Wiki Selling TSLA Options - Be the House

[KTC Lurker]

The terminology I've settled on for myself - a roll is a specific transaction where the purpose is to buy time on a marginal or ITM position. It is mechanically a single ticket with two transactions - close the current position and open the new position. There are circumstances in which transitioning between the two makes the roll ticket necessary (ask me how I know ).

Even in those circumstances one can probably close / open a subset of the contracts a few at a time in order to transition into the new position.


The other transaction is closing a winner, and opening a new position. I've used the roll ticket for these as a convenience, but these are just "take the winner" and "open a new" transaction. I use different terminology as much for my own benefit as anything else, even if I use the roll transaction ticket for the convenience.

I am certain that there is no commission savings - at least with US brokers as it really is two transactions under the hood, and you get to pay for both.

Thanks. I understand the mechanics behind the roll, but procedurally it seems like it adds a dependency for opening the new position - the old one must have enough interest/volume to close. If it's just something to minimize clicks, that makes sense, but otherwise it was just an outlier in strategy from what I see most here do - close the existing position then open the new position or open a new position while the old position is still going.

 

[MP3Mike]

Especially on closes though I'll switch to a market order if I'm having trouble getting a fill and the shares are moving against me. It's sort of an "I've decided I'm done with the position - so be done with it". I've had a situation that missed a fill by less than a dime and then moved against me to the tune of 10's of dollars; I don't let that happen again.

I was having a problem closing a BPS today, and using a market order never even occurred to me.

I had set a limit order for $0.01/debit so it would have cost $1.43 per contract. ($1+commision/fees on each leg). They wouldn't take it even though it showed the bid/ask from a 0.01/credit to 0.01/debit for the combined close. So I ended up closing the short legs for $0.03 ($3.01/contract no commission since it is under $0.1) followed by immediately closing the long legs for $0.03 ($2.78/contract). So it ended up costing me $0.23/contract to close them out.

Breaking it up saved me $1.20/contract from what I was offering them. (Of course you have to have the cash available to BTC the short legs first.)

 

[ammulder]

I've had some thoughts about compounding gains using BPS. The math of using the gains to sell more, and more - it's alluring. The difficulty is that a max loss might be enough to wipe one out completely - or at least down to the income from the most recent sale.

What I've done - I've got my own number for the position size I'd like to be selling. Beyond that I'm letting the cash build up and not using it for BPS. I'm also not (yet) using it for shares or LEAPs, though I semi-expect that to change. The intention is to have at least 50% more cash than I'm using in my BPS position as I believe that'll be enough to recover from a bad trade. I might allow some or most of that 50% to be in leaps or shares - still deciding on that point.

I think that 50% will be enough as I believe that managing a losing position down to a 50% loss won't be all that difficult - I accomplished that on a position where in retrospect I didn't really know what I was doing One thing I have figured out from previous paper exercises - a huge contributor to overall profitability is managing losers aggressively (keep 'em small).

Managing losers aggressively leads me to a third idea to consider (NOT-ADVICE though!) - setup a small and really aggressive position. A position that is designed to put you into a losing situation that needs management. Not only to experience the mechanics of managing a losing position, but also the emotions.

And 50% extra cash plus a 50% loss leaves me continuing to sell the full position. But that's me and my choice.


The point is that 100% compounding is (MHO) pretty risky, as it keeps us exposed to a single big and bad move.

Well, I plan to stay pretty conservative with the put spreads in the IRA so as to minimize the chances of a big loss. It turns out that compounding works fine making $3-4 per share per $50 put spread, not only if you’re going for $5-6 or whatever we can get for a $50 spread these days. Sure, it will take longer to get giant, but I have a while yet before I plan to be drawing on the IRA.

If the worst did come to pass, I’d remind myself that this started with only $10k diverted from my retirement savings, which in the grand scheme of things, is not so much to lose. But truly I’d plan to take corrective action on any spreads going sour well before they became a total loss!

As far as setting aside some cash each week rather than pumping it all back into selling more spreads… I won’t do that while I’m getting this off the ground. If things go well, eventually I will, perhaps half and half more spreads and more shares? I wouldn’t keep cash lying around unused though. I’d get shares — it’s non-taxable so I could sell them again if needed. This strategy of course might change when I near or reach retirement and require more stability than TSLA shares might offer.

Disclaimer: I have a 401k which I’m unable to drain without quitting my job, and which also offers a very limited selection of funds and no individual stocks. So no matter what I do in the IRA or taxable account, I have a solid block of deworsified investments for retirement. It’s not what I might wish on days like today, but it does give me more freedom with TSLA in my other accounts without my entire financial future being at risk. I guess this goes to the point of everyone’s situation and goals being different.

 

[adiggs]

Thanks. I understand the mechanics behind the roll, but procedurally it seems like it adds a dependency for opening the new position - the old one must have enough interest/volume to close. If it's just something to minimize clicks, that makes sense, but otherwise it was just an outlier in strategy from what I see most here do - close the existing position then open the new position or open a new position while the old position is still going.

It does add a dependency and in the case of rolling a vertical spread, it gets you 4 legs into a single ticket. That's a lot of bid/ask slippage and it can pile up.

It can also make fills hard to come by, but if you're in a state where you don't have the cash on hand to buy out the short, so then you can sell the new short, then it is what it is.


It's worse rolling a put vertical spread (BPS) over a short put (2 legs vs. 1 leg).

 

[adiggs]

Well, I plan to stay pretty conservative with the put spreads in the IRA so as to minimize the chances of a big loss. It turns out that compounding works fine making $3-4 per share per $50 put spread, not only if you’re going for $5-6 or whatever we can get for a $50 spread these days. Sure, it will take longer to get giant, but I have a while yet before I plan to be drawing on the IRA.

I keep an eye on the %-of-spread-size that I'm collecting. If one collects $2.50 in your $50 wide spread example, or I suppose more accurately earns that much each week (say open at 3.75 and then close at 2/3rds), then that's 5%/week.

And that's uhm.. ridiculously good


I haven't seen really distant / conservative positions achieve 10% but I've been seeing them break 5%. Which is .. uhmm ... ridiculously good.

 

[AquaY]

Good call. We are now at 845.20 after hours, and still on an up trend.

@5:30PM Etrade shows $845.10
Anywhere within 5 maybe even 10 points on a closing rally like that and you are at great risk of being exercised IMO
I had watched these closely and thought of closing them out the last few days at 50% profit but with the probability according to Options analyzer of 95% I let them ride but kept watching them while I worked at my desk.
This morning I put an order to close @.06. At 4:45 I changed that to 10 cents ( which was the offer at the time) They were trading at 10 cents but I was not being filled so I cancelled and made it a market order almost too late.
That was too close. Interesting experience though.

 

[bkp_duke]

I'm with a different broker but I've wondered about some stuff like this. My brokerage has me in a margin call (Federal call) despite my having 100% account equity and having more than enough cash to back my BPS. As all of my short positions are winning right now I'm letting it ride, but some insight into what the broker initiated order might look like is valuable to me.

Knowing that they're more likely to close the short position(s) both makes a ton of sense, and is also my preference.

Now if I only understood why I get a margin call on a position where I hold >120% cash for the backing needed for the position. I sense a conversation with my broker in the near future.

I'm in the EXACT same position with Fidelity. I've seen it happen 3 times now. All 3, it's just disappeared in a day or two.

I think, but am not certain, it has something to do with the timing of them closing positions out 1-2 days later.

Always scares the crap out of me, regardless.

 

[MP3Mike]

they closed the short call leg at the market for $0.08 and I had a limit order to close the entire condor for $0.05. Maybe that was optimistic?

their order definitely reduced my risk and I’m not harmed at all. I’m surprised though as the max loss was cash secured. Maybe they just don’t want the hassle of assigning me the shares and selling the shares.

I'm with a different broker but I've wondered about some stuff like this. My brokerage has me in a margin call (Federal call) despite my having 100% account equity and having more than enough cash to back my BPS. As all of my short positions are winning right now I'm letting it ride, but some insight into what the broker initiated order might look like is valuable to me.

Knowing that they're more likely to close the short position(s) both makes a ton of sense, and is also my preference.

I suspect they will only ever close the short position, since the long position doesn't have any risk attached. As to why they do it, they know what could happen, like we saw in that one YouTube video lately.

Your position can close OTM, and everything looks fine. Then in AH the price drops, and the person holding your short put calls their broker and executes it AH. You don't get the notice in time for you to be able to call in and execute your long put, so it doesn't cover any of the risk. You end up in a world of hurt, with not enough cash to cover the shares you bought and end up in a Fed call that you might not be able to meet. (It is why I can't stand to hold a short position, anywhere close to the SP, past noon on the day that it expires.)

Things would be much simpler if options just expired at the close of market instead of one and a half hours later.

 

[M3Rider]

Don’t just let it die ITM though. Learn to roll, e.g., on Oct 20-22 buy-to-close (BTC) the 102221C860 and sell-to-open (STO) something like a 102921C880, probably for a net credit, but preserving $20 x 100 = $2,000/100 shares. Keep rolling until the CC has a chance to expire OTM, and you preserve all the capital gains and hold your shares. Good luck!!

It's not just die ITM. American options can be exercised any time before expiration.
If CC is ITM before the expiration, someone may exercise it and you will incur taxes, which can be devastating for FIFO tax lot order and low cost basis.

 

[UnknownSoldier]

I executed my first trade, following the same spread I was asking about earlier. Traded BPS 675/620 10/29 x100, collected $18k in credit, and I sincerely hope we don't sell off enough after earnings to sniff under 700 again. If this works out, I'll keep on trading deep OTM BPS because it's way safer than selling cash secured puts much closer to the money while collecting less premium per put.

If this is truly the wave of the future then I have secured the retirement income and cash generation I need and I will move forward with my other plans.

 

[buttershrimp]

He is/was the user @paydirt76. He really disliked selling premium back in the day but who knows if he is in board now. I doubt it.

Paydirt's (TSLA) Option Investing Guide

Yashu is paydirt?

 

[EV forever]

I'm with a different broker but I've wondered about some stuff like this. My brokerage has me in a margin call (Federal call) despite my having 100% account equity and having more than enough cash to back my BPS. As all of my short positions are winning right now I'm letting it ride, but some insight into what the broker initiated order might look like is valuable to me.

Knowing that they're more likely to close the short position(s) both makes a ton of sense, and is also my preference.

Now if I only understood why I get a margin call on a position where I hold >120% cash for the backing needed for the position. I sense a conversation with my broker in the near future.

I'm in the EXACT same position with Fidelity. I've seen it happen 3 times now. All 3, it's just disappeared in a day or two.

I think, but am not certain, it has something to do with the timing of them closing positions out 1-2 days later.

Always scares the crap out of me, regardless.

Remember the Federal call on my Roth IRA account that I was so stressed about a couple of weeks back? Well absolutely nothing happened with that one - other than the one ominous sounding warning. Now, in that case, I had used all cash in the account down to the last $500 to sell BPS - so I thought the Fed Call was well deserved. Well, after closing those at a decent profit, I did the same thing again just to see if I get another Fed Call - used up all cash leaving only a few hundred on Tuesday. No Fed Call yet this week! So I have no clue what the heck triggers it and what doesn't.

Well, I plan to stay pretty conservative with the put spreads in the IRA so as to minimize the chances of a big loss. It turns out that compounding works fine making $3-4 per share per $50 put spread, not only if you’re going for $5-6 or whatever we can get for a $50 spread these days. Sure, it will take longer to get giant, but I have a while yet before I plan to be drawing on the IRA.

If the worst did come to pass, I’d remind myself that this started with only $10k diverted from my retirement savings, which in the grand scheme of things, is not so much to lose. But truly I’d plan to take corrective action on any spreads going sour well before they became a total loss!

As far as setting aside some cash each week rather than pumping it all back into selling more spreads… I won’t do that while I’m getting this off the ground. If things go well, eventually I will, perhaps half and half more spreads and more shares? I wouldn’t keep cash lying around unused though. I’d get shares — it’s non-taxable so I could sell them again if needed. This strategy of course might change when I near or reach retirement and require more stability than TSLA shares might offer.

Disclaimer: I have a 401k which I’m unable to drain without quitting my job, and which also offers a very limited selection of funds and no individual stocks. So no matter what I do in the IRA or taxable account, I have a solid block of deworsified investments for retirement. It’s not what I might wish on days like today, but it does give me more freedom with TSLA in my other accounts without my entire financial future being at risk. I guess this goes to the point of everyone’s situation and goals being different.

My 401K allows transfer of funds to a Brokerage link account within the 401K - it does not allow any individual stocks or ETFs either. But the advantage is that it allows any mutual fund that Fidelity offers. So a couple of years back I started transferring money into brokerage link and invested a large portion of it in the Baron Partners fund and Baron Focused growth fund - these have a high % of TSLA as well as some SpaceX. The returns have been great the last 2 years . This year was a bit rocky early on, but they are back to being profitable YTD. Plus, this was the only reasonable way to invest a bit in SpaceX for me - albeit a very small %.

 

[adiggs]

I executed my first trade, following the same spread I was asking about earlier. Traded BPS 675/620 10/29 x100, collected $18k in credit, and I sincerely hope we don't sell off enough after earnings to sniff under 700 again. If this works out, I'll keep on trading deep OTM BPS because it's way safer than selling cash secured puts much closer to the money while collecting less premium per put.

If this is truly the wave of the future then I have secured the retirement income and cash generation I need and I will move forward with my other plans.

Congratulations! My original position were some cash secured puts at the 200 and 175 strike when the shares were around $400. Starting far, far OTM is (MHO) a good idea. It's easy to creep a bit closer, later on, should you so desire. But its also hard to complain with >$10k in a week or two. That's .. uhm ... good.


I do have a NOT-ADVICE suggestion. Take 1-10 of those positions and open something aggressive with them. Maybe 800/745s - the purpose is to have a small (but not trivial) position that is closer to the money and that you are taunting the share price to come get. The idea is to get a small position ITM and to manage it, before you have the big position go ITM and need to manage it.

I've had a big position go ITM all of a sudden (literally - expiration day went from OTM to $200 ITM in a flash) and I didn't really know how to manage it well. I did what I knew to do and didn't finally finish cleaning it up until a month or so back when the position was a year old (rolled the suddenly deep ITM call out by 2 years). With what I've learned since I would / will handle a similar situation differently should (when) it arises in the future. Much better (MHO) to get a small position into trouble, that you can buy out for a max loss, to then see what you can do with it (i.e. - avoid buying it out for the max loss).


You might see what a roll on a vertical looks like (these are short vertical (put) spreads). You might also see what a roll that cuts the spread size in half and doubling the number of contracts looks like. OR, or, or, ... There are a variety of management techniques for handling losing positions, or positions that are threatening to become losers, and I like to try out the management when I don't need it.

As a bonus those small number of aggressive positions will be earning a lot more per contract, but that's not the point or an objective.

You also don't need to try the small number of more aggressive positions immediately. You'll know when its time for you.

 

[M3Rider]

Closed off everything for this week, +94k.
For 10/22 I have
40x -700/650 @3.65 (opened Wed) and
170x -730/680 @2.55 (opened today)
58k with what seems like a limited risk.

I am not sure I really want to open bps for 2-3 weeks away for the same reason @BornToFly mentioned - if SP starts going against you on a consistent basis those other dates may not be any easier to manage.

I've had tons of puts earlier this year sold for, like, every week till EOY. When SP fell to 550 in May, all of them combined crashed my remaining margin and gave me a margin call. I managed to get out of it by rolling like the next 2 months worth of puts to December. But did not like the experience of being so much underwater on all of them and so much time value sitting in far away puts, so that it would not be easy to close them without major losses.

 

[BornToFly]

Regarding the earlier question about cash vs margin secured BPS. With cash, if the SP goes down, you are fine, because the money required is the gap in the spread, and that doesn't change. Now, it is nice to have extra cash on hand in case you need to roll and the roll costs money (net debit), but you don't have to fear a margin call. However, if you are using Margin derived from your TSLA shares, now you have to worry about a dropping SP because you will have less margin available as the SP drops. So if you needed all your margin when the SP was at 750, you will be in trouble if the SP drops to 650 and you still have all the positions open. You will get a Margin call. I use the Margin Calculator tool in Fidelity to simulate a change in the SP down to 650 or 620, and I look at how much margin I would have at that SP. That is the Margin I use to then open BPS with the SP at 720, as an example.

 

[AquaY]

Closed off everything for this week, +94k.
For 10/22 I have
40x -700/650 @3.65 (opened Wed) and
170x -730/680 @2.55 (opened today)
58k with what seems like a limited risk.

I am not sure I really want to open bps for 2-3 weeks away for the same reason @BornToFly mentioned - if SP starts going against you on a consistent basis those other dates may not be any easier to manage.

I've had tons of puts earlier this year sold for, like, every week till EOY. When SP fell to 550 in May, all of them combined crashed my remaining margin and gave me a margin call. I managed to get out of it by rolling like the next 2 months worth of puts to December. But did not like the expirience of being so much underwater on all of them and so much time value sitting in far away puts, so that it would not be easy to close them without major losses.

Were your puts naked or spreads?
What percentage of your margin did you have in reserve that didn‘t save you from the margin call?
I ask because Ive been trying to figure out what is a good percentage of margin to hold in reserve while not leaving too much on the table

 

[BornToFly]

Regarding risk. Lets keep the math easy. You sell 100x BPS with $100 gaps between legs (600/700). Margin/cash needed is $1M. That is also the theoretical max loss if the SP drops below 600 and you were on vacation (did nothing). Now lets assume you sold them for $4. Income was $40,000 for the $1M in risk. However, the real risk is actually lower if you watch the SP. If the short leg you sold gets close to the Money, you can roll to lower strikes and later date with no additional money needed (you keep the same $4 price difference in the Put legs). If you were hopeful the SP was going to climb, so you didn't roll, and now the sold leg goes ITM, you can still roll, but it may start to cost you. Let's say things get really bad and the price difference between the legs is now $10. It will cost you $100,000 to save yourself ($60,000 if you take into account the $40k you made originally). So a lot less than the $1M you theoretically had at risk. The bottom line is with BPS you can't sell them and go to an island with no Internet or you risk maximum loss. If nothing else, at least set stock price Alerts that tell you the SP is getting close to your short leg. I think that as long as you stay on top of it, and roll aggressively when you need to (don't try to keep making money on a spread going south), you should be able to manage the situation without a huge loss. Anyone disagree (did I screw up)?

 

[ammulder]

I think the one thing you didn’t mention is that a gap down in price can cover the entirety of a small spread (say, $5-20) but would still leave plenty of maneuvering room in a larger spread (like the $100 example you used). So smaller spreads have an inherently larger risk of max loss.

 

[M3Rider]

We’re your puts naked or spreads?
What percentage of your margin did you have in reserve that didn;t save you from the margin call?
I ask because Ive been trying to figure out what is a good percentage of margin to hold in reserve while not leaving too much on the table

Luckily, those were naked puts, not spreads.
I just started selling spreads 4 weeks ago.
I don't know the percentage, my broker doesn't have very good tools for the margin calc.

I felt maybe like 30%. Maybe I overstretched a bit. Those drops seemed unreal/fake and I wanted to take advantage of them.

When $550 drop in March recovered to $700 with a good Q1 ER, I thought the dip was over and assumed the 550 will not come back. So, definitely leveraged up some more. Then came 550 in May. Surprise, surprise.

See others in this thread recommending to use only 40% of your margin. We can prob do a poll to see what is prudent. Then, again, depends on the risk with the positions you're taking.

If you're selling spreads ITM, you're taking a huge risk. If you're selling bps $200 OTM, then you're probably pretty safe and can keep much less in reserve.

 

[BornToFly]

Luckily, those were naked puts, not spreads.
I just started selling spreads 4 weeks ago.
I don't know the percentage, my broker doesn't have very good tools for the margin calc.

I felt maybe like 30%. Maybe I overstretched a bit. Those drops seemed unreal/fake and I wanted to take advantage of them.

When $550 drop in March recovered to $700 with a good Q1 ER, I thought the dip was over and assumed the 550 will not come back. So, definitely leveraged up some more. Then came 550 in May. Surprise, surprise.

See others in this thread recommending to use only 40% of your margin. We can prob do a poll to see what is prudent. Then, again, depends on the risk with the positions you're taking.

If you're selling spreads ITM, you're taking a huge risk. If you're selling bps $200 OTM, then you're probably pretty safe and can keep much less in reserve.

See my post 30 minutes ago. The amount needed in reserve isn't dependent on OTM or ITM. It is the size of the spread, and how much margin you will still have if the SP drops if your collateral is all TSLA shares.