TSLA Trading Strategies

[Papafox]

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

Congrats on a daring but successful play. There's nothing to prevent you from taking some money off the table. I've begun with my programmed deleveraging by selling 15% of my TSLA leaps a couple days ago. I'm now only 160% leveraged! The goal is to find a point where you're very happy if TSLA runs up like a Falcon 9 rocket and ok if it takes a dip. Although I expect TSLA to have a great year, I also believe in the "sugar happens" philosophy. Weigh the chances of one versus the other and ask yourself where it makes the most sense for you to be right now.

If the leaps you are holding are Jan '18s, I'd consider at some point rolling some into Jan '19s. As a general rule, I try to roll forward with at least 6 months to go before expiration. You want to leave plenty of time to recover from an unexpected dip.

 

[TMSE]

Congrats on a daring but successful play. There's nothing to prevent you from taking some money off the table. I've begun with my programmed deleveraging by selling 15% of my TSLA leaps a couple days ago. I'm now only 160% leveraged! The goal is to find a point where you're very happy if TSLA runs up like a Falcon 9 rocket and ok if it takes a dip. Although I expect TSLA to have a great year, I also believe in the "sugar happens" philosophy. Weigh the chances of one versus the other and ask yourself where it makes the most sense for you to be right now.

If the leaps you are holding are Jan '18s, I'd consider at some point rolling some into Jan '19s. As a general rule, I try to roll forward with at least 6 months to go before expiration. You want to leave plenty of time to recover from an unexpected dip.

Thanks Papafox! All my LEAPs are Jan'18. I want to capture long term cap gains, so I intend to close or roll forward them right after the 1 yr anniversary in late August this year. That will leave a little under 5 months before Jan'18 expiry.

 

[sunhelm]

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

Let me share my thoughts when I decided to do this after the 1Q17 post ER dip. My share cost ave was 280 and was mortified when sp went down to 290+ . I was already familiar with the DITM Leap strategy that Papafox described. My logical mind told me now was the best time to employ this strategy. However, my emotional mind could not get over the fact that I could have sold at $320 a day before and now would be forced to sell @297.

When I sold at this price, my advise is do not be tempted to time your Leap option prices with a low limit order. As Papafox said, leaps are not very liquid. I ended up buying the Leaps the next day, by then, SP had run up another few bucks.

As you can see, logical mind won in the end but what I want to emphasize that reading the various strategies and employing them seems easy. Actually winning an argument against ones emotional self when the real life situation is at hand and acting on the plan is actually a very hard battle to fight.

 

[Fifield]

Does anyone happen to have - and willing to share - the AAPL Options Strategies pdf Ongba put together back in 2013 or 14? I'd love to get a copy, if available.

 

[bdy0627]

I'm working on buying a call option. I trade through Vanguard. I can select the expiration date of 01/18/2019. One option also lists (TSLA1-ADJ) after the expiration date. Any idea what that is? Do I want to purchase that call option or the one without it? Thanks!

 

[zdriver]

I'm working on buying a call option. I trade through Vanguard. I can select the expiration date of 01/18/2019. One option also lists (TSLA1-ADJ) after the expiration date. Any idea what that is? Do I want to purchase that call option or the one without it? Thanks!

The other one is probably (much) cheaper, yes? That's probably a converted SCTY call.

You almost certainly want the one without - the volume and open interest on the non "ADJ" call should be significantly higher as well.

Here's how it looks at TD Ameritrade as of close today. Converted SCTY calls are the top 14 listed, with much lower prices, as they're only 11 share contracts. (as opposed to the normal 100 share contracts) Avoid those, liquidity is thin, and the math is a lot harder to grok.
Second half of the image is DITM "normal" calls.

Here's a few ITM "normal" calls, the rest being OTM. Note the differences in volume and open interest. These are most likely what you're looking for.

 

[ggr]

Converted SCTY calls are the top 14 listed, with much lower prices, as they're only 11 share contracts. (as opposed to the normal 100 share contracts) Avoid those, liquidity is thin, and the math is a lot harder to grok.
Second half of the image is DITM "normal" calls.

I don't think you can actually buy them "to open" anyway... only if you had initially written them, could you buy "to close". I tried to buy some a few months ago to take advantage of a momentary price anomaly and my broker wouldn't accept the order.

 

[bdy0627]

Thanks for the help!

 

[LargeHamCollider]

It took AAPL to show growing profits with iPhone for it's $15 to $100+ run.
It took FB to show growing profits for its run from sub $30 to $100+.
It took GOOG to show growing profits for it's long multi-year run.

More recently, it took AMZN to show growing profits (mostly from AWS) for it's stock price to go from $300 to 900.
And it took NVDA to show growing profits for it's stock price to go from sub $20 to $100+

All these example, growing profits were a result of:
1. larger-than-expected market, and
2. the ability of the company to seize the market with large margins.

I think it's going to take TSLA to show growing profits and then we'll see a dramatic multi-year run that will surprise most people. But those growing profits aren't going to come this year. When they do come though (I'm expecting mid to late 2018), then I expect to see some real fun.

The DaveT quote is from the price action thread but my post here is about trading strategies.

I 100% agree with the quoted text, between then and the current time I expect continued high volatility with price from 260-400. I'm not an experienced trader and historically have just been a buy and hold guy with LEAPs and stock; but I'm thinking of getting a bit more adventurous and doing some swing trading for the next 6 months.

I'd like to hear some more experienced players weigh on in the idea of swing trading the next six months.

 

[Ocelot]

Hey Atlargehamcollider,

Firstly by no means do I consider myself an experienced trader. I do dip my toes in options, and frankly am considering the reverse. It is hard to time things, and it looks like the road ahead as you suggest will have major twists and turns, which lead to potential for great gains, and great losses. There always seems to be a macro threat, be it Greece, Brexit, etc, but this one seems 'bigger'.

Personally, I am stongly considering selling my (few) leaps and converting to stock. Is anyone else considering that strategy?

 

[LargeHamCollider]

Hey Atlargehamcollider,

Firstly by no means do I consider myself an experienced trader. I do dip my toes in options, and frankly am considering the reverse. It is hard to time things, and it looks like the road ahead as you suggest will have major twists and turns, which lead to potential for great gains, and great losses. There always seems to be a macro threat, be it Greece, Brexit, etc, but this one seems 'bigger'.

Personally, I am stongly considering selling my (few) leaps and converting to stock. Is anyone else considering that strategy?

My LEAPs are all J19s, I don't think the J19s are significantly threatened by current macro events. 18s I'd probably be worried about.

 

[Ocelot]

Well , definitely 2019 are better, and its about time you should be rolling or cashing in on the 18's anyhow, so the 18's were an easy decision. Maybe I am being too pessimistic, but I can see TSLA stagnating until profit starts coming which easily could be second half of 2018.

 

[dakh]

Yep, just rolled most of my J18s up and out to J19 with 300 strike. Easy to do in 401K, and half of what I had in taxable account was long term. But the rest, will still have to wait until they're long term. Taking a 300+% gain and then giving a third of that up, no thanks.

 

[elasalle]

Sold Jan 19, 290 PUT (for like $52), used that to buy Jan 390(for like $32) Call for almost 1:1.5. Worst case 2019, I will get TSLA for 290
reasonable risk I think

Did something similar, but used NVDA 115-120 PUTS , and TSLA for the CALLS again

& sold AUG 420 CALLS to create some calendar spreads (took $2) off each 2019 Call

 

[neroden]

I don't think you can actually buy them "to open" anyway... only if you had initially written them, could you buy "to close". I tried to buy some a few months ago to take advantage of a momentary price anomaly and my broker wouldn't accept the order.

TSLA1s? You absolutely can buy them to open. I did so in an account where the amount of free cash was so small I couldn't buy a share or a TSLA option, so I bought a TSLA1 call (don't really expect it to work out, but it's a lottery ticket).

Very thinly traded though. If there's an ask price you can buy at the ask. If there isn't? You can't. Don't try to improve the spread, it won't work.

 

[ggr]

TSLA1s? You absolutely can buy them to open. I did so in an account where the amount of free cash was so small I couldn't buy a share or a TSLA option, so I bought a TSLA1 call (don't really expect it to work out, but it's a lottery ticket).

Very thinly traded though. If there's an ask price you can buy at the ask. If there isn't? You can't. Don't try to improve the spread, it won't work.

Maybe it's dependent on the broker. I tried to buy at the reported ask, and the order was still rejected.

 

[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.)

Ok, I wanted to circle back to this discussion, as I finally heard back from my tax advisor regarding constructive sales.

Here were the two scenarios that I sent my tax advisor:

Scenario 1

I bought to open 10 contracts of January 2018 300 strike TSLA call options on 10/21/16, and would like to protect the gains I have generated while waiting to sell these options after one year has passed in order to get long term capital gains treatment.

I am considering selling to open 10 contracts of 11/17/2017 300 strike TSLA call options.

I would then plan to sell to close the 10 January 2018 300 strike TSLA call options on 10/23/17, and then use the proceeds (ideally on the same day on 10/23/17) to buy to close the 10 11/17/17 300 strike TSLA call options. My question is whether or not this series of transactions would trigger the constructive sale rules (and eliminate the long term capital gains treatment for the 10 January 2018 300 strike call options I sold, even though they were sold over one year from purchase).

Another situation that I could foresee with the trade is that I sell to open 10 contracts of 11/17/2017 300 strike TSLA call options, and the price of TSLA drops dramatically for whatever reason, leading me to buy to close those options for a profit before 10/23/17, leaving my original January 2018 300 strike TSLA call options unhedged. I would also be curious if there are any adverse tax implications if I subsequently sold my original January 2018 300 strike TSLA call options after 10/23/17 in that scenario.

Scenario 2

One other trade that I am considering is as follows:

I bought to open 10 contracts of January 2019 350 strike TSLA call options on 3/16/17, and would like to protect the gains I have generated while waiting to sell these options after one year has passed in order to get long term capital gains treatment.

I am considering selling to open 10 contracts of January 2019 360 strike TSLA call options.

I would then plan to buy to close the 10 January 2019 360 strike TSLA call options on 6/1/18 (over one year from the date these options were opened), and then use the proceeds to sell to close the 10 January 2019 350 strike TSLA call options 61 days later (@neroden, I added the 61 day language given the exceptions you cited above). My question is whether or not this series of transactions would trigger the constructive sale rules (and eliminate the long term capital gains treatment for both of the transactions, even though they were both sold over one year from purchase).

And here is the response I got from my tax advisor:

Uner either scenario, the taxpayer will not trigger the constructive sale rule. When a taxpayer buys a call and then sales a call for the same secuirty at a different strike price or expiration date, the two options will be treated as separate and distinct positions.

The short position will reduce the risk of the original long position but it is not considered a constructive sale. The taxpayer will realize long term gain if it closes each psition with an offsetting position more then one year after opening the original position.

For reference, here is the language re: constructive sales from publication 550:

Constructive sale.

You are treated as having made a constructive sale of an appreciated financial position if you:

• 
  Enter into a short sale of the same or substantially identical property,
  
  
• Enter into an offsetting notional principal contract relating to the same or substantially identical property,
  
  
• Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or
  
  
• Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract).

You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter.

I think the part that really matters here is the fact that an option at either a different strike price (even if it is only one strike higher) is NOT the same or substantially identical.

In any event, hopefully this is helpful for folks. As we return to all time high territory, I am most concerned about my January 2018 LEAPs, as I could foresee issues that make result in the significant gains I have accrued evaporate pretty quickly, with little time to recover. If I didn't have such a big gain being treated as short term capital gains, I would just roll these into January 2019 LEAPs, but I want to avoid paying ordinary income if at all possible, and this strategy of selling short an option at the same strike right around the date I reach long term capital gains or the same LEAP one strike higher seems to make sense to me as a strategy. Curious for others' thoughts.

Now that I understand the tax treatment, it just come down to deciding if/when I should do it...

surfside

 

[geneclean55]

I will defer to your tax advisor, but it is interesting that a stock, and stock option for the same company are most definitely considered 'substantially identical' according to IRS literature regarding wash sales and such, but apparently two different options for the same stock are not considered 'substantially identical'.

 

[neroden]

I think the part that really matters here is the fact that an option at either a different strike price (even if it is only one strike higher) is NOT the same or substantially identical.

Yes, that seems to be the key part. I knew different expirations were not substantially identical, but that leaves you with exposure you didn't want. Different strike prices aren't substantially identical either, I guess. That does leave you with a little bit of exposure (you've constructed a spread) but that's probably fine for you.

 

[MitchJi]

In any event, hopefully this is helpful for folks. As we return to all time high territory, I am most concerned about my January 2018 LEAPs, as I could foresee issues that make result in the significant gains I have accrued evaporate pretty quickly, with little time to recover. If I didn't have such a big gain being treated as short term capital gains, I would just roll these into January 2019 LEAPs, but I want to avoid paying ordinary income if at all possible, and this strategy of selling short an option at the same strike right around the date I reach long term capital gains or the same LEAP one strike higher seems to make sense to me as a strategy. Curious for others' thoughts.

Now that I understand the tax treatment, it just come down to deciding if/when I should do it...

surfside

Maybe I'm missing something but if your try to sell the puts to protect your gain won't they be subject to the same taxes that you are trying to avoid?

In other words I don't see any potential tax benefits to buying the puts.