TSLA Trading Strategies

[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.

I'm proposing selling calls, which would move in the opposite direction of the long calls I hold (therefore I would effectively lock in the size of my gain today but allow myself to get long term capital gains for the existing gain by being able to hold until after one year has passed).

surfside

 

[MitchJi]

I'm proposing selling calls, which would move in the opposite direction of the long calls I hold (therefore I would effectively lock in the size of my gain today but allow myself to get long term capital gains for the existing gain by being able to hold until after one year has passed).

surfside

Thanks! But don't you need to cash out the calls at the same time you cash out of your J18's, or else you need to be concerned about the SP rising before you close the calls? I still don't see how you can use that "insurance" without paying the taxes you are trying to avoid.

IMO the only things that would cause the SP to go down over the next 12-18 months would be either a macroeconomic issue or something like a meteor taking out either the Gigafactory or the Fremont factory. Are you trying to protect yourself against one of those scenarios or are you trying to protect yourself against a dip that your J18's won't have sufficient recovery time for? Because if it's the latter you could protect yourself by either selling longer term puts or buying longer term calls. If the SP moves up as expected you even if there's a dip that wipes you out in the meantime you'd be better off than going short.

 

[surfside]

@MitchJi, to make it really simple, i would like to deleverage my TSLA position somewhat through selling my Jan 2018 LEAPs given i) the significant increase in share price, ii) the potential risk of delays/issues with model 3 production having a material impact on the share price at a time when i would not be in a position to hold out given the looming Jan 2018 option expiration date and iv) the current volatile political environment. However, i have held my Jan 2018 LEAPs for less than a year, and so what i am trying to do is to lock in my gains at today's price while allowing myself to receive capital gains treatment. I have explained above how this is possible and why the trade I have proposed would essentially put me in the same position as if I were to sell the Jan 2018 LEAPs after they reach one year.

As others have noted in the market action thread, TSLA has historically been extremely volatile; this strategy has the added benefit of allowing me to close the short side of the sale for a profit if the stock does drop meaningfully and allowing my Jan 2018 LEAPs to go naked if I decide that is the best decision. In any event, one likely outcome is that I will buy Jan 2019 LEAPs with the proceeds of the transaction to stay long but with additional time to ride the ups and down.

Hope this helps you understand my rationale.

surfside

EDIT to add after re-reading your question -- I'm not trying avoid paying taxes entirely (that should be fairly obvious -- gonna have to pay taxes regardless) -- just trying to pay long term capital gains instead of ordinary income; selling these calls will put me in the same position as selling my LEAPs today, but give the benefit of getting long term capital gains (when I close both positions after my long position has reached on year; any gains/losses between now and then on the calls i just sold will be offset by equivalent losses/gains on the calls i already hold).

 

[GoTslaGo]

@MitchJi, to make it really simple, i would like to deleverage my TSLA position somewhat through selling my Jan 2018 LEAPs given i) the significant increase in share price, ii) the potential risk of delays/issues with model 3 production having a material impact on the share price at a time when i would not be in a position to hold out given the looming Jan 2018 option expiration date and iv) the current volatile political environment. However, i have held my Jan 2018 LEAPs for less than a year, and so what i am trying to do is to lock in my gains at today's price while allowing myself to receive capital gains treatment. I have explained above how this is possible and why the trade I have proposed would essentially put me in the same position as if I were to sell the Jan 2018 LEAPs after they reach one year.

As others have noted in the market action thread, TSLA has historically been extremely volatile; this strategy has the added benefit of allowing me to close the short side of the sale for a profit if the stock does drop meaningfully and allowing my Jan 2018 LEAPs to go naked if I decide that is the best decision. In any event, one likely outcome is that I will buy Jan 2019 LEAPs with the proceeds of the transaction to stay long but with additional time to ride the ups and down.

Hope this helps you understand my rationale.

surfside

EDIT to add after re-reading your question -- I'm not trying avoid paying taxes entirely (that should be fairly obvious -- gonna have to pay taxes regardless) -- just trying to pay long term capital gains instead of ordinary income; selling these calls will put me in the same position as selling my LEAPs today, but give the benefit of getting long term capital gains (when I close both positions after my long position has reached on year; any gains/losses between now and then on the calls i just sold will be offset by equivalent losses/gains on the calls i already hold).

This makes sense according to McMillan (Options as a strategic investment).

You sell calls on your long-term shares. Get a paid for the calls and when and if they execute you get profit from the shares. (Not sure about tax treatment, but I would assume the call premium is short term and your share profit will be long-term).

You reinvest a portion into J19's (question is ITM or OTM) which has less time value issues. If you follow @Papafox 's advice, DITM ones (interestingly enough these run almost exactly at the intrinsic value). Then depending on how the stock does you can only lose your J19 invested amounts if it goes down, but partake in the upside if it goes up. Issue is papafox's DITM works best when stock price is low, since DITM price is pretty high right now.

This locks in your gains*, and allows you to participate in the upside. One other thought is that LEAPS prices are influenced by current interest rate and volatility. Higher rates and volatility will bring increase prices. Currently both are relatively low (arguable about volatility). So by doing your trade you may also benefit from buying LEAPS low, and if interest rates rise, the LEAPS should go up too.

I am really interested in adding J19's to my holdings (I don't plan to sell anytime soon as I am willing to wait out any downside with my shares), but wife is getting cold feet again...

Obviously if you were truly trying to avoid taxes you just wouldn't sell.

*McMillan's scenario states that you take your winnings and put them in a 1 year CD or T-Bills to make them untouchable to truly lock in your gains, otherwise one would be tempted to play more and lose the winnings...your discretion on this one. Problem is that interest rates now are so low, the future gains from pulling your money out of the shares do not seem to be worth it to me. I might put it in a municipal bond fund instead (I'm too lazy/uninformed to do the individual bond reasearch).

 

[Jonathan Hewitt]

I closed two june17 call options today (expiry 16.jun). Will buy one or two 2018/2019 deep in the money calls for the same money tomorrow morning. And then I'll be all set for the long and steady run-up for the next year or two. :-D

Any advice on which options I should choose to buy when I have 15k USD available? one deep itm, or several just ITM? Which exp.dates?

I like choosing different strikes when I buy multiple calls because there's a 0% chance of me picking the perfect strike so picking multiple gives me a better chance of not putting all your money on the worst strike possible.

As far as what you should buy it all depends on if that $15K is play money you can blow, your life savings, or money that if you lose it you can't pay the rent. It also depends on your strategy, risk tolerance, other portfolio holdings, how much more money you plan to add to your investing account in the near future, etc.

 

[MitchJi]

I closed two june17 call options today (expiry 16.jun). Will buy one or two 2018/2019 deep in the money calls for the same money tomorrow morning. And then I'll be all set for the long and steady run-up for the next year or two. :-D

Any advice on which options I should choose to buy when I have 15k USD available?
1.Which exp.dates?
2. one deep itm, or several just ITM?

1. Definitely J19's if safety is a high priority. J18's could be taken out by some medium term M3 launch problems.

I believe that you should not purchase options that make up a substantial portion of your portfolio unless you are extremely confidant (I can't stress this enough, be careful not to get sucked in by some of the wildly optimistic posts on this forum) that the SP will rise enough (from the current price) to make a substantial profit before they expire. That rise might, or might not have any relationship to wether the options are in the money or not. For J19 LEAPS's it's normally best to use an expiration date in your plan that's 8-12 month's before the actual expiration date for one or two reasons;
a. You want to avoid being forced to sell your options at a bad (short-term) time.

b. Unless you decide to purchase DITM calls (with essentially zero time value) the loss due to theta (time value) increases much faster as they get closer to the expiration date.

Long call calculator: Purchase call options
2. I'd use the calculator above and pick J19 LEAPS's with a strike price that you are extremely confidant will be profitable by early or mid 2018 at the latest. If you are sure that you can chose options that are not DITM I don't believe it makes sense to restrict yourself to buying DITM options. There are three reasons that's excessive IMO, not an advice!. Your own judgement (if you are not extremely confidant you should not be buying LEAPS's!), the additional 8-12 month's of cushion, and the fact that the time value loss is close to mouse nuts until the options get close to expiration.

Please let us know if you have any further questions, and which options you decide to buy.

 

[MitchJi]

@MitchJi
EDIT to add after re-reading your question -- I'm not trying avoid paying taxes entirely (that should be fairly obvious -- gonna have to pay taxes regardless) -- just trying to pay long term capital gains instead of ordinary income; selling these calls will put me in the same position as selling my LEAPs today, but give the benefit of getting long term capital gains (when I close both positions after my long position has reached one year; any gains/losses between now and then on the calls i just sold will be offset by equivalent losses/gains on the calls i already hold).
surfside

MAybe I'm missing something but how can you avoid paying ST gains on the calls you sell for insurance? You have to sell them at the same timer as the calls you purchased earlier so won't any profits on them be taxed as ST gains?

As others have noted in the market action thread, TSLA has historically been extremely volatile; this strategy has the added benefit of allowing me to close the short side of the sale for a profit if the stock does drop meaningfully...

Closing the short side of the sale for a profit will be taxed as ST gains?
If this is a foolish question don't bother to answer (I'm not trying to increase my own understanding, but to help insure that you are not making a mistake).

 

[surfside]

If the stock drops and i sell those calls less than a year out at a gain, I will indeed have to pay short term capital gains on those calls. If this happens, i am happy to pay short term capital gains on the portion of my "gain" that i would have lost by not selling those calls; if the stock really tanks and i sell my original calls at a loss, those losses will help to offset my gains on the hedging calls i sold (and in any event, i would be in a better position because i have the cash from selling the calls in the first place). Hope this makes sense.

surfside

 

[TMSE]

MAybe I'm missing something but how can you avoid paying ST gains on the calls you sell for insurance? You have to sell them at the same timer as the calls you purchased earlier so won't any profits on them be taxed as ST gains?

Closing the short side of the sale for a profit will be taxed as ST gains?
If this is a foolish question don't bother to answer (I'm not trying to increase my own understanding, but to help insure that you are not making a mistake).

Short selling or writing call options or writing put options always incur short term cap gains, no matter how long you hold those positions. It is because you receive cash upfront when you initiate those transactions.

 

[Jonathan Hewitt]

Coming back to calls for a moment... I'm looking at Jan 19 with a strike of 440, will cost $4500. As I personally expect $TSLA to be 500 by the end of this year, if this were to be the case then wouldn't I make a bucket-load of profit? Seems too easy, do I miss something critical??

You may expect TSLA to be at $500 by the end of the year but that doesn't mean it's going to happen. There's a zillion reasons why that may not happen. It might not even happen by Jan 2019. If TSLA only makes it to $485 in Jan 2019 then you make $0. You will wish you bought just stock instead as you would have made a ton of money with stock. Anything less than $485 in Jan 2019 than that you are losing money, potentially 100% of your money. I think you are going to be right, but I don't even have much of my portfolio in way out of the money options like the one you mentioned because the repercussions are too great if something doesn't go exactly right to put a lot of my money in something like Jan $440s. Most of my money is in Jan 2019 $200s.

With all that said if you are wiling to take the risk that is why you could potentially make "a bucket load of profit." The super high risk is compensated by a potential for a high potential reward. A decision to buy call options should not be taken lightly. The leverage is often times not worth it, especially for those who don't have a full understanding of what they are getting into.

 

[MitchJi]

Short selling or writing call options or writing put options always incur short term cap gains, no matter how long you hold those positions. It is because you receive cash upfront when you initiate those transactions.

That's only part of the transaction though.

 

[MitchJi]

You may expect TSLA to be at $500 by the end of the year but that doesn't mean it's going to happen. There's a zillion reasons why that may not happen. It might not even happen by Jan 2019. If TSLA only makes it to $485 in Jan 2019 then you make $0. You will wish you bought just stock instead as you would have made a ton of money with stock. Anything less than $485 in Jan 2019 than that you are losing money, potentially 100% of your money. I think you are going to be right, but I don't even have much of my portfolio in way out of the money options like the one you mentioned because the repercussions are too great if something doesn't go exactly right to put a lot of my money in something like Jan $440s. Most of my money is in Jan 2019 $200s.

I don't disagree with the point that you are making but that fact is not correct! It's only true if he holds the option until it expires.

If for example the SP is $390 by Jan 4, 2018 it will make him about 20 percent. I believe that is bad way to make 20% and I don't likely the steepness of that curve but quite a few people seem to think that the only way that they can make money on options is to hold them until expiration which is incorrect.

 

[Jonathan Hewitt]

I don't disagree with the point that you are making but that fact is not correct! It's only true if he holds the option until it expires.

If for example the SP is $390 by Jan 4, 2018 it will make him about 20 percent. I believe that is bad way to make 20% and I don't likely the steepness of that curve but quite a few people seem to think that the only way that they can make money on options is to hold them until expiration which is incorrect.

I don't see what is incorrect with what I wrote?

Are there really people out there who think they have to hold options to expiration?

 

[TMSE]

That's only part of the transaction though.

What is the other part?

 

[ggr]

I don't disagree with the point that you are making but that fact is not correct! It's only true if he holds the option until it expires.

If for example the SP is $390 by Jan 4, 2018 it will make him about 20 percent. I believe that is bad way to make 20% and I don't likely the steepness of that curve but quite a few people seem to think that the only way that they can make money on options is to hold them until expiration which is incorrect.

You're technically correct, of course, but that 20% is only on paper. To realize it, he would have to actually make the decision to sell the options on Jan 4, 2018, as opposed to continuing to hold on to them in search of the big payoff. Doing nothing is easier than continually making decisions for a whole year about whether "now" is the time to sell or not, in the face of presumed optimism.

But thanks for mentioning this. What it means to me is that I have to decide in advance under what conditions I would sell. Then queue orders to do that. I have an action plan now.

 

[MitchJi]

What is the other part?

Really?!

 

[TMSE]

Really?!

Oh sorry, your original question was on insurance and how you pay for that insurance and the tax effects.

Buying protective puts is insurance. If the underlying security is held under 12 months, the clock gets reset, no matter what the option expiry or strike price. Check this When buying puts to protect profits

If you are writing covered calls to pay for this insurance, be sure to write out of the money calls or just one strike below last trading day's closing price and at least 30 days remaining before call option expiry. Otherwise you will lose long term gains on the stock. Check this Qualified Covered Calls—Special Rules

In summary, all of this is overly complicated and it is better you consult an independent financial advisor who can look into your unique situation.

 

[MitchJi]

I don't see what is incorrect with what I wrote?

Are there really people out there who think they have to hold options to expiration?

Because it was an incorrect concept. In the two charts posted by @bdy0627 the difference is NOT the minimum rise needed to make a profit. The difference is that with the options with the higher strike price you have much less time for it to happen. You get exactly what you pay for, you pay for less time value and you get less time value.

On this forum there,probably are people who think that the SP needs rise enough to be above the strike price by enough to cover the premium, and probably quite a few more who don't understand the basic voltage in bold above. Even if everyone understands that fact it doesn't mean that contradicting it is correct.

 

[Jonathan Hewitt]

Because it was an incorrect concept. In the two charts posted by @bdy0627 the difference is NOT the minimum rise needed to make a profit. The difference is that with the options with the higher strike price you have much less time for it to happen. You get exactly what you pay for, you pay for less time value and you get less time value.

On this forum there,probably are people who think that the SP needs rise enough to be above the strike price by enough to cover the premium, and probably quite a few more who don't understand the basic voltage in bold above. Even if everyone understands that fact it doesn't mean that contradicting it is correct.

I originally wrote "If TSLA only makes it to $485 in Jan 2019 then you make $0." So you are claiming that because I didn't explain how one could profit before expiration that I wrote is incorrect? Are you saying I'm wrong by omission? I only wrote that if in Jan 2019 if it's not that high you are losing, which is true. This scenario where someone does not sell until expiration could very well happen, as ggr very well explained.

I think you and I would probably both agree that newbies shouldn't be buying calls at strikes they don't expect the share price to reach even though you and I both know very well that we can still profit off those trades. I apologize if people misunderstood what I wrote and I do appreciate you raising a concern that people may have misunderstood what I wrote. This helps me write more clearly in the future. On the other hand, if you could refrain from saying people are "not correct" because you interpret what they wrote differently than what they actually wrote then that would be a more polite way to handle things. Impoliteness is one reason people stop contributing to the forum.

 

[Tslynk67]

You may expect TSLA to be at $500 by the end of the year but that doesn't mean it's going to happen. There's a zillion reasons why that may not happen. It might not even happen by Jan 2019. If TSLA only makes it to $485 in Jan 2019 then you make $0. You will wish you bought just stock instead as you would have made a ton of money with stock. Anything less than $485 in Jan 2019 than that you are losing money, potentially 100% of your money. I think you are going to be right, but I don't even have much of my portfolio in way out of the money options like the one you mentioned because the repercussions are too great if something doesn't go exactly right to put a lot of my money in something like Jan $440s. Most of my money is in Jan 2019 $200s.

With all that said if you are wiling to take the risk that is why you could potentially make "a bucket load of profit." The super high risk is compensated by a potential for a high potential reward. A decision to buy call options should not be taken lightly. The leverage is often times not worth it, especially for those who don't have a full understanding of what they are getting into.

Thanks Jonathan - I realise that one usually trades calls before expiry, but my basic understanding of how calls work is correct, which is what I wanted verifying.

Note that here in Belgium, we have (at this time) no capital gains tax on stock-market profits, just a small duty paid per trade...