TSLA Trading Strategies

[Ryo]

Anyone else tempted to write Jan19 100 puts (or similar)? They are fetching a premium of 13.75 which means that TSLA would need to be below $86.25 in more than 2 years to lose money.
Like @neroden, I would only do this cash secured.

 

[Jonathan Hewitt]

Anyone else tempted to write Jan19 100 puts (or similar)? They are fetching a premium of 13.75 which means that TSLA would need to be below $86.25 in more than 2 years to lose money.
Like @neroden, I would only do this cash secured.

$13.75 divided by $86.25 of your own cash to secure the position=~16% return, divide by ~2 years=8% return per year. If I'm going to invest in TSLA I don't want 8% return per year, even if the risk is pretty low. If Elon dies or an earthquake destroys Fremont and sends the stock under $100, 8% isn't worth it to me. If I'm bent on writing Jan 19 puts cash secured I would go up to at least $120 or $140 strike and get a lot better return rate for more or less the same risk.

If you are thinking of writing them on margin then your return would be much better and changes my thinking. A $100 Jan 19 put ties up $1450 of margin according to my brokerage, which would be 95% return on capital and 47% return per year. This sounds a lot better but the risk here is much greater. If TSLA continues to fall the margin requirement will go up and your rate of return will fall, and you could possibly face a margin call if you are overleveraged.

You also have to consider the alternatives. You could pull in about the same amount of premium writing a Jun $160 put and could collect the full amount in 1/4th the time or a Jan 18 $135 put in half the time. It also depends if you plan to hold until expiration. A lot of put writers use risk management for their written puts and close them out once they get 50% of max profits. Once you get 50% of max profits it's often not worth trying to get the second 50% because of gamma risk. For a Jan 19 option it is going to take forever to get that 50% due to time decay and will likely only occur early on if TSLA shoots up.

I'm not giving any advice for any positions you could take but want to make sure you are considering all the things I have mentioned before you make your decision. There are other things to consider I haven't mentioned, also, and my view point is probably different than others. That's what makes a market, we all have different life situations, portfolios, and appetite for risk.

 

[neroden]

Due to the very curious structure of the options markets, I've found that writing two-year-out cash-secured puts doesn't usually get me much more than writing one-year-out cash-secured puts.

The way I look at it, since I'm planning to hold to expiration, is to calculate the static rate of return for the Jan 2018 put, then look at the incremental rate of return for the Jan 2019 put. Usually the extra return isn't worth much for me. I work back through the dates until I find a "sweet spot" expiration date where I feel that I'm getting a good return. The date isn't worrisome because I always pick a strike price that I'd be comfortable buying at, no-matter-what.

I will also point out that implied volatility is quite low right now. You get a much better deal if you sell at high implied volatilty. Took me years to figure this one out, and thanks to Jonathan Hewitt for pointing out the significance of it.

 

[MitchJi]

Anyone else tempted to write Jan19 100 puts (or similar)? They are fetching a premium of 13.75 which means that TSLA would need to be below $86.25 in more than 2 years to lose money.
Like @neroden, I would only do this cash secured.

The option doesn't need to be in the money to be green from a buyer and subject to exercise. The J19 $240's I bought for about $30k are worth about $36k today, in about 3 weeks.

 

[Ryo]

Thanks @Johathon Hewitt and @neroden for your words of wisdom. This is exactly what I was looking for, thoughts and considerations, not specific buying or selling advice. I've been trading options for about 3 years now (infrequently) and have had the most success writing call options, and buying LEAPs.

Getting a potential 8% annualized return on cash secured TSLA long term puts doesn't sound so attractive relative to simply putting that money into an index fund does it.

I will admit I have not paid attention to IV. Can either of you point me to where I can find this value and provide a context for what is considered historically low or high?

 

[Ryo]

The option doesn't need to be in the money to be green from a buyer and subject to exercise. The J19 $240's I bought for about $30k are worth about $36k today, in about 3 weeks.

I understand that @MitchJi, if TSLA heads lower in short order the option value will certainly increase. I am not sure what your point is here exactly. I doubt someone would exercise it if it was not in the money, and even if they did do that, l would come out a winner.

 

[MitchJi]

I understand that @MitchJi, if TSLA heads lower in short order the option value will certainly increase. I am not sure what your point is here exactly. I doubt someone would exercise it if it was not in the money, and even if they did do that, l would come out a winner.

I didn't mean exercise, I meant sell to close. And if I sold my $240 calls and you got picked to buy them they are definitely out of the money and I'd make about $6k. Who's going to lose the $6k?

 

[ggr]

I didn't mean exercise, I meant sell to close. And if I sold my $240 calls and you got picked to buy them they are definitely out of the money and I'd make about $6k. Who's going to lose the $6k?

I think you're misunderstanding something, but I'm not quite sure what. If the option buyer chooses to exercise the option, someone will get a surprise. But "sell to close" is just like trading a stock, someone else must agree to buy, and a price gets negotiated the usual way on the exchange. No one gets assigned anything.

 

[Ryo]

I think you're misunderstanding something, but I'm not quite sure what. If the option buyer chooses to exercise the option, someone will get a surprise. But "sell to close" is just like trading a stock, someone else must agree to buy, and a price gets negotiated the usual way on the exchange. No one gets assigned anything.

Correct, they can sell to close, but it won't impact me. It just means someone else owns that contract now.

 

[neroden]

Thanks @Johathon Hewitt and @neroden for your words of wisdom. This is exactly what I was looking for, thoughts and considerations, not specific buying or selling advice. I've been trading options for about 3 years now (infrequently) and have had the most success writing call options, and buying LEAPs.

Getting a potential 8% annualized return on cash secured TSLA long term puts doesn't sound so attractive relative to simply putting that money into an index fund does it.

I will admit I have not paid attention to IV. Can either of you point me to where I can find this value and provide a context for what is considered historically low or high?

I've been using this:
Free weekly implied volatility, historical volatility and volatility percentile data | Option Strategist

 

[Jonathan Hewitt]

I will admit I have not paid attention to IV. Can either of you point me to where I can find this value and provide a context for what is considered historically low or high?

I like Stock Options Analysis and Trading Tools on I Volatility.com for the chart you can make, like this:

I also like Dough.com. They will give you IV but also two other helpful metrics they made up called IV Rank and IV Percentile.

Hopefully I don't butcher these explanations and that they make sense. IV rank takes the current IV and compares it to the volatility over the last year and ranks it on a percent scale. For example, an IVR of 75 means it is 75% of the way in between the lowest IV has been and the highest IV has been. So if the lowest IV has been is 10% and the highest it's been is 20% and it's currently 15% then IVR would be 50%.

IV Percentile is similar but instead of a straight up rank it looks at how long the stock has been at each volatility value and time weights it. So for example, and IVP of 100% means 100% of the time over the last year IV has been lower and an IVP of 50% means 50% of the time IV has been lower. This is helpful compared to IVR because when you have a one time event that spikes volatility (like the crazy drop we had in Feb this year), this will throw off IVR for the rest of the following year. You will get a really high Volatility like we did in July but IVR won't be as high as it normally would. I use both IVR and IVP as a quick check of where Volatility is on a stock.

Dough.com has a ton of other useful tools available, too. Both Dough.com and IVolatility require creating a free account but I find them both worth it if you do a decent amount of options trading. Vega is a more advanced concept to understand well but it helps your probabilities of success and all the help possible is needed to be successful with options. I'm still learning more about options all the time myself, so just keep on learning!

 

[Mario Kadastik]

Well my new strategy is to sell 5% OTM weekly puts every week. If the stock drops I'll either roll them forward or close it out and re-open once the stock has settled somewhat. From the math doing this on margin is about 3% / week return so you only need 24 weeks of successful trades to have a 100% gain. This means that it allows for half of the weeks to delay the trade to the next week (i.e. roll forward 1 week to a lower strike, same $ value). Selling short term puts is where you gain all of the loss of time value of the option contract, but doing it just 5% OTM of course carries risk and one needs to monitor the trades all the time and make sure not to be overleveraged as a 10-15% drop overnight on news like SCTY acquisition can easily put you deep in the red. But making an annual growth of 20+% should be relatively straightforward, but requires some discipline

 

[Jonathan Hewitt]

Well my new strategy is to sell 5% OTM weekly puts every week. If the stock drops I'll either roll them forward or close it out and re-open once the stock has settled somewhat. From the math doing this on margin is about 3% / week return so you only need 24 weeks of successful trades to have a 100% gain. This means that it allows for half of the weeks to delay the trade to the next week (i.e. roll forward 1 week to a lower strike, same $ value). Selling short term puts is where you gain all of the loss of time value of the option contract, but doing it just 5% OTM of course carries risk and one needs to monitor the trades all the time and make sure not to be overleveraged as a 10-15% drop overnight on news like SCTY acquisition can easily put you deep in the red. But making an annual growth of 20+% should be relatively straightforward, but requires some discipline

I've decided to do a partial hedge of my long positions by shorting 0.10 delta calls at opportune times with 45-60 days expiration. I could be more aggressive with my hedging but you never know when TSLA is going to shoot up on news. A 0.10 delta call has a ~90% chance of ending up out of the money so if I close them out and roll them before expiration that should raise the percentage chance of expiring even more. In the rare chance they end up in the money I should have made a killing on my long positions as a .10 delta call is pretty out there. They don't bring in a ton of cash themselves but should help me buy more TSLA while we wait for some real price appreciation.

I like your idea but for myself I would want more capital than I currently have for me to implement that strategy. I usually stick to writing puts for the 45-60 day window with about a 0.3 delta and try to do so when volatility is higher so I have a chance of making money if Vega comes back down. This time frame gives me time to be right (or wrong and back right again!) but not too long where theta decay is low. By taking them off at 50% of max profit instead of holding until expiration I can have a very high win percentage. Weekly puts will give a much greater potential reward but will fail more often due to gamma risk so I'm glad to see you are accounting for that. Someone with plenty of capital can absorb the gamma risk, just like you said!

 

[1kEE]

I've been thinking it would be nice to plot the entire option chain on a 3-d graph with expiry on one axis, strike on second and price on vertical axis. Be fun to do that daily and compare (animating would be fun) over time.

Any web sites that do that? If not, what's the best place to copy and paste the option chain data into excel?

 

[neroden]

Haven't seen that. I'd like to see the animations if you do it.

 

[Tenable]

Haven't seen that. I'd like to see the animations if you do it.

Neroden, I decided to follow your buy March 200 calls and sell jan 20 200s. Thank you for your contributions. Given todays movement, any updated thoughts on the trade?

 

[Jonathan Hewitt]

Neroden, I decided to follow your buy March 200 calls and sell jan 20 200s. Thank you for your contributions. Given todays movement, any updated thoughts on the trade?

Based on a Vega of 14.5 per spread and if we get a Volatility increase of ~15% then the value of the spread should have an increase of ~$2.18, just for the volatility increase! This is a 37% profit off of an entry of $5.82. We also have theta decay going on, currently helping us about $3 a day.

While a volatility increase and theta decay will help our profits, any move away from the strike price ($200 in this case) will lower the value of the spread. Based on current conditions I see a breakeven in-between $186 and $216 but a volatility increase will widen the range.

I can almost guarantee volatility will increase (at least 10% I would think) and I can promise 100% time will pass but I can't help much on where the strike price will be between now and January. Depending on how risk averse you are you could close and take the profits you have right now (~10%) or hold out for a little bit as we have a good amount of time. This is a trade that can go to 0 and not good to risk a lot of capital on. I am holding out for at least 30% profits and up to ~100% but will monitor the share price and volatility as time goes on. For example, if the share price gets away from us (up or down) and we are getting closer to expiration I am more likely to just close for break-even.

 

[Tenable]

Based on a Vega of 14.5 per spread and if we get a Volatility increase of ~15% then the value of the spread should have an increase of ~$2.18, just for the volatility increase! This is a 37% profit off of an entry of $5.82. We also have theta decay going on, currently helping us about $3 a day.

While a volatility increase and theta decay will help our profits, any move away from the strike price ($200 in this case) will lower the value of the spread. Based on current conditions I see a breakeven in-between $186 and $216 but a volatility increase will widen the range.

I can almost guarantee volatility will increase (at least 10% I would think) and I can promise 100% time will pass but I can't help much on where the strike price will be between now and January. Depending on how risk averse you are you could close and take the profits you have right now (~10%) or hold out for a little bit as we have a good amount of time. This is a trade that can go to 0 and not good to risk a lot of capital on. I am holding out for at least 30% profits and up to ~100% but will monitor the share price and volatility as time goes on. For example, if the share price gets away from us (up or down) and we are getting closer to expiration I am more likely to just close for break-even.

Jonathan,

Thank you for taking the time to reply. Your well reasoned feedback is very much appreciated.

 

[neroden]

Neroden, I decided to follow your buy March 200 calls and sell jan 20 200s. Thank you for your contributions. Given todays movement, any updated thoughts on the trade?

Just for the record, I did not advise you to do that. I do not give investment advice here. And I didn't make this trade and would not make this trade. The only calls I own are for Jan 2019 expiration.

I hope you understood this but your wording was unclear.

 

[Tenable]

Just for the record, I did not advise you to do that. I do not give investment advice here. And I didn't make this trade and would not make this trade. The only calls I own are for Jan 2019 expiration.

I hope you understood this but your wording was unclear.

Neroden, I must be miss remembering the person that originally suggested this trade. I of course, understand that no thoughts posted here are given as investment advice. Regardless, I appreciate your contributions across this forum.