have ensure our survival through this dark time, we have to accept what we have right now is all we have to work with. It keeps us from taking unnecessary risk. Then, we need to find systems and methods that we have successes with.
Start small and slow.
Fail small and often.
Make those small losses back before betting larger.
Personally every day I try to answer these questions:
1) What are the important supports/resistance levels?
2) What is the large/medium/small degree wave count? Are we more likely to go up/down/sideway this day/week/month?
3) Is there a bullish/bearish divergence signal on the appropriate timeframe? If we drop 10% from high, I’m not going to look at anything lower than 1H for signs of reversal.
4) How is the market going to try and trap me today?
• If the trend is up LT and MT=I'm going to sell ATM puts aggressively
• If it is up LT but down MT=I'm going to try to find a ST bottom to sell OTM puts
• If it is down LT=I will not sell any puts
Bottoms can be called based on S/R, wave count and divergences.
Macro event timing is also a powerful tool. I don't know how CPI and FOMC is going to go, but I know the week before will be a "reversal to the mean" week. People will settle big bets before the week is over which means there's a limit to how low/high the SP can go.
Handling ITM short calls
An ITM call is not a death sentence. You don't have to let them call away your shares. You can roll them out, betting on a reversal to the mean if you think that's a reasonable expectation. That's your exit strategy.
The stock may break 180 in the next 6 days for a plethora of reasons. Maybe China sales number this week is going to be great. Maybe market rallies a lot more from here. Maybe maybe maybe. But for the stock to close 6/30 above 210, there must be some sort of significant development that compels market participants to allow TSLA to break out and hold above the breakout point right before a significant release which may turn out to be a dud. I'm a lot more confident this will not happen than I am about whether 180 will be broken next week. And -185C next week can be rolled to 210 for 6/30.
So really, for me, the question has never been "Will TSLA break x by date y?" but rather "if TSLA breaks x by date y, will it ever revisit x again in the future and if so, how long is that going to take?"
If you don't accept the possibility of your calls going ITM every once in a while, that means you can never be wrong in picking a strike and we all know that's impossible. All you can do is pick a good r:r play and have a solid exit strategy which may require a reasonable cost in term of money and time. That lowers my stress level. Life is unpredictable.
Breakouts/Breakdowns
First we need to see a clear rejection to the downside, then a few down days before spiking again. Judging by the strength of that spike, we can then tell if its the last spike or not.
When Selling longs
Do a synthetic short. Get an ATM -call and a +put at the same Strike. That should help cover losses, with volatility so high the put premium is pricey but so is the credit you are getting for the CC.
If you had sold your longs, you technically sell but don't receive any premiums for the sell. Here you receive a premium and then in turn use the premium to buy some downside protection. Worst case stock moves up and you lose your shares and the +P goes to 0. But you now have a 50% probability of the stock moving down and you benefitting, not only with a IV crush but also your ATM +P now being ITM. There is a risk of the stock just being flat, in that case you end up net 0, but you still keep your shares.
If you had sold your shares at what point do you consider it safe to move back into the stock? What if the stock moves up after earnings? So the question is are you willing to take a 50% probability of success that the stock moves lower post earnings?
If the stock moves up your -C can just be rolled out to a later in time expiry, you cut your +P at a loss (insurance) and you still possibly collect a little bit more premium by going our further in time.
By selling your shares outright you are 100% sure that the stock price will be lower.
On Averaging down
There's a science to averaging down and most people do it wrong. Averaging at the next strong support in hope it will do a DCB there. If that fails, look for the next strong support. This means you have to acknowledge that your first buy can be too early and have a plan to average down before you pull the trigger.
However, this means the very first buy has to make sense. If you buy just because its "low enough", chance are you will average down too early. If you do it right, it will feel less like averaging down and more like buying at supports that fail to hold - this is very common and an acceptable risk in trading. Best if you buy at supports AND have a SL for when your thesis doesnt work out. So instead of holding your first buy all the way down to the next support, you cut it early for a small loss then wait for the next support to try again, again with a SL. Setting SL IMO is one of the hardest things to get right that separate good traders from bad ones. If you set it too tight, you can get faked out. If you dont set it, you risk massive losses. A good Stop Loss is made possible by a good entry. If you enter with crappy R:R then it will be extremely hard to set your SL right. So you have to get both the entry and the SL down to a science, something very few people can do.
Averaging down is hard if:
a. You are too bullish on the fundamentals and think sooner or later it will go up.
b. You don't have a systematic approach to setting entry. "feeling" is not a reliable method. I like charts. Theres also dark pool, flow, etc...
c. You think in absolutes, that you cant be wrong so averaging down is always your plan B or C instead of plan A.
AFAIK, I'm the only one here that has been selling naked calls (there's no such thing as a naked CC - CC implies you have shares to back the call while naked means you don't). I have done risk assessment to death on this topic.
BW/BCS/CSP
A BW is simply a CSP. If you buy shares at 765 and sell calls at 740, with some discrepancy in premium due to interest rate, its the exact equivalence of selling a 740 CSP, only your head is tricked into thinking its not by the 2 separate transaction. So, keep it simple and think in term of CSP. If you are willimg to sell a 740 CSP, then proceed with the BW and vice versa.
Treat naked short calls as you would BCS, only with a longer leash if your aim is income. Naked calls mean you dont cover it with anything to maximize returns and reduce risk. The more net premium you receive, the less risk you have to take.
What do I mean treat it like you would a BCS? Do I mean always sell FOTM naked calls? No.
If you normally sell BCS as a directional bet, like some of my friends do. They would, for example, sell 715/720 NVDA BCS right now if they think it will go down more. However, if you are not into directional bet, like I deduce from your posts, then sell FOTM naked calls, same as your BCS. The difference is: further OTM than BCS. If you normally go with 6 SD on the BCS, then go with 7 or 8 SD on the naked call. Same entry (sell at resistance) as a BCS for maximizing R:R.
TL;DR:
Naked calls = BCS
Covered calls (even if DITM) + long shares = CSP
Keep it simple and know what you want to get into. Directional or nondirectional? Up or down? Capital in cash to earn interest or deployed in shares for higher premium?
On Bull Runs
Trying to predict this with a hard ceiling is the definition of standing in front of a train. Once the stock is confirmed to be uptrending, best thing to do is buy at pull back and ride it. Get out when momentum stalls through RSI & MACD divergence.
I said repeatedly that this week exp & 165+ only because 165+ would give enough wiggle room if it bounces hard. Look how many people still got stuck below 165. 165 was a good number as price action has shown post ER. Got 2 good dips below 160 from 165 but eventually it gave because the stock was too oversold. So nothing is 100%.
When Short Puts Go ITM
a) Sell 100s and then reopen a short leap put with some extrinsic left, hoping this one can stay opened long enough for the SP to recover. Do this in 100s increment to make sure you get a favorable fill on the puts (maximizing extrinsic).
b) Instead of trying to get back into a short put position, treat it as a BW (which it is). Keep 100s and then sell a leap CC against it. The extrinsic on the CC will be much more than the one on the same strike put because of the high interest rate environment we're in. See if this difference can make up for the amount of interest you're having to bear by holding the shares instead of the puts. For example, a 280 BW is going to have a $12 extrinsic while a short put only $4. $8 divided by $280 * 11 months / 12 months = 3.1%, less than the current rate on cash. Worth to notice that a BW is going to have slightly higher delta and higher theta than a short put so it's favorable if the SP keeps basing here for a while longer but less appealing if the SP reverses hard from here.
c) Start selling weekly CCs instead of a single leap cc against those 100s. The weekly premium when added up can go higher than 3.1% and are more flexible against sudden reversal in price, assuming you're not getting caught in a rip.
d) Do (a), but weekly lower strike puts instead of leap puts, collecting more weekly extrinsic.
The goal here, if you still want to hold on to this long position, is trying to collect premiums to pay for the interest given up in the exchange of cash for shares, or simply reverse that exchange.
On Choosing Safe Covered Calls:
The formula to find a new strike price is: New theoretical top x 0.618 - (minus) 87 =x.xx
If you wonder whether your roll is a good/safe roll, do this quick calculation: strike price / 0.618 - 141. The result will be the highest TSLA can go before correcting for your roll to be considered "safe." I know I've been harping on about the 50% retracement. However, to be "safe", give yourself only 38.1%. If the stock tops out at 287, it will pull-back to 265 minimum.
To choose a low, the retracement/consolidation that precedes it has to be a major one.
If you roll your CC to 197.5, the highest TSLA can go before correcting will be 260 before pulling back to 197.5. That's safe. As your CCs go ITM, don't just look at how far the stock can run, but also whether your CC will survive all the way to the bottom of the pullback. That's what matters. It keeps you from cutting losses prematurely. That's also the reason why when I have ITM CCs, I'd spend about 0.5 - 1 to roll them out every week, improving the strike $2.5 - 5 further than I would have without spending that $0.5 - 1. Since the pullback will be at least 38.1% of the runup, every $2.5 - 5 strike improvement you give yourself can work itself out to $5 - 10 added to the top.
On Selling CC's during volatile weeks
The chart screams short squeeze, structureless. It didn't get down to 159, invalidating the rising wedge. It strengthens the case for 265 later this year. Its is very dangerous to call the top right now as it has made fresh new highs on the daily RSI. Huge momentum on MACD that will take at least a week to cool down and possibly curl down. I'd sit back and wait for bearish divergence on the daily, or at least on the 4h, followed by a reversal candle, then a few follow through candles, then a weak retest before having conviction on CCs.
Fib and the psychology of choosing strikes
First, have a set of criteria for calling the bottom. For me it's a bullish divergence on a bigger timeframe, depending on the tenacity of the drop. For this previous drop, I was looking for at a minimum a divergence on the 4h timeframe. Luckily we got it on the daily as well. Once that's in place, I look for the SP to reclaim the 10 SMA, signaling a change of direction.
That's how I'm calling for 175 to be the bottom. If it's not, then we start over. I don't care what other people think unless they show me their method and I agree with it.
Fibs:
Once a bottom is in, the stock will ALWAYS at least reclaim the 0.236 fib level and MOST OFTEN will be rejected initially by this level. This level was 194.14, see how cleanly it went? Knowing this, pick your strike accordingly. If it's in the middle of the week, you can try to sell a 2-3 DTE call on these conditions:
1. The strike price is at least higher than the 0.236 level. That's my strike.
2. The stock price is at a point where the 0.236 level falls inside of the 1 SD from the SP. That's my entry. Quick way to do this is look at that 2-3 DTE strike. Add the ATM call & put premium then multiply that sum by 0.85. That's 1 SD. Add that to the SP and see if it exceeds 194.14. If it does, it means the SP will hit 194.14 first before fulfilling its quota - poised for a pullback soon. If it is lower than 194.14, it means the stock has room to run without exceeding its quota. You will incur greater paper loss before it pulls back.
Now, if you want to sell a 6-7 DTE call around this level, then take profit after it has hit 194.14 and pulled back because you don't know what is going to happen after the pullback. If 175 is the bottom and this is just a pullback, the next move will be up to take out 194.14. Since you're allowing the stock enough time to both pullback and go back up, take this into consideration.
The 0.381 level at 209 is a bit different. Since the stock dropped so aggressively both before and after ER, you can tell this is a serious move. As such, the 0.381 level will not only act as a super strong resistance, but also a boogeyman, preventing the stock from ever getting close. However, if the stock acted differently (dropped little before or after ER), then you can expect 209 to be taken out at some point before the next P&D and 219 gets challenged.
Therefore, once the stock has taken out 194.14, proving that 175 was indeed the bottom, you can make 209 your last stand for selling calls. Can go even lower to 205. If the stock runs past it, it will come back soon-ish.
The magnet:
Given how negative reaction went around this ER, no matter how far the stock runs up between now and Q1 P&D, I expect it to pull back just before as fear sets back in and people will want to be mostly out of the stock. The bottom remains, but the lowest fib level at 194.14 should act as the magnet.
If the stock can take out the 209 level & hold above it convincingly, we can be a bit more serious about much further upside. This is when I like to go with a 2 SD strike and using intraday exhaustion as my entry. If the stock exhausts at 210 and the 7 DTE 2 SD strike is at 225, I'll sell 225. Tomorrow if the stock runs up again, I'll calculate the 2 SD strike at the end of the day. If it has moved up to 227.5, then I'll roll my strike up to 227.5, prepping for a blow off top that can overextend past resistances.
On detecting a breakout:
As we're approaching the strong $209.3 resistance. Keep an eye out for a few things:
a) Yes, the stock has shown strength on the 2h, but will it show it on the 4h and take us up further? Meaning, once it has taken out $201.30 (closing over $201.3 on any 2h candle, not just breaking it intra-candle) will the next candles be green until it's reached overbought on the 4h?
b) On the day when it takes out $201.3, will the highest closing price far exceed $201.3, resulting in an even higher RSI reading on the 2h compared to the peak of 72.43 on Friday? If not, we're just going to have a bigger bearish divergence, now on the 2h, leading to another pullback which can morph into a full blown correction, possibly marking the end of this recovery.
Both are very closely related. If either one happens, the other often follows. However, we will be happy with just one. If none happens, then be very careful on that day and prepare for a steep correction.
I sure hope the stock can go further than just the 2h timeframe but we trade the chart, not what we wish to happen.
For the record, the 4h RSI is right now sitting at 60.8. To reach 70, I estimate it needs to reach 215 minimum. The good news is it had reached it in both of the big DCBs we had in 2023.
Momentum tips
a) Monitoring IV and rising call prices as one metric
b) Divergences and volume are very helpful.
c) Fib level where divergence develops tells a bigger story about what's coming next. From a potential bottom, if momentum stalls just above the 23.6 level, the bounce has no legs because it has to get above 38.2 for a bottom to be in. Stalling just above 23.6 is no good. This is just one of many things to look for.
Detecting Hidden bullish divergence
Lower rsi on higher SP at the TOP is bearish divergence, leading to reversal.
Lower rsi on higher SP at the bottom is hidden bullish, leading to continuation.
When to buy LEAPS
The time to buy LEAPS is when we're at the bottom, then buy close to the current share price - if you get in low and the SP takes off then they are greatly de-risked by a lot of the value flipping from extrinsic to intrinsic - write against them on the way up to increase profits, mostly I'd say a few months out at very OTM strikes.
On Selling Puts After Shares Assign On a CC:
Not much of an expert when it comes to selling puts as I've always been almost 100% all in and only sell naked puts for extra income. But if your goal is to get back in, treat a short put as a BW. When you think it's bottomed out, try to guess how far it's gonna run up and how far the pullback is going to be, before going up again. You have 2 choices: either get in at the bottom and ride it back up or sell some puts. If you sell puts at the bottom you won't be able to get back in at the bottom because that how bottoms work. Once it touches it, it's gonna rocket back up. If you sell puts at the bottom, you've determined to get back in at the pullback. Say it touches 235 and you think that's the bottom. Then you think it's gonna go up to 260 for the 2nd peak of the triple top pattern, before pulling back to maybe 240. At 235, you sell a 240P 1 week out. Fun fact: a 240P sold at 235 gives you the same amount of time value as a 230P. As the stock touches 260, you close this 240P and then use the profit to get back in when it pulls back to 240. If it sounds complicated, that's because it is. Nothing beats a good old fashion share grab at the bottom.
On Rolling
There's no use talking about strikes without looking at the chart. Generally speaking, I look at option premium as primarily made up of 2 components: theta and delta. If you think the stock is going to make big moves in 1 direction, triggered by some sort of signal, then better to exchange delta for theta, and don't half ass it. If you think the stock is going to reverse, do the opposite. This is not about how long you're gonna be tied up. It's about whether you have the information and conviction to do this dance. Done right, you can get a ton of room for the stock to run when it's about to run and then roll it back just in time before it reverses. Thinking "how long am I gonna be tied up?" is already accepting defeat. Stocks don't run up forever, when you only think about rolling it out, you're only dealing with one half of the journey without giving any thought to the second part. So if it breaks 258.08, roll it out to December 2025 at even credit. Then when you think it's topped out, roll it back in to 7 DTE for even credit, or better yet, close the calls and sell the shares. Now, my chart read can be wrong and it has been wrong enough times to make other strategies just as relevant if done right. This is just how I'd do it.
Assorted Notes (not sure who shared them)
- If you find yourself too desperate for the stock to go up or down, leverage up or down the other way accordingly.
- Can rescue ITM short calls by flipping some to puts using $$ from exercised short calls. You could salvage some or all of your 9/15s by doing that. That would then shift your risk to the downside, but you might be able to roll the puts back down a bit if that were to happen.
- I would either roll out weekly or accept assignment and then sell weekly puts at the same/similar strikes (again rolling weekly if wrong).
- Watch out flipping calls to puts
- Don't overreact by rolling sold puts higher to finance rolling sold calls higher
- To cover short calls which are ITM I would consider buying ATM calls on the short term. In this case you need to consider delta. You need to sell 100 shares in order to obtain 2 ATM calls. 100 shares is 100 delta and 2 ATM calls is also 100 delta. If you do this you trade gamma. If stock price goes up your 2 ATM calls will run faster than 100 shares. If stock price goes down your loss will run slower than 100 shares.
-You could sell farther OTM puts to raise the strike on your calls without buying them back completely.
-If your shares are called away, you will have a lot of cash to sell puts.
-You have equal chance of getting it wrong or right whatever you do.
-I try to stay away from making quick adjustments to my original position for a few reasons: 1) The psychological regret is more if you adjusted the position and then you were wrong. I’d rather be patient with my original position that I entered into and be wrong then to panic BTC at a loss and be wrong. 2) If you always buy back when it goes against you, you will be taking a lot of losses you don’t need to and then you still have the anxiety of when to resell. 3) If you’re OTM you have >50% chance of staying OTM, all things being equal. 4) You were okay with being exercised when you sold. That’s the only advantage I know of when selling options - to be okay with either outcome is really liberating. If you take a loss just because the market went against you, it means you weren’t really okay with being exercised. Ultimately, I’ve come to a place where I just try to psychologically balance my positions - if I find myself too desperate for the stock to go up or down, I leverage up or down the other way accordingly. I have a large long position, so selling weekly calls balances it out in that I either make a weekly income or my net worth goes up. At the end of the day, the mental stress is not worth it to make a few bucks, especially when you never know what’s going to happen, anyway.
-How to play catch up with a bullish channel: Roll for $0 or a small debit. If an ATM weekly roll is not affordable maybe it's worth exploring longer dated options and bet on an eventual reversal to the mean, which means there has to be something on the calendar that will compel the market to take a more cautious stand: Maybe a 1st quarterly GDP reading, a FOMC meeting, a monthly CPI release, the P&D report, etc... use these events as a potential temporary downward magnet for the SP and roll your calls to just before them. This is what you should do if something like a November 2020 or November 2021 happens again.
-If you're caught dead with a slightly ITM call, roll it out a few months or so.
- If you're caught with an ITM call within a bullish channel, identify its slope, then you will have an idea of how ITM you can afford to be and still be able to play catch-up.
- Be VERY careful with selling puts along these rallies. Don't assume it will go on forever. Once it reverses, it can reverse hard and you won't have time to react. Do still sell them as you should never fight the trend, but be conscious of the channel which will act as a magnet pulling the SP back down.
- Bullish channels have a limited shelf-life and the stock tends to gravitate toward the bottom of the channel overtime before eventually falling out of it and it takes a tremendous amount of energy to touch the top. Every time it touches the top, ask yourself what happened. Did something fundamentally change, like a massive ER beat, or is it something else? If TSLA rallies to the top all by itself then pls, for the love of God, don't stand in front of it. On the other hand, if it is simply responding to unexpected developments that don't really have a long term impact to the fundamentals, then it's more of a flash than a freight train. This is when one should expect a reversal to the mean.
- Can TSLA break out of a bullish channel? It sure can, but the market doesn't like it. Every time that happened in the past, the stock would eventually fall back to earth after a spectacular breakout. For example, the first time was inclusion in the S&P 500 followed by a gamma squeeze into Q4 2020 ER. The second time was a massive Q3-2021 ER beat followed by a massive short squeeze. But, eventually, the stock couldn't survive the high altitude and crashed back to earth weeks/months later.
- When TSLA is acting irrationally, especially after a fundamental change, get out of the way.
- I trade until my leap spreads are free. Then, because one side is short and the other is long, one side always has a loss. Because of FIFO, I can pick the side with a loss, day trade it, and have a tax loss even if the spread overall is profitable. 100% of my gains this year are in a bunch of 2025 leaps, so I won’t pay any taxes this year so far, even though I’m up a ton.
Bonus from user "BXR140"
Fundamentally, I never exit a -C/-P at a loss. That's my #1 rule. (My other #1, as noted above, is "don't ever roll for debit"). I'll simply keep rolling until I exit through expiring worthless (or at least getting close to worthless and then closing out)--even if it takes weeks or months--by slowing burning down the negative value through progressively more favorable strikes. I certainly wouldn't suggest that's the most profitable approach as it can tie up capital that could otherwise be earning profit, but it keeps me in check on the selling side. Selling options is almost inherently a long term losing game if you don't apply some strict rules for selective entry/exit (to be fair, that's all trading, but especially with selling options), and so "never close for a loss" is my approach to never getting too deep and, ultimately, never losing.
Next, if you're trading in a Fidelity IRA (and probably many other IRA platforms?) you're pretty limited in rolling. You can't do splits and flips like you can with a regular Level 4 account. Much to my chagrin you can't even sell a call against existing shares to back into a covered call position in a Fidelity IRA (To be fair, I haven't confirmed with Fidelity whether or not that's user error on my part...).
But to answer your question, generally when it comes to selling options and especially selling naked/cash covered, you're should be doing so at a strike where your analysis says the price won't go. So for instance on a put, if your original strike was (as it should be...) below a technical support price/zone and the price blew out the bottom of that support and now you're ITM, you'd want to identify the next area of support (using whatever method works for you) for your roll-to strike price. If that next area is pretty close and especially if its strong and especially if the stock is in general strong both technically a fundamentally, you can take your chances by just rolling outa week in expiration and down in strike or however far you can go on credit, based on the logic that your analysis suggests there could be a fairly quick reversal in underlying back into your favor. But...if the signs aren't as positive, you'd want to roll farther down and, preferably, not really farther out (you want to get out of this, after all).
So if things look really shitty you could just flip the -P into a -C. This one's a pretty agressive move and I definitely wouldn't recommend it as a go-to as it explicitly means you're getting yourself out of an ITM -P and into an ITM -C, but its also the most basic: All you're doing is buying to close the -P and selling to open an equivalent value -C, again at a strike that makes sense, and again, for credit. This is mostly useful in a major tanking scenario where the whole market is going south, but can be used around earnings too if it looks like a post-earnings dump is going to keep swirling.
Just to be clear, when I say always roll for credit, I'm talking cents on the contracts (or dollars on the position). I usually try not to go below $10 just so I know any fees and commission will be covered, but at some point the credit your taking could be used for a more favorable strike/expiration. Depending on the option B/A spread, I'm usually collecting maybe tens of dollars on the position.
The other thing you can do is a split--all this means is you buy your -P to close (or -C, or spread, or whatever--none of these strategies are just about puts) and sell multiple -P's to open, 'splitting' the value of the original -P over that number of -P's for the specific purpose of having a lower strike--ostensibly one below a strong support--and, if possible, a closer expiration. This can be a bit of a rabbit hole too so you really need to be careful about it. It ties up more capital/margin and increases your downside risk. But, in moderation and in the right scenario it can be a reasonably safe and fast way to get out of a red position.
As previously noted, my go-to is a combination of the two--a split-flip. I use it all the time to pull out of ITM covered calls when I don't just want to close the position (RSUs especially), but I'll also do it with diagonals (which are sort of the all-option version of a covered call) and vertical spreads, though rarely do I go long on a vertical spread... Anyway, in that scenario I BTC my ITM -C and STO a -C with a higher strike, and then also STO a -P (and as previously noted, usually a credit spread over a naked -P), and occasionally--especially for WAY ITM -C's--multiple -P's. This works no problem in a standard four-leg orders as it ends up looking like:
BTC ITM -C
STO less ITM -C
STO OTM -P
BTO farther OTM +P
The reason I like this strategy is that it splits the current value of the ITM -C across more contracts, giving me a more favorable -C (which is the primary thing I'm trying to get out of). It also flips some of the red value to the other side of the equation, so price movement in the unfavorable direction isn't all bad--if price keeps going up on underlying those -P's are going to lose value quickly, if price moves down that makes my ITM -C less ITM, and, assuming I was smart with where I chose my -P strike, they'll still expire worthless. Bear in mind that split-flip example was solving for an ITM -C, but you can imagine it working for an ITM -P too.
Somewhat related, I'll often sell ATM or even ITM CCs during earnings week to capture the mega high Vega. For instance, on Monday two weeks ago I sold a just-ITM ROKU weekly where the time value was (I think) something like 7% of my capital on the trade. So that meant that if earnings hit I'd make 7% on my capital in 5 (or less) trading days, and if earnings tanked I'd have something like 8% (or maybe more?) downside protection. Earnings ended up pretty shitty, but I still ended up with something like $100 profit.
Yeah its good to understand that, especially in context of The Wheel, a -P is NOT the inverse of a covered call, so you absolutely shouldn't be using the same logic on choosing strike prices and expirations. The inverse of a CC is if you shorted 100 shares and then sold a -P.
Insert same soapbox as upthread about ∆ having little to do with selling options, but again I appreciate that you're using ∆ to try and find some way to normalize risk. I just can't stress enough for folks that maybe don't fully understand that nuance that selling options to realize ∆ is a terrible way to try and make money.
Since it sounds like you're using Fidelity, look into the "Probability Calculator" and "Profit/Loss Calculator" in the options tab. In slightly different ways both of them provide a much more accurate normalization you're looking for, in a way that incorporates the whole picture of the contract and not the very small piece of the pie that's ∆. Picking a -C/-P based on ∆ is like picking a Tesla over XYZ car because you like the frunk. Yeah, no question its cool to have a trunk. But if the reason you pick a Tesla is because of the frunk....
Otherwise, monthly CCs really aren't a bad way to go. You get more Vega on the monthlies than the weeklies which is nice for profit, less maintenance than a weekly so that's always great, more room to run (you'd have a farther OTM strike with a monthly than a weekly), and more time to pull out of an ITM scenario if you're feeling YOLOey. And most importantly with a CC vs a naked/cash covered put, its really no big deal if you go ITM on a covered call. Being ITM basically just gives you downside protection until you can roll out of it. Obviously you get no income during that time, but each roll that moves the strike up you sort of 'unlock' more profit.
Yeah, its super sketchy to open a -C/-P position without an exit at some price target that makes sense. Basically, if you're actually letting an option expire worthless, odds are you're doing it wrong. A common value to close is $5, and some (many?) brokerages will actually waive fees when you're closing a contract that low since they don't want to deal with the hassle of potential assignment. And seriously, if you're at $5 contract value--especially if its not later in the day on Friday, its kind of insane to not close out.
But...IMHO a smarter, less aggressive price target is the way to go--say, closing out when contract value is 25% of what you sold it for. A potentially more practical method to implement this is to roll the value that's left to your next preferred expiration (next week, next month, whatever). WIth pretty much any OTM contract, and especially weeklies, its a better deal to roll before close on Friday and sometimes even Thursday, unless you're sufficiently OTM on that contract and have the capital/margin to open up a new position. Depending on how close to zero your current contract value goes, its very plausible that you can find a suitable contract for next week that has better theta.
So the rub with selling options is that one can easily fall into the too-good-to-be-true trap. Its easy for a trader to be a little lax on finding proper entry and exit points based on the perceived logic of "I don't have to be right, I just have to be not wrong". Unfortunately, that approach significantly increases the already unfavorable odds that one cycle will wipe out (or more) the profit collected from many previous cycles. Make no mistake, selling options still requires diligence with an entry, exit, and stop.
For a case study on the unfavorable odds, had one sold a 1450 weekly put on Friday close they would have collected a little less than ~$1k in time value--that would be for a contract that's ~$200 OTM and has a ~10% chance of being ITM. Assuming that's average collection (it won't be, but first order, that's not a problem with the case study), over 9 cycles one makes $9k on $145k worth of capital. First blush, 6% in two months ain't so bad, right?. The issue is that on the 10th cycle that's statistically ITM, the underlying drops $200, and at that point you're just hoping you found the bottom of a pretty major drawdown. If the underlying goes down more than $10 from there (equivalent to the $1k you collected on the current contract), you're eating into the past two months of profits. If the underlying goes another $100--equivalent to the $9k you collected previously plus the $1k from the current contract--your last 2 months are a wash. If it goes farther, you're progressively more and more in the hole. And of course if that statistical ITM happens sooner in the two months, it all gets more red.
Similarly, a more aggressive case using 1550 would have collected ~$2.1k on a ~25% probability ITM. Assuming 3 good weeks you're at ~$6.3k profit, but now the fourth week only needs a dip of $100 in underlying to go ITM, and a ~$184 drop in underlying to wash out the ~month's work.
The same math applies at any underlying price and any expiration timeframe, and the same math applies if you're allowing yourself to be put shares (and thus you're starting in the red). Its a tight line to walk to maintain profit with that kind of strategy, and the odds of staying on the right side of the line are SIGNIFICANTLY improved by having things like proper entry, exit, and stop targets.
Countering those case studies--and obviously a different strategy completely--for a comparison in profit, remember my "looks like we might see it drop down to high 1300's" from upthread? Had one bought an ATM call on the first drop down and back through $1400 on 7/24 (I'm using November for expiry as its a good rule of thumb to never buy calls/puts closer than ~3 months expiration), one would have laid out ~$25k in capital and would be sitting at ~$13-14k profit. In three weeks. (To be clear, that was before I made the statement). Had that same call been purchased the second time price dropped down and back out of the high 1300's, confirming that support, (that would have been on 8/10, so after I made the statement), one would have even more profit.
As it stands I bought calls a little too aggressively on that price target, risking a bigger drawdown in an attempt to beat the flag breakout. I bought near close of 7/31, which was around $1430 underlying--and I bought $1600 (Nov) calls to reduce my ∆ exposure a bit, so I'm "only" sitting at $9.4k/contract profit right now. Futures are looking good right now and while Asia-Pac is split, Shanghai is up like 2.3% (to be fair, TSLA seems to deviate from the market more than other stocks...but TSLA is increasingly heavy in China so seeing DJSH up can't be bad news), so there's a good chance I'll open to a nice jump in profit.
The point is that the level of effort is basically equivalent in the two strategies (I'm actively charting TSLA either way), the position I took basically waited for [what I deemed] a quality entry point, whereas the -P strategy relies on quantity over quantity to return results. And, since any kind of trading or investing is all about making money, it does seem to make sense to focus on quality of unbounded profit positions over quantity of bounded and limited profit positions...
Exactly as Elon says, dividends are for when you run out of things to invest into
I'm 100 pages behind on the other thread (despite fast scrolling through most of the nonsense), just went through all the earning-call posts yesterday, the refusal of most of the folks there to engage in any discussion that might be considered "bearish" is shocking, and the derision to factual posts that don't fit their narrative is disturbing. TBH I was very much in that same camp for years, I sucked-up everything I was served by Musk and took it all on faith, but I've managed to snap out of that now and view it as an echo-chamber, in essence no different from TSLAQ
Tesla loan or financing interest rate is really hurting their sales.
Yes, Tesla would do better to keep the base price higher and offer 0% finance, cars would shift and margins would be better
So then consumer goods companies should trade lower as no-one is buying their stuff. The ones that can afford it likely don't care about interest rates anyway...
I'm pretty sure everyone cares about interest rates. Even Elon (Not referring to TSLA specific caring).
