Short-Term TSLA Price Movements - 2013

[DaveT]

In that case the short-term gain rate would apply. But when writing fairly long term out of the money options as I did, I can always buy back the options if the share price gets near too the strike price. It's highly unlikely that the options would be exercised while they are out of the money and far from the expiration date.

So I'm understanding the benefit if the stock drops in price. Namely, you've received $20/share by writing covered call right now so if the stock drops (and you think it'll go back up), then you can just close your covered call positions by buying them back at a much lower price.

However, in the case where the stock rises in the coming weeks/months to $180+, then I'm unclear of what choices would be available to you. I'm guessing if you thought the stock will drop from $180+, then you just hold your covered calls and then close them out if the stock price dropped (and you think it'll recover back to $180+). The other choice would be if you thought the stock would continue to rise from $180, then you could close out your covered calls positions at a loss by buying them (but at a much higher price, ie., $30... so an overall loss of $10/share). Otherwise, I'm guessing you wouldn't want to be holding on to those covered calls in Jan 2014 if/when the stock is $200+ because then they'll get exercised at expiration date and you'll be liable for short-term capital gains tax on your stock gain (from your cost basis, if held less than a year which I'm assuming it would be).

I'm guessing writing covered calls at $165 Jan14 would make sense if you think $200+ stock price in Jan14 is unlikely, and you're more expecting it to be somewhere between $150-180 with possible dips under $150, and you're confident that you can close out your covered calls if necessary with minimal loss prior to Jan 14 if needed. Is that fairly accurate, Curt? Or are you seeing it differently?

 

[tmont]

It means he sold his soul. j/k

It means he sold the ability for someone to buy his shares at a specific price. E.g. allow someone to buy his shares for $160 each before September 21st.

For that, he gets $9.10 per share.

Of course, if the stock price never goes over $160, nobody is going to take him up on that offer, and he pockets the $9.10, and can do it again. So he just lowered his purchase price per share by $9.10 each.

The downside is, if the price goes to e.g. $180, he would still be forced to sell $160, and would make only $169.10 on the deal (the original $9.10 and the $160).

Covered calls at the money on a volatile stock like Tesla can net you around 7% per month on a volatile stock like Tesla. But you miss out on large upward price movements while still sitting with all the downside risk.

- Deon

Deon - thanks for the explanation. Could you clarify what the advantage would be of writing a covered call versus other hedging strategies, such as buying a put option? Buying a put option seems safer since at worst you can only lose the premium.

Thanks,
tmont

 

[Curt Renz]

I'm guessing writing covered calls at $165 Jan14 would make sense if you think $200+ stock price in Jan14 is unlikely, and you're more expecting it to be somewhere between $150-180 with possible dips under $150, and you're confident that you can close out your covered calls if necessary with minimal loss prior to Jan 14 if needed. Is that fairly accurate, Curt?

Yes. I'll add that the hedging choice of writing calls over buying puts is due to the huge premiums for TSLA options because of high volatility expectations. I'm expecting far less volatility than seen in recent months. Assuming that I maintain my option position through the January expiration and TSLA closes that day just under $165, my TSLA shares would have each gained nearly $12 from the current price and I can keep both my shares and the over $2000 per option contract that I pocketed today. I wrote exactly enough calls to match my shares. Meanwhile, I can alter my options position at any time of my choosing except in the unlikely event of exercise. In the case of a significant rise in share price, during that time the options would not have grown in price by as much as the shares due to the withering of the time value built into the premium, which is especially great for TSLA options.

 

[marvinat0rz]

Thanks for the primer, Curt. I'm learning a lot about hedging with options just by reading this

 

[brianstorms]

Reading the twitter feed for $TSLA gives me a lot of conviction. The vast majority of people there still believe that demand is falling off for Model S and are pointing at Q2 report as evidence. They are actively shorting the stock. I believe there is still another squeeze to come, but not right now...apparently Q2 was not a good enough punch in the gut yet.

Reading the Twitter feed where tweets contain "$TSLA" can be hazardous. Them's mostly StockTwits posts and let's just say, it's questionable whether all their elevators go to the top floor.

 

[Curt Renz]

Could you clarify what the advantage would be of writing a covered call versus other hedging strategies, such as buying a put option? Buying a put option seems safer since at worst you can only lose the premium.

See the explanation in my latest reply to DaveT. If a sold call option is exactly covered by shares, then any gains in share price should more than make up for losses from being short the option. This is due to the option's withering time value. It's naked calls not covered by shares for which losses can be unlimited.

 

[Johan]

See the explanation in my latest reply to DaveT. If a sold call option is exactly covered by shares, then any gains in share price should more than make up for losses from being short the option due to its withering time value. In the case of an owned put that expires worthless while matching shares are exactly at the strike price, due to lost time value the gain in the share price should be less than the price paid for the put.

... Except for the fact that in the event of a very rapid rise in price of the underlying stock due to highly bullish sentiment, let's say news Berkshire Hathaway are trying to acquire Tesla at a hefty premium, the psychology in the options market could mean that for a period of time the premium of the call (which Curt would have to buy back to close his open position after selling a call contract) could in fact increase significantly more than the underlying stock. Or am I wrong?

 

[sullitf]

Reading the Twitter feed where tweets contain "$TSLA" can be hazardous. Them's mostly StockTwits posts and let's just say, it's questionable whether all their elevators go to the top floor.

http://www.inquisitr.com/895561/intempo-47-story-skyscraper-no-elevator-benidorm/

Did they recently build a new office in Spain?

 

[DonPedro]

... Except for the fact that in the event of a very rapid rise in price of the underlying stock due to highly bullish sentiment, let's say news Berkshire Hathaway are trying to acquire Tesla at a hefty premium, the psychology in the options market could mean that for a period of time the premium of the call (which Curt would have to buy back to close his open position after selling a call contract) could in fact increase significantly more than the underlying stock. Or am I wrong?

The option price can increase faster than the underlying stock if it is still some way from the expiration date and volatility increases concurrently with the price increase. Paradoxically, the extra rise is because of the downside protection offered by the call as compared to the stock.

However, you can always hold the covered call to expiration. If you decide to do that no matter what, you have basically traded your profits above the strike price for the lumpsum payment you got for the calls.

 

[Curt Renz]

... Except for the fact that in the event of a very rapid rise in price of the underlying stock due to highly bullish sentiment, let's say news Berkshire Hathaway are trying to acquire Tesla at a hefty premium, the psychology in the options market could mean that for a period of time the premium of the call (which Curt would have to buy back to close his open position after selling a call contract) could in fact increase significantly more than the underlying stock. Or am I wrong?

I don't see why the option would rise more than the stock. The bullish sentiment described above should affect both stocks and options equally regarding the intrinsic value. If not, then arbitrageurs would almost instantly push them back into line. Meanwhile, the time value built into the option decreases with time.

 

[aznt1217]

Stocktwits is a funny site. Don't take anybody's advice too seriously. It's the internet after all.

Anyway guys. We closed the week above $150.00 I'm satisfied. I hope next week touches $160. Enjoy the weekend.

 

[vfx]

$725,230,041,600: If BMW were valued like Tesla, it would be worth that much. And yes, that is 3/4 of the way to $1 trillion.

http://blogs.wsj.com/corporate-inte...orth-725-billion-when-you-value-it-like-tesla

coverage link
BMW Is Apparently Worth 725 Billion Dollars In Teslaland - Comparing BMW And TSLA - tftf - Seeking Alpha

 

[Curt Renz]

The option price can increase faster than the underlying stock if it is still some way from the expiration date and volatility increases concurrently with the price increase.

That's true. My choice was partly based on my opinion that TSLA volatility will decrease during the upcoming months rather than increase, thus reducing the time value built into the option premiums. The time premium for TSLA is currently huge. It's hard to imagine it getting higher, but it could if takeover rumors started swirling as Johan suggests. But also as you note, that would not matter at expiration. I could be wrong, but that is how I've positioned myself. I don't mean to advise that others should do the same.

 

[DonPedro]

That's true. My choice was partly based on my opinion that TSLA volatility will decrease during the upcoming months rather than increase, thus reducing the time value built into the option premiums. The time premium for TSLA is currently huge. It's hard to imagine it getting higher, but it could if takeover rumors started swirling as you suggest. But also as you note, that would not matter at expiration. I could be wrong, but that is how I've positioned myself. I don't mean to advise that others should do the same.

I've done virtually the same as you: Hedged 1/5 of my long position with covered $155 calls.

 

[ckessel]

BMW Is Apparently Worth 725 Billion Dollars In Teslaland - Comparing BMW And TSLA - tftf - Seeking Alpha

Yea, you see a graph like that and it's hard not to realize Tesla has a long way to go to justify it's valuation. It'd have to ship 200,000 cars a year to have it's value be relatively similar to BMW's ratio.

I fully understand folks saying Tesla is inflated or hyped or something similar and I even agree since much of the price is banked on potential. I don't see it suffering a big drop though unless something happens to make that potential seem less likely to occur.

 

[Johan]

I don't see why the option would rise more than the stock. The bullish sentiment described above should affect both stocks and options equally regarding the intrinsic value. If not, then arbitrageurs would almost instantly push them back into line. Meanwhile, the time value built into the option decreases with time.

I'm sorry if my reasoning is completely off here, but I was under the belief that there is really no mathematical/theoretical way to calculate the time-value of an option, other than the fact that usually the time-value decreases as you come closer an closer to expiry. In the end the pricing of the time-value part of an option reflects bid/ask - supply/demand. In your case you sold the call now for $20. If the stock drops slowly in the coming months to for example $140 I could see that call option trading for say $10 in October. Then let's say that suddenly after the Q3 report we get a massive short squeeze. As the stock prices shoots up, at the moment it passes by $165, don't you think that call would trade at >$20, even though the time-to-expiry in fact is now much fewer months than today? I'm not saying you've done a bad trade, I'm just trying to understand the possible downsides. If there was no real risk to the trade then I don't understand how you would get paid for doing it?

 

[mitch672]

Johan, the worst outcome for Curt would be his position is sold for $165 + the $20 premium he received, so he'd be out of TSLA at $185, not too bad, really, unless the stock is above $185, but he's counting on time to decay the premium, and if volatility stays low, he could likely buy the call back for 1/2 what he sold it at, if you think it might be over $185 in January of 2014

 

[tmont]

See the explanation in my latest reply to DaveT. If a sold call option is exactly covered by shares, then any gains in share price should more than make up for losses from being short the option. This is due to the option's withering time value. It's naked calls not covered by shares for which losses can be unlimited.

Thanks Curt, that makes sense. I guess the only thing preventing me from selling covered calls is that I don't own 100 shares yet.

One more question for you: What method are you using to determine the optimal strike price / premium?

Thanks,
tmont

 

[kevin99]

Short-Term TSLA Price Movements

Even though not as dramatic as the Q1, this week is still a historical week. Can't be more pleased with how everything shapes up.

Well I am getting ready for the Tesla Monday play... Enjoy your weekend.

 

[willowspuppy]

Johan, the worst outcome for Curt would be his position is sold for $165 + the $20 premium he received, so he'd be out of TSLA at $185, not too bad, really, unless the stock is above $185, but he's counting on time to decay the premium, and if volatility stays low, he could likely buy the call back for 1/2 what he sold it at, if you think it might be over $185 in January of 2014

If one were to do this, would it make sense to turn around and buy more shares at today's price with the premium received?