TSLA Trading Strategies

[ZenMan]

so I caught up with my broker and they confirmed that it is not possible to hold both the long and short side of an options contract.

thinking that I am likely to just sell the next highest strike price to create a (very small) bull call spread.

now I just have to decide if/when to make the trade.

surfside

I think a LEAP is a lot like a owning a stock. There are very specific rules about treatment of covered calls sold against stock. (And in your case I would think the rules would be similar with your LEAPS). I'm in a similar situation, I have J18 300 Calls. I was thinking of selling J18 400 Calls at the same price I purchased the 300's. I will have a risk free bull call spread of 100 points. I might wait to see if we get a run after earnings and see if I can do a 300 - 450 bull call spread. I need the 450s to be worth $14 for a risk free spread.

From Investopedia:
When writing ITM covered calls, the investor must first determine if the call is qualified or unqualified, as the latter of the two can have negative tax consequences. If a call is deemed to be unqualified, it will be taxed at the short-term rate, even if the underlying shares have been held for over a year. The guidelines regarding qualifications can be intricate, but the key is to ensure that the call is not lower by more than one strike price below the prior day’s closing price, and the call has a time period of longer than 30 days until expiry.

For example, Mary has held shares of MSFT since January of last year at $36 per share and decides to write the June 5 $45 call receiving a premium of $2.65. Because the closing price of the last trading day (May 22) was $46.90, one strike below would be $46.50, and since the expiry is less than 30 days away, her covered call is unqualified and the holding period of her shares will be suspended. If on June 5, the call is exercised and Mary’s shares are called away, Mary will realize short-term capital gains, even though the holding period of her shares were over a year.

For a list of guidelines governing covered call qualifications, please see the official IRS documentation here, as well as, a list of specifications regarding qualified covered calls can also be found at Investor's Guide.

Read more: Tax Treatment For Call & Put Options | Investopedia Tax Treatment For Call & Put Options
Follow us: Investopedia on Facebook

 

[AlMc]

@surfside: Thanks to you and others for your recent analysis that incorporate the NCIs from the former SCTY.

If your analysis is correct I do not think a 'beat' on earnings is priced in at this point. From what I have seen the average analyst has a loss of close to 70 cents/share. I have not even seen a 'whisper' number close to a 'beat'.

The SP seems to have been affected more by EM reinforcing the '3' will go into production in July and the Tesla semi reveal in September.

yes, the SP has seen a nice increase over the last several weeks but do you feel that the market is expecting a 'beat' or even a modest loss?

I believe quoting one's own posts is not 'good form' but what the heck:

I see that Fred L and Electrec has posted a 'loss' of 16 cents as a consensus for Q1. Not sure if this leads me to correct my model for what will happen with the SP post ER/CC.

Tesla (TSLA) is about to publish its financial results for first quarter 2017 – here’s what to expect

I would be interested in what others have seen as a consensus and whisper numbers.

MY TDAmeritrade feed still shows a range from -1.79 to +0.23 with an average of -0.81

 

[MitchJi]

so I caught up with my broker and they confirmed that it is not possible to hold both the long and short side of an options contract.

thinking that I am likely to just sell the next highest strike price to create a (very small) bull call spread.

now I just have to decide if/when to make the trade.

surfside

I don't like to discourage anyone from locking in a profit, but doing that now for 2019 LEAPS seems like an extremely poor decision to me.

Not an advice!

My quick comparison to 2013:
2013 Tesla had one product. It became clear that the product exceeded expectations, and that Tesla could manufacture about 20k per year at a profit.

Now (most of these should happen before the end of 2017, but they are all slam dunks by the end of 2018):
AP cross country drive.
2170 cells in the MS-MX, increased capacity, reduced costs, and faster supercharging.
M3 alien dreadnaught production line producing 5k-10k cars per week (5k is about a car per minute). Positive M3 margins.

TE sales and profits.

Solar shingles. How many do you think that they are planned to produce of each type before having four varieties available?

Squeeze?

I probably forgot some, and I didn't even mention any impact of the semi or the "exciting" announcement above the additional Gigafactories!

Can you make a credible case that between now and mid 2018, that the SP increase won't be greater than the 2013 increase?

Maybe after a stratospheric rise due to a squeeze your strategy would make sense, but otherwise I can't see it. I'm not trying to convince you that you are wrong. I'm suggesting that you try to convince yourself that you are correct, while keeping the foregoing list in mind. Please let us know what you think!

 

[neroden]

This question should probably be in the beginners options trading thread, but figured i would go ahead and post here, as it is a potential trading strategy (i guess):

-Let's say I have J19 LEAPs that have significant gains that I would like to sell but would be subject to short term capital gains.

I was trying to think this weekend how I could lock in those gains but then also figure out a way to ensure I get long term capital gains treatment

This was possible prior to 1997 but not any more.

The IRS considers any such action to be abusive and will figure out how to make you pay short-term rates. There are an awful lot of different rules designed to catch you.

Look up the "constructive sale" rules in publication 550, which are the ones most relevant to your case. There's one exception:

From the IRS:

Exception for certain closed transactions.

Do not treat a transaction as a constructive sale if all of the following are true.

1. 
   You closed the transaction on or before the 30th day after the end of your tax year.
   
   
2. You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction.
   
   
3. Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions.

If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true.

So if you create a hedge this year, close it this year (or the first month of next year), and hold the position unhedged for another 60 days, you're in the clear. Otherwise, the creation of the hedge was a constructive sale.

So you can't really lock in your gains without realizing them this year. You could hedge temporarily but you must be exposed to the full potential loss for 60 days at a later date.

Sooo... if you plan to hold your LEAPs until 2019, but you think there's a short-term drop coming, you *can* sell a (different strike) call, wait for the drop, and buy that call back. As long as you continue to hold your LEAPS for 60 more days, you're OK. But this isn't really "locking in your gains", it's making a completely separate trade. (Which is probably why it gets an exception in the tax code.)

 

[Zhelko Dimic]

@surfside: Thanks to you and others for your recent analysis that incorporate the NCIs from the former SCTY.

If your analysis is correct I do not think a 'beat' on earnings is priced in at this point. From what I have seen the average analyst has a loss of close to 70 cents/share. I have not even seen a 'whisper' number close to a 'beat'.

The SP seems to have been affected more by EM reinforcing the '3' will go into production in July and the Tesla semi reveal in September.

yes, the SP has seen a nice increase over the last several weeks but do you feel that the market is expecting a 'beat' or even a modest loss?

I think some people are figuring it out, luvb2b work has leaked out
Check change in revenue estimate over time, it's going up (from estimize.com)

 

[elasalle]

Sold Some Jun 420 calls against non - core Jan 19th LEAPS. If we cross 420 by June, will be more than happy to part with a few .. else a few extra bucks .. for other option plays.

 

[elasalle]

BTW, I haven't seen tasty trade mentioned on this forums. Check out tastytrade | a real financial network | financial news and entertainment a lot of stuff on options trading. The guy Tom Sosnoff was co-founder of ThinkOrswim

 

[Tenable]

Sold Some Jun 420 calls against non - core Jan 19th LEAPS. If we cross 420 by June, will be more than happy to part with a few .. else a few extra bucks .. for other option plays.

For $.50? Doesn't seem like the best risk reward ratio.

 

[elasalle]

For $.50? Doesn't seem like the best risk reward ratio.

Nothing to do with Risk/Reward, just sold so I can buy some FB calls (June 2018 @ 200) options for earnings with the same (just staying in the game) . I don't plan to sell Jan 19 LEAPS till atleast July (M3 launch), but if it hits 420 by June, ain't complaining. Chose June (like 45 days out), because I feel we will not cross 420 by then. Could have sold below 400 and got more $$, but with Short interest as well as good earnings(likely) I didn't.
Note I am a complete novice in this ..

 

[sdorn]

Any thoughts on doing a long straddle at $295 strike for June expiration (closing price today was $295.46)? Cost is about $26.00, but seems likely the stock will move a good bit one way or the other over the next 5 or 6 weeks. Anyone else doing straddle or strangle strategies?

 

[Papafox]

Here's a review of the DITM (deep in the money) call strategy I've been using. I borrowed the idea from @Chickenlittle and have modified it a bit since. The idea is to buy leaps (Jan 2018 or Jan 2019 at present call options) with little or no time value to hold onto like they are stocks. The second component of the strategy is to make the deep in the money leaps be a big part of your holdings when TSLA has taken a substantial dip so that you have a nearly 2 to 1 leverage going up. As the stock price rises, you gradually convert DITM leaps to shares by selling leaps (or exercising them) and increasing your holdings in TSLA stock. Thus, you go from 2X leverage when the stock price is in a dip to 1X leverage when you think the stock has reached questionably-high valuations. If you do it right, you have 2X leverage for much of the run up in value and 1X leverage for the ride down. Then you rinse and repeat.

The primary advantage of the strategy is that it takes into account the volatile nature of TSLA stock. If the stock trades neutral over a multi-year period, you are still making money from the rises and falls of the stock. You're not really timing the market. Rather, you're systematically reducing your leverage as the SP rises so that when the inevitable correction happens, you are in position to make money from that correction by releveraging once the bottom has been reached. Thus, you never let your leaps expire and you never pay much time value). You also are still in a position to benefit from an unexpected further runup because you are still heavily in the stock, just not as heavily leveraged as when you owned the leaps instead of shares. This strategy works on the principle that we are not good at detecting the top.

The principle of buying DITM leaps when the SP is low and converting to a position of 100% shares when the SP is high works best in an IRA or a 401K because you are not paying taxes every time you sell leaps and convert to shares. As your DITM leaps get within 6 months or so of expiring, you sell them (hopefully on an up day) and you buy the next year's DITM leaps (also with little or no time value). The sweet spot for buying DITM leaps is at a strike price that is about 50% of the current stock price. I've been able to get J19 150s for less than $3 time value, and I've been selling some J18 120s and 125s to buy some of these. Notice that when you sell at 120 strike price leap and buy a 150 strike leap, you are "harvesting" nearly $3000 cash from each contract. You are free to reinvest than money or consider it a dividend.

Some investors like Zhelko use DITM leaps as a permanent shares replacement. He does not use the DITM leaps for leverage. Rather, since they can be purchased for about half of what you would pay for stock, there's a certain maximum loss that you will take (50% of your money is still in cash). The downside of DITM leaps as shares replacements would be when the SP of TSLA falls below the strike price of the leaps and you cannot roll the leaps forward to the next year without paying a substantial premium. The upside of using leaps as a shares replacement is that as the SP falls and gets closer to the leaps, the leaps actually start picking up time value and so time value starts working in your favor. It's all a matter of how low the SP goes before turning around. You could get wiped out with a prolonged (many months) dip below the strike price where the stock can completely recover. That's the tradeoff. As long as you don't think there'll be a prolonged 50% drop in SP, though, the leaps instead of shares strategy should work for you.

One of the disadvantages of using leaps as shares replacements is that they are not nearly as liquid as shares. You can sell all your shares in 10 seconds if you are in a hurry to get out, but DITM leaps take patience to sell unless you're willing to pay a negative time value to get rid of them. Thus, there's value in converting some leaps to shares (rather than just selling leaps) as you perceive the SP is getting closer to a local high.

 

[Johann Koeber]

Here's a review of the DITM (deep in the money) call strategy ...
The principle of buying DITM leaps when the SP is low and converting to a position of 100% shares when the SP is high works best in an IRA or a 401K because you are not paying taxes every time you sell leaps and convert to shares. As your DITM leaps get within 6 months or so of expiring, you sell them (hopefully on an up day) and you buy the next year's DITM leaps (also with little or no time value). The sweet spot for buying DITM leaps is at a strike price that is about 50% of the current stock price. I've been able to get J19 150s for less than $3 time value, and I've been selling some J18 120s and 125s to buy some of these. Notice that when you sell at 120 strike price leap and buy a 150 strike leap, you are "harvesting" nearly $3000 cash from each contract. You are free to reinvest than money or consider it a dividend.

.....

Thank you for sharing.

I wonder if the 3,000 $ cash extracted from each contract can be considered a loan from the market. But you pay interest on this loan, because the time value of the 150 is greater than the time value of the 120. And you might loose some money when buying and selling because of the spread. I'm just wondering if it is worthwhile. There may be cheaper loan options.

I certainly like your idea of adjusting the leverage depending on market situation. Actually I like even more leverage when the market goes up, less when the market goes down.

Here's one of my strategies:

I have 2 positions:
TSLA stock
TSLA OTM LEAPS, say 500 strike Jan18'19

I allocate the same $ amount to each, thus rebalancing the portfolio.

The CALLS appreciate faster when the price goes up. So I sell a part of the CALLS and buy shares.
Vice versa when the price declines.

Worked well for me - so far.

 

[kenliles]

Thank you for sharing.

I wonder if the 3,000 $ cash extracted from each contract can be considered a loan from the market. But you pay interest on this loan, because the time value of the 150 is greater than the time value of the 120. And you might loose some money when buying and selling because of the spread.
[ ]
Here's one of my strategies:

I have 2 positions:
TSLA stock
TSLA OTM LEAPS, say 500 strike Jan18'19

I allocate the same $ amount to each, thus rebalancing the portfolio.

The CALLS appreciate faster when the price goes up. So I sell a part of the CALLS and buy shares.
Vice versa when the price declines.

Worked well for me - so far.

As a long time user of LEAPS for both leverage and stock replacement,
My experience is this stock coupling with OTM LEAPS leverage is nearly identical to PFox DITM stock replacement. They both work well, properly monitored and actively adjusted. And produce very similar results
The stock provides a security for OTM (kept 50% or higher) levelizing the risk commensurate with all DITM LEAPS, while providing similar net returns.
Zhelco's method of equating stock shares to DITM plus cash is also very effective. I used to teach that one; although to be honest, it takes discipline that most don't maintain as they see the cash as lost opportunity it's rather than risk mitigation (as it should be) and end up over leveraging instead of other alternatives for using that cash.
Anyway- All three of Hess methods properly deployed are excellent, and produce outsized earnings compared to stock only.

That said, I have taken an approach of stock only in recent months due to e macro risks. This has under performed relative to the above 3 methods, as I knew it would, so I took resources outside the market and brought into the stock- so hold an outsized (nearly 3x) common position (relative to net worth all investments). I took this approach to insure I could hold a strong position for a decade, surviving expected macro troughs.

Well done, all 3 of you guys-
Keep it up!

 

[surfside]

This was possible prior to 1997 but not any more.

The IRS considers any such action to be abusive and will figure out how to make you pay short-term rates. There are an awful lot of different rules designed to catch you.

Look up the "constructive sale" rules in publication 550, which are the ones most relevant to your case. There's one exception:

From the IRS:


So if you create a hedge this year, close it this year (or the first month of next year), and hold the position unhedged for another 60 days, you're in the clear. Otherwise, the creation of the hedge was a constructive sale.

So you can't really lock in your gains without realizing them this year. You could hedge temporarily but you must be exposed to the full potential loss for 60 days at a later date.

Sooo... if you plan to hold your LEAPs until 2019, but you think there's a short-term drop coming, you *can* sell a (different strike) call, wait for the drop, and buy that call back. As long as you continue to hold your LEAPS for 60 more days, you're OK. But this isn't really "locking in your gains", it's making a completely separate trade. (Which is probably why it gets an exception in the tax code.)

Thanks so much for the detailed response @neroden -- I've been meaning to ask the following question regarding your comments -- given I am dealing with 2019 LEAPs, do I still have to close the hedge transaction that I open this year, or would both the hedge (selling Jan 19 LEAPs) and the original call (Jan 2019 LEAPs that I bought earlier this year) be treated as long term capital gains (and not be deemed a constructive sale) under the following scenario:

i) I put on a hedge today by selling Jan 2019 calls at a higher strike than the Jan 2019 calls I bought earlier this year.

ii) I close the hedge let's say in June 2018.

iii) I then sell the calls at least 60 days after June 2018 in September 2018

Would this work, or is the tax code explicit that the hedge that I put on have to be sold in the same tax year I put it on? It seems like an odd requirement, and essentially makes it such that you are going to be subject to short term capital gains on the hedge in any scenario not considered a constructive sale.

Thanks in advance,

surfside

 

[Papafox]

Thank you for sharing.

I wonder if the 3,000 $ cash extracted from each contract can be considered a loan from the market. But you pay interest on this loan, because the time value of the 150 is greater than the time value of the 120. And you might loose some money when buying and selling because of the spread. I'm just wondering if it is worthwhile. There may be cheaper loan options.

I certainly like your idea of adjusting the leverage depending on market situation. Actually I like even more leverage when the market goes up, less when the market goes down.

Here's one of my strategies:

I have 2 positions:
TSLA stock
TSLA OTM LEAPS, say 500 strike Jan18'19

I allocate the same $ amount to each, thus rebalancing the portfolio.

The CALLS appreciate faster when the price goes up. So I sell a part of the CALLS and buy shares.
Vice versa when the price declines.

Worked well for me - so far.

Thanks for the alternate strategy, Johann. Sometimes it takes me time to wrap my brain around a concept. Here's my concern about the combination of stock and OTM leaps. I'm a firm believer in the "sugar happens" principle in which we position ourselves for a run up and all of a sudden the stock is sliding down. In my scenario with the DITM leaps, there is no loss of time value if there's a prolonged dip. With the OTM leaps, we are losing time value during the dip unless you managed to dispose of them quickly. The problem with selling OTM leaps when the stock is plunging is that it's kind of like selling ice cream at the arctic circle. Do you assume that you will dispose of the OTM leaps quickly if the stock starts down? The scenario I'm laying out is the one where DITM leaps works well, and I'm trying to understand how it could work as well with OTM leaps and stock. Thx.

As far as "harvesting" some money by selling too deep in the money leaps and buying the highest strike DITM leap that has close to zero time value, I employ this strategy on days when the stock price is showing a definite trend upward or downward. I can't sell shares on a downward moving day and then buy shares close to the end of the day because I'm not approved for day trading. I can, however, sell $120 J18 leaps after I see the trend and then buy $150 J19 leaps closer to the end of trading, thus improving the value of my portfolio without necessarily spending money to do so.

 

[kenliles]

In my scenario with the DITM leaps, there is no loss of time value if there's a prolonged dip. With the OTM leaps, we are losing time value during the dip unless you managed to dispose of them quickly.

Yes that's true, but the missing consideration is the difference in proportion of investment $s. Vastly different for the two scenarios. Using OTM LEAPS, most of the investment $s are kept as common, the OTM LEAPS, used as the 'risk' portion are much smaller in $s, but carry the same growth potential (as a much larger investment in OTM LEAPS)
The point you are making only carries if OTM are used (in equal $) replacement of DITM, and is true if so constructed.
The 2 methods carry a different proportional construction of funds, with a different timed risk assessment, but have very similar net returns in both directions.

 

[AlMc]

I have tried both methods that @Papafox and @kenliles have described. They both work, as described. Actually, since I have more than one account in TD I am using both methods. Purchased most of the LEAPS between 180 and 200 SP late last year. So far the OTM LEAPS are performing better, as they should, with the rapid appreciation in the SP over the last few months.

 

[TMSE]

I have tried both methods that @Papafox and @kenliles have described. They both work, as described. Actually, since I have more than one account in TD I am using both methods. Purchased most of the LEAPS between 180 and 200 SP late last year. So far the OTM LEAPS are performing better, as they should, with the rapid appreciation in the SP over the last few months.

I sold my TSLA common, and then used the proceeds to buy SCTY OTM LEAPs in late August last year. They are ITM and DITM now, having appreciated over 300%. In little over 3 more months, they will become long term cap gains. But, the fear of losing all those gains is making me nervous . I can put a collar around them to hedge and cover associated hedge cost though

 

[neroden]

Thanks so much for the detailed response @neroden -- I've been meaning to ask the following question regarding your comments -- given I am dealing with 2019 LEAPs, do I still have to close the hedge transaction that I open this year, or would both the hedge (selling Jan 19 LEAPs) and the original call (Jan 2019 LEAPs that I bought earlier this year) be treated as long term capital gains (and not be deemed a constructive sale) under the following scenario:

i) I put on a hedge today by selling Jan 2019 calls at a higher strike than the Jan 2019 calls I bought earlier this year.

ii) I close the hedge let's say in June 2018.

iii) I then sell the calls at least 60 days after June 2018 in September 2018

Would this work, or is the tax code explicit that the hedge that I put on have to be sold in the same tax year I put it on? It seems like an odd requirement, and essentially makes it such that you are going to be subject to short term capital gains on the hedge in any scenario not considered a constructive sale.

Thanks in advance,

surfside

Honestly, I can't go through the IRS rules carefully enough to check this for you, and I'm not licensed to provide tax advice. I strongly advise that you read them for yourself.

That said, yes, I think the IRS really does mean that you have to open and close the "hedge" in the same tax year (or 30 days after the end of it). They won't let you hold the counterbalancing positions long-term; that's treated as a constructive sale. The exception seems designed to allow a "short term trading" account and a "long term account" to not interfere with each other.

 

[surfside]

Honestly, I can't go through the IRS rules carefully enough to check this for you, and I'm not licensed to provide tax advice. I strongly advise that you read them for yourself.

That said, yes, I think the IRS really does mean that you have to open and close the "hedge" in the same tax year (or 30 days after the end of it). They won't let you hold the counterbalancing positions long-term; that's treated as a constructive sale. The exception seems designed to allow a "short term trading" account and a "long term account" to not interfere with each other.

Totally understood - I really appreciate the insight you have already provided. I will consult with my tax advisor and report back what I learn.

surfside