Advanced TSLA Options Trading

[vgrinshpun]

I have some Jan 15 $200 calls I bought last November and are now up 300%. I've been debating if it makes sense to sell and take some profits now while moving some up to higher 2016 strikes on any pullback. But also wanted to hold on for a couple more months so the profit can be considered long term capital gains. These were intended to be LEAPS (and of course no longer are) but waiting till November makes it only 2 months till expiry and therefore more risky. I'm confident TSLA be up in the next couple of weeks but not sure about any pull backs from now till November. Would hate to hold it till November only to see its value decrease.

Any ideas on what might be the best strategy? I've considered selling covered calls to create a risk free spread but have heard that that restarts the timer on the calls for long term capital gains. That true?

I usually don't let taxes drive my trade decisions, but this is one case in which I think it does (can?) make a significant difference

Thanks!

I would form cost free bull spread and wait until just before expiration to sell lower leg and buy back the upper leg. Based on your info you bought your $200 calls for about $15 each. You can probabaly sell strike $290 calls of the same expiration date to make cost free $200-290 spread. Assuming that stock is above 290 before Jan 17 you will be able to book $90 per call, while removing any risk of losses from now on. This compares to making $90-15 if you just wait close to expiration with the same assumption of price just exceeding $290 before expiration. So you would make 16.6% more with the spread than just waiting and cashing out before expiration. If you are concerned with taxes you would need to compare your delta between long/short term bracket with this 16.6%. Huge advantage of forming spread, of-course, that the risk of loosing original $15 is eliminated.

I used this tactic with good results as we were moving up from the after-fire lows...

 

[Chickenlittle]

So the general principle is in the mid-high range, you want to be fully invested but you don't want to take too much risk with long-dated options because the risk of loss is higher and reward lower than when the stock was in the low-mid range. Most people would probably be best off just owning stock and long-dated LEAPs that were purchased in the lower low-mid range and have at least 1 year left to expiration. The reason being is if you have LEAPs that are less than a year, then it becomes more of a shorter term play. In your case with Jan15, you have 5 months left until expiration. So it's really a short-term option now and no longer a LEAP. And the value of your Jan15 position will dramatically rise or fall based on the rise/fall of the stock (ie., if stock goes under $200, it'll drop a lot and if goes to $300 it will rise a lot). And since it's in a tax-deferred account you could roll out your position without tax consequences. So, in your case if you're ambitious and wanting to play the short-term stock movement (over the next 4-5 months), then you're free to keep you Jan15s. And I wouldn't necessarily argue with you since I also agree there's a very good chance/likelihood that we break ATHs in the next couple months. I would just advise that you recognize it as a shorter term play. (Note: Roughly 30% of my TSLA position is Jan15 options purchased at various points in May-Nov 2013 in the lower low-mid range or super-low range, but since they now only have 5 months left I consider them a short-term play and not a long-term investment and I recognize the risks of such investment. If I didn't have tax consequences I would have rolled all my Jan15 out to Jan16 in the lower half of the low-mid range back in Nov-Dec last year, and probably would have converted a significant portion of my stock to Jan16 at that time as well.)

If you're not wanting to play the short-term movements as much, you could also roll out your Jan15 150 strike options to something like Jan16 170 strike options (or a bit higher strike to be a bit more ambitious but I'd advise against OTM since we're in the mid-high range). And you could also just convert them to stock (something I would definitely suggest if we reach super-high trading range). You could also do something where you convert some to Jan16 170 strike LEAPs and convert some to stock. This would lower your risk (and reward) a bit but keep you fully invested with stock and some long-dated (over a year) ITM options.

But overall, the investment model I shared is more geared toward the long-term investor with a large (in terms of % of portfolio) invested in TSLA and is looking for 1) lower risk than a more aggressive shorter term investor, but is also looking for 2) greater returns than holding just stock.

since extensively sharing your principles of investing, can you share with us your percent gain over the past two years so we can gauge the results you have achieved? not asking for dollar amounts just a percentage.

 

[DaveT]

Dave, what is your take on selling covered calls, assuming the stock is trading in the mid-high range or above?

Well, first it's kind of sad that this discussion was moved to Advanced TSLA Options Trading because my original post/methodology was not gear to short-term trading but rather long-term investing, and it wasn't geared to advanced options but rather an infrequent use of leverage (ie., LEAPs) when the stock hits a really low valuation range and mostly holding stock through most of the ups and downs.

Anyway, regarding covered calls I think there's really two audiences/approaches. For the short-term trader who knows what they're doing, they'll use whatever they need to accomplish their short-term trading goals - whether it be covered calls, selling puts, debit spreads, credit spreads, iron condors, etc.

Now for the long-term investor who's interested in selling covered calls, I think there are two audiences here - taxable account holders and tax-deferred account holders. For the tax deferred account holder, if they sell covered calls and their stock is taken away then there are no tax consequences. But for the taxable account holder, there are tax consequences when shares are taken away/sold. And for some the taxable consequence can be as high as 37% (ie., 23.8% federal, 13.3% california state tax). So, with tax consequences it changes the game.

For the general TSLA long-term investor, I'm not too hot on selling covered calls in general since 1) they might think TSLA is high and sell covered calls, but their judgment of "high" might not be accurate, 2) if they get their shares called away, then they need to face the difficult task of trying to enter again which is often very difficult to know when to enter and with how much. If they just keep holding their TSLA shares for many years (assuming TSLA keeps executing) then they don't have to worry about trying to re-enter.

If you're going to sell covered calls though, for a stock like TSLA the best odds are to probably sell them when the stock is in the high end of the super-high range or even surpasses the super-high range. But determining what that high end of the super-high range is not easy (but something I'll attempt explaining in the future in my series).

For me personally, I'm not looking to take profits from my long-term TSLA position so I'm not interested in selling covered calls for part or all of my position, since the possibility of my shares being called away are always a possibility and I don't want to face those tax consequences. But as I mentioned before, if you're short-term trading and/or have a tax-deferred account or really know what you're doing, then it's different.

 

[The Blue Owl]

Well, first it's kind of sad that this discussion was moved to Advanced TSLA Options Trading because my original post/methodology was not gear to short-term trading but rather long-term investing, and it wasn't geared to advanced options but rather an infrequent use of leverage (ie., LEAPs) when the stock hits a really low valuation range and mostly holding stock through most of the ups and downs.

Anyway, regarding covered calls I think there's really two audiences/approaches. For the short-term trader who knows what they're doing, they'll use whatever they need to accomplish their short-term trading goals - whether it be covered calls, selling puts, debit spreads, credit spreads, iron condors, etc.

Now for the long-term investor who's interested in selling covered calls, I think there are two audiences here - taxable account holders and tax-deferred account holders. For the tax deferred account holder, if they sell covered calls and their stock is taken away then there are no tax consequences. But for the taxable account holder, there are tax consequences when shares are taken away/sold. And for some the taxable consequence can be as high as 37% (ie., 23.8% federal, 13.3% california state tax). So, with tax consequences it changes the game.

For the general TSLA long-term investor, I'm not too hot on selling covered calls in general since 1) they might think TSLA is high and sell covered calls, but their judgment of "high" might not be accurate, 2) if they get their shares called away, then they need to face the difficult task of trying to enter again which is often very difficult to know when to enter and with how much. If they just keep holding their TSLA shares for many years (assuming TSLA keeps executing) then they don't have to worry about trying to re-enter.

If you're going to sell covered calls though, for a stock like TSLA the best odds are to probably sell them when the stock is in the high end of the super-high range or even surpasses the super-high range. But determining what that high end of the super-high range is not easy (but something I'll attempt explaining in the future in my series).

For me personally, I'm not looking to take profits from my long-term TSLA position so I'm not interested in selling covered calls for part or all of my position, since the possibility of my shares being called away are always a possibility and I don't want to face those tax consequences. But as I mentioned before, if you're short-term trading and/or have a tax-deferred account or really know what you're doing, then it's different.

Thanks. I should have been more specific. I am referring to selling OTM weeklies against the core stock position, with the intent of keeping the stock forever, all held in a non-taxable account. The strike should be safely out of the probable range, being content with a small premium. Repeat every week. The purpose here would be to add a moderate boost of 0.5-2% per week on a continual basis, and deploy the accumulated cash on dips to buy more shares. If one can sell a non-trivial amount of contracts, it can really add up. Also, when done before earnings, the (usually) higher volatility means selling covered calls can increase the size of the boost quite significantly. Staying out of the range where you can get called away is key, as you pointed out.

So I was looking at this as a long-term strategy to boost the long-term return, as opposed to a short-term trading move or as a way to take profits.

 

[DaveT]

[removed. i think i shared tmi.]

 

[DaveT]

Thanks. I should have been more specific. I am referring to selling OTM weeklies against the core stock position, with the intent of keeping the stock forever, all held in a non-taxable account. The strike should be safely out of the probable range, being content with a small premium. Repeat every week. The purpose here would be to add a moderate boost of 0.5-2% per week on a continual basis, and deploy the accumulated cash on dips to buy more shares. If one can sell a non-trivial amount of contracts, it can really add up. Also, when done before earnings, the (usually) higher volatility means selling covered calls can increase the size of the boost quite significantly. Staying out of the range where you can get called away is key, as you pointed out.

So I was looking at this as a long-term strategy to boost the long-term return, as opposed to a short-term trading move or as a way to take profits.

You're trying to basically make money over time using a short-term strategy of selling weekly OTM covered calls on your TSLA long-term position. This is difficult because TSLA is so volatile and sometimes when it goes up it really goes up fast and even though you though the OTM covered calls were far enough OTM, still somehow it reaches the strike and you can get your shares called away. You could also buy the calls back before expiry as well. But whatever the case, you're getting into short-term trading and it requires short-term trading expertise.

From what I've seen can work is the following: (note: this is advanced short-term trading)
1. If TSLA is in an uptrend, then sell put credit spreads for income.
2. If TSLA is trading sideways, sell iron condors
3. If TSLA is in a downtrend, sell call credit spreads (or covered calls if you own stock).

That's the general approach, but then it gets more advanced knowing the exact timing of when to sell the options (ie., on a downtrend when price has rebound you sell more call credit spreads counting on the resumption of the downtrend, but if the downtrend is broken then you need to adjust your strategy quickly).

In any case, short-term trading requires expertise and monitoring.

I would suggest learning from the best traders in the world who are making money off of selling options, if you're interested.

 

[The Blue Owl]

You're trying to basically make money over time using a short-term strategy of selling weekly OTM covered calls on your TSLA long-term position. This is difficult because TSLA is so volatile and sometimes when it goes up it really goes up fast and even though you though the OTM covered calls were far enough OTM, still somehow it reaches the strike and you can get your shares called away. You could also buy the calls back before expiry as well. But whatever the case, you're getting into short-term trading and it requires short-term trading expertise.

From what I've seen can work is the following: (note: this is advanced short-term trading)
1. If TSLA is in an uptrend, then sell put credit spreads for income.
2. If TSLA is trading sideways, sell iron condors
3. If TSLA is in a downtrend, sell call credit spreads (or covered calls if you own stock).

That's the general approach, but then it gets more advanced knowing the exact timing of when to sell the options (ie., on a downtrend when price has rebound you sell more call credit spreads counting on the resumption of the downtrend, but if the downtrend is broken then you need to adjust your strategy quickly).

In any case, short-term trading requires expertise and monitoring.

I would suggest learning from the best traders in the world who are making money off of selling options, if you're interested.

The type of account I have (registered account in Canada) doesn't allow me selling options of any kind, with the only exception of covered calls.

I did get called away twice. The last time I did a tabulation of the results (after about 3 months of employing this strategy) I had managed close to 1% per week, including the high premiums from the high-volatility weeks pre-Q1 earnings, but also the penalty for being called away when the stock jumped. I stopped doing it going into Q2 earnings. Anyway, I now get your point about this being a short-term trading technique, even though I am a long-term stock holder.

 

[justdoit]

You're trying to basically make money over time using a short-term strategy of selling weekly OTM covered calls on your TSLA long-term position. This is difficult because TSLA is so volatile and sometimes when it goes up it really goes up fast and even though you though the OTM covered calls were far enough OTM, still somehow it reaches the strike and you can get your shares called away. You could also buy the calls back before expiry as well. But whatever the case, you're getting into short-term trading and it requires short-term trading expertise.

From what I've seen can work is the following: (note: this is advanced short-term trading)
1. If TSLA is in an uptrend, then sell put credit spreads for income.
2. If TSLA is trading sideways, sell iron condors
3. If TSLA is in a downtrend, sell call credit spreads (or covered calls if you own stock).

That's the general approach, but then it gets more advanced knowing the exact timing of when to sell the options (ie., on a downtrend when price has rebound you sell more call credit spreads counting on the resumption of the downtrend, but if the downtrend is broken then you need to adjust your strategy quickly).

In any case, short-term trading requires expertise and monitoring.

I would suggest learning from the best traders in the world who are making money off of selling options, if you're interested.

Yea, great advice. I've been doing a little bit of that. Worse case you roll them forward. I usually buy/sell two to three weeks out (more time premium).

I had sold a bull put spread 230/240 a couple of weeks back which expire next week. Hope they expire worthless. Just sold another bull put spread 260/270 for a couple weeks out. I believe we're in an uptrend and can break ATH's and that's when I'll close that spread.

 

[Robert.Boston]

Well, first it's kind of sad that this discussion was moved to Advanced TSLA Options Trading because my original post/methodology was not gear to short-term trading but rather long-term investing, and it wasn't geared to advanced options but rather an infrequent use of leverage (ie., LEAPs) when the stock hits a really low valuation range and mostly holding stock through most of the ups and downs.

Sorry, Dave, I was waffling between whether to move this discussion to this thread or to the Long Term Investing thread. I guess I should have chosen the latter, but I thought the depth of discussion here was out of character for the short-term price movement thread.

 

[DaveT]

Sorry, Dave, I was waffling between whether to move this discussion to this thread or to the Long Term Investing thread. I guess I should have chosen the latter, but I thought the depth of discussion here was out of character for the short-term price movement thread.

No worries, I totally understand.

 

[EldestOyster]

I won't claim to understand how half of this works, but I do read the posts and am trying to acquire some knowledge a piece at a time. This turns out to be difficult, because these concepts are interrelated! What I can't seem to get is how LEAPS apparently lose value over time. In my understanding, it's some kind of option, and once the contract is made, the unchangeable factors are (1) price you can buy at, (2) the premium you pay (a fee for the privilege), and (3) the expiration date. If I'm right, the only thing that can change the "value" is the current stock price. So, am I missing a factor (maybe the premium is a monthly fee or something), or did I misinterpret the notion of "time value"?

I hope this can be explained without writing a book

 

[Johan]

I won't claim to understand how half of this works, but I do read the posts and am trying to acquire some knowledge a piece at a time. This turns out to be difficult, because these concepts are interrelated! What I can't seem to get is how LEAPS apparently lose value over time. In my understanding, it's some kind of option, and once the contract is made, the unchangeable factors are (1) price you can buy at, (2) the premium you pay (a fee for the privilege), and (3) the expiration date. If I'm right, the only thing that can change the "value" is the current stock price. So, am I missing a factor (maybe the premium is a monthly fee or something), or did I misinterpret the notion of "time value"?

I hope this can be explained without writing a book

Look at at a price chart for calls for a given stock and a given call price. The ones further out in expiry will be more expensive. This is logical of course, since buying an option with a further out expiry gives the underlying stock more time to rise in price. By the same logic from the moment you buy a call it will start to loose time value. In your list above the "premium" (nr 2) is not unchangeable. Premium=time value.

 

[Chickenlittle]

I won't claim to understand how half of this works, but I do read the posts and am trying to acquire some knowledge a piece at a time. This turns out to be difficult, because these concepts are interrelated! What I can't seem to get is how LEAPS apparently lose value over time. In my understanding, it's some kind of option, and once the contract is made, the unchangeable factors are (1) price you can buy at, (2) the premium you pay (a fee for the privilege), and (3) the expiration date. If I'm right, the only thing that can change the "value" is the current stock price. So, am I missing a factor (maybe the premium is a monthly fee or something), or did I misinterpret the notion of "time value"?

I hope this can be explained without writing a book

1. LEAP is just an option with a long expiration date
2. The value of the option depends on demand and supply. There will be more demand and higher price for an option that has a longer time since it is more likely to reach target. Obviously the price of stock affects option price as the lower the strike the more likely to be "in the money" what a lot of people fail to realise is that an option that is just below the current price of stock performs a lot better percentage wise than one that is very deep in the money.

dO NOT invest at this point. You are not ready yet

 

[Robert.Boston]

Think about time value using the following thought exercise:

One minute before the option expires, the value of the underlying security is unlikeLy to change much, so the value of the option "collapses" to equal the difference between the stock price and the option's strike price (or zero, if the option is out of the money). The time premium is (nearly) zero.

The day before the option expiry, there is some room for movement in the stock price--not much, but more than in the case above. An option that's just OTM might become ITM, so it's value won't be zero--very low, but not zero. That's the time value.

Two months before the expiry, there's a much greater chance that a just-OTM option will end up ITM, so people are willing to pay more for it. The time value is much higher.

So, this exercise demonstrates why the time value decays as the expiration date approaches.

 

[chickensevil]

I feel like I have a decent enough grasp on options at this point that I am going to take the plunge... Just going to end up buying like... 1 option here soonish, and let it play out. I figure I can risk a total loss on such a relatively small amount... and with the overall sentiment of TSLA looking bullish again, it should be relatively safe. It will take a while to get the approval and the account funded, but will definitely report back what single trade I make and how it pans out.

Just a question because I am trying to avoid margin accounts, if I purchase a call, and take it to expiration, will I be able to roll that as an immediate sell of shares on the open market, or would I need to sell off the option before it expires? Will the broker just do that for me by default? (might depend on who I use, I suppose...) That was the only thing never clear enough to me.

 

[The Blue Owl]

Just a question because I am trying to avoid margin accounts, if I purchase a call, and take it to expiration, will I be able to roll that as an immediate sell of shares on the open market, or would I need to sell off the option before it expires? Will the broker just do that for me by default? (might depend on who I use, I suppose...) That was the only thing never clear enough to me.

If you hold 1 call to expiration, and it expires in the money, you must have sufficient funds in your account to purchase the 100 shares under the contract. If you don't have enough funds, the portion of the call not covered by sufficient funds will expire worthless, or at least that's what my broker will do, because I don't have margin enabled. I don't know what might happen if you have margin; the broker may buy the shares for you (at the strike) or not, I don't know.

But one thing is clear, they do not "roll out" as an immediate sell of shares, since you don't have shares. You need to buy them first, then sell them.

You can sell the call before expiration, and you'll get (roughly) the amount corresponding to the number of shares covered by the contract multiplied by the difference between the call strike and the price of the underlying, assuming the call is in the money. I said "roughly", because the price of the option before expiration also depends strongly on the time left (the time value.)

To see the effect of time and price of the underlying on a call option, see this calculator.

 

[Chickenlittle]

I feel like I have a decent enough grasp on options at this point that I am going to take the plunge... Just going to end up buying like... 1 option here soonish, and let it play out. I figure I can risk a total loss on such a relatively small amount... and with the overall sentiment of TSLA looking bullish again, it should be relatively safe. It will take a while to get the approval and the account funded, but will definitely report back what single trade I make and how it pans out.

Just a question because I am trying to avoid margin accounts, if I purchase a call, and take it to expiration, will I be able to roll that as an immediate sell of shares on the open market, or would I need to sell off the option before it expires? Will the broker just do that for me by default? (might depend on who I use, I suppose...) That was the only thing never clear enough to me.

I have a lot of options but am Leary of buying more at this price. I suspect you own stock. Have you considered sellin a covered call? Could get over 11 dollars for a 450 strike in 2016. You would either keep the money or essentially sell shares at 461 then if called away. Not bad options. Of course you should hold onto the shares to keep it covered but if stock is dropping the price of theses calls will drop steeply and you can buy them back for a lot less than sell your shares if you desired

- - - Updated - - -

If you hold 1 call to expiration, and it expires in the money, you must have sufficient funds in your account to purchase the 100 shares under the contract. If you don't have enough funds, the portion of the call not covered by sufficient funds will expire worthless, or at least that's what my broker will do, because I don't have margin enabled. I don't know what might happen if you have margin; the broker may buy the shares for you (at the strike) or not, I don't know.

But one thing is clear, they do not "roll out" as an immediate sell of shares, since you don't have shares. You need to buy them first, then sell them.

You can sell the call before expiration, and you'll get (roughly) the amount corresponding to the number of shares covered by the contract multiplied by the difference between the call strike and the price of the underlying, assuming the call is in the money.

Sorry not true. You can sell your call if in the money without exercising or needing any cash

 

[The Blue Owl]

Sorry not true. You can sell your call if in the money without exercising or needing any cash

That's what I said (in the last paragraph). His question, as I understood it, is if the call expires, will the broker credit him for the difference between the strike and the price of the underlying. The answer to that question is no.

You cannot sell your call after it expires. You can sell it any time before, whether it's in the money or not.

 

[chickensevil]

So basically, I have to sell my Option off each time before expiration or it will expire worthless? Hrmmmm. Very well then... is there a strategy to how long you could reasonably hold an option before you get locked out? 1 day? 1 hour? 5 minutes? (as in time left before expiration)

I wouldn't want to risk covered calls on the chance that they get pulled away from me. Then I would have to deal with having the sell, trying to buy back shares, and such.

 

[The Blue Owl]

So basically, I have to sell my Option off each time before expiration or it will expire worthless? Hrmmmm. Very well then... is there a strategy to how long you could reasonably hold an option before you get locked out? 1 day? 1 hour? 5 minutes? (as in time left before expiration)

You can keep them for as long as the market is open, and there are buyers for your calls, just as for any other security. You can't trade options after hours. As for strategy, it's anyone's (or yours, really) guess. You want to maximize profit, so just sell them when they reach maximum value

I wouldn't want to risk covered calls on the chance that they get pulled away from me. Then I would have to deal with having the sell, trying to buy back shares, and such.

Yes, you run that risk with covered calls. BTW, in that case, the selling of shares from under you happens automatically (after expiration.)

Please do yourself a favour and peruse the site I recommended earlier. You will see, at a glance, the effect of time on the price of the option, which is dramatic. That will help you with the timing of the exit.

- - - Updated - - -

Sorry not true. You can sell your call if in the money without exercising or needing any cash

Just for reference, this is what my broker sends me every time I have options expiring that week. Emphasis mine.

---

Dear client,
Please be aware your account currently has one or more option positions which are approaching expiry.


As options may be automatically exercised or assigned at expiry, please monitor your account and ensure your account always maintains sufficient margin.


Maintaining margin
If:
· your options positions are likely to expire in-the-money
· you do not have sufficient margin to cover the auto-exercise(s) and/or assignment(s)
· you do not take action by 2 p.m. EST on the last business day prior to expiration


We may close your positions or elect for any long in-the-money options in your account to expire worthless.

If you do not have sufficient margin in your account to cover auto-exercises or assignments, choose among the following actions:
1. Deposit additional funds to your account.
2. Transfer funds or positions between your accounts.
3. Close the option position(s).
4. Close other position(s) in your account.
5. Let your long option(s) expire worthless.