Wiki Selling TSLA Options - Be the House

[euro2012]

Nope - you're right.

A good way to think about this idea, as well as calculate it, is to tally it up as deltas. Owning 100 shares provides you with 100 delta, meaning that each $1 increase or decrease in the share price will generate $100 change in your value.

A deep ITM call might have a delta of .90, thus purchasing one of these contracts will get you 90 delta.


From what I've seen previously if I go out to the furthest expiration date and look for the option selling for 1/2 of the share price (shares at $900 - I'd be looking for the leap selling for ~$450) then I end up fairly deep ITM and can purchase 2 leaps for the price of 100 shares, and get around .75-.80 delta on the contracts, or 150-160 delta between the 2 contracts.

The key here - are you buying the contracts as share replacements with a bit of leverage, or are you buying the contracts speculating on the future price? All of my thoughts here are in the leap-as-share-replacement category.

Using the option chain at this moment, shares at $890, the 500 strike Jan 2024 call can be purchased for $465. So maybe the 530 strike for $445. The 530 strike has a delta of .8537 - call it .85, so 2 of them will get you the equivalent of 170 shares (counted in deltas). This 2 for 1 exchange doesn't free up any cash though - it just turns it all into leaps that gets you roughly 1.7x leverage.

So maybe you buy 5 contracts to replace 300 shares. That'd get you 5*.85 = 425 delta instead of 300 and leave you with $44k in left over cash. Or maybe go 4 contracts to replace 300 shares, getting you 340 delta (.85*4) to replace 300 delta, and leaving you with $89k in cash left over for other purposes.


You are actually increasing your exposure to moves up in the share price (to the degree that you want to) and getting some cash left over for other purposes.

You are ALSO paying some time value. Those 530 strike calls that you pay $445 premium for is the equivalent of buying shares at $975, or $85 over the price available today. THink of that $85 in time value as the interest you pay on the loan to own 170 shares using the cash that would purchase 100 shares. You can recoup that $85 in time value via covered call sales if you'd like. Or you'll come out ahead when the shares go up past $975.

You can (will) also roll or sell these calls well before expiration. Say 3-6 months? Somewhere around there you'll find that around 1/2 of the time value is gone. Which also means that you can recover half of that time value that you paid up front.

You might also find that the shares have gone up so much that the time value is down to roughly 0, so you might as well hold to expiration, and you won't care in the slightest that you paid $85 for the privilege (you'll be pretty excited in fact).


You can be more ATM as you mention. The leaps are less share replacement in that case and more speculative, but this stuff is all on a continuum anyway. I got deep ITM on my purchases to minimize the amount of time value I'm paying for, as well as better enabling sales of covered calls.

Super helpful, yes. Thanks for confirming my thoughts. Does anyone using IBKR know how much margin is available with leaps, if any?

 

[bkp_duke]

What's the "not advice" on this?

Considering an Iron Condor for
780/810 970/1000

Too close to the sun?

 

[MikeC]

What's the "not advice" on this?

Considering an Iron Condor for
780/810 970/1000

Too close to the sun?

I opened some IC -p700/+p800 and -c1000/+c1100 for 10/29 for $3.26. Not happy with the premiums, I think I've been spoiled the last few weeks.

 

[adiggs]

What's the "not advice" on this?

Considering an Iron Condor for
780/810 970/1000

Too close to the sun?

Sounds scary to me. That's mostly the call side as I think that we don't yet have a feel for how the market is going to take the earnings. I believe that the best historical description is an initial sell-the-news, followed by the great results getting into the share price over the next couple of weeks.

If +$30 is "sell-the-news" then the next couple of weeks will be fun (if you like the share price going up). Whether we'll get to 970 by 10/29 seems unlikely to me, but it also sounds like getting close enough for a nice sunburn.


I'm also leery of such narrow spreads, but that's me, and the reasons have been well documented. There's clearly more leverage and a higher % gain available with those.

The 780/810 - I'm thinking similarly. I'd probably do something more like 720/820 or 770/820 if I were going to be really aggressive. But I bias towards less aggressive and this is where @BornToFly and I differ in our approaches - I use the wider spread to lower risk by improving on management options ahead of time, and increasing the net premium for most weeks where no management is needed. They're using a smaller spread and going further OTM to lower the likelihood of going ITM in the first place (which totally makes sense to me as well).

 

[Cherry Wine]

What's the "not advice" on this?

Considering an Iron Condor for
780/810 970/1000

Too close to the sun?

Personally, I opened 10 -780/+680 put spreads expiring 10/29 just to get some skin in the game. If the stock moves against this trade, then I'll be happy to sell lower strike put spreads at a higher premium. If it moves to the upside significantly, and I miss out on additional premium (by not having sold more put spreads), I'll get to open some bearish call positions. I'm also waiting to sell on the upside because if we do bust through ATH then there are currently no known resistance points, and I'll want to be positioned well on the other side of 1,000 in case some momentum comes in.

The risk is that the stock trades sideways all week, and I miss out.

 

[bonk3125]

I’m itching to open some BPS for next week. That usually means I need to check my emotions. I’ll keep sitting out until I see something worth risking.

 

[AlexShimo]

Long time lurker here.

Slightly OT:
A bit disappointed by premiums for next week (low IV), I looked at a pure Earnings play through IV crush for SNAP.
SNAP Earnings are today after close, IV for this week is currently around 190%.

Not-advice!

Cheers

 

[bkp_duke]

Long time lurker here.

Slightly OT:
A bit disappointed by premiums for next week (low IV), I looked at a pure Earnings play through IV crush for SNAP.
SNAP Earnings are today after close, IV for this week is currently around 190%.

Not-advice!

Cheers

Appreciate, but the options volume in SNAP is pretty small compared to TSLA. I could see a few trades from some people here really moving the needle on a stock like that.

 

[BornToFly]

$1.25 credit for a $700p/$600p spread. So my plan should be to throw in an order at $1.35 and see if it executes in all this volatility? That's an astonishing 9 day return on $10k for about 1 in 5,000 risk.

I really need to look into this world much more. Not sure I want to have a huge pile of cash sitting outside TSLA, but this makes a very strong case for maybe jumping in and out as SP takes these big legs up then stays flat for a couple years.

If TSLA hits $1300+ after 4Q earnings, I think I'd be comfortable playing this game for the next few years.

I would consider 750/650 for next week. Should be extremely safe. Or I would do 2x 750/700 for more premium. Roll it if SP hits 760. You can do it! Water is warm!

 

[mickificki]

I would consider 750/650 for next week. Should be extremely safe. Or I would do 2x 750/700 for more premium. Roll it if SP hits 760. You can do it! Water is warm!

Funny enough opened a position earlier for 750/650. Probability of OTM is 91% (knock on wood)...

 

[InTheShadows]

Closed all of the BPS 10/29 spreads I opened yesterday for ~60% gains shortly after open. Sold more 10/29’s with the freed up cash with the short leg of 840. 25 minutes later the largest account I have, those closed as well with my 25% GTC order.

Then opened all remaining positions and the one that day traded with 850 short legs for some pretty sweet premiums for 10/29.

These were sold with the delta around -18 when executed. They are a little closer to the money and I may need to manage them. I have an alert set for <860. I’m ok with having to manage them a week or two if need be. I think we will test 900 again this week. If we get through it to 905+, I’m going to watch for a peak to turn my bps into IC’s.

 

[BornToFly]

Well, sold some iron condors for 10/29. 740/790 - 1000/1050. Only about $1.8, but better than nothing. The last few weeks spoiled me.

I had an order for a few more and set price at $2.40. Didn't think they would fill, but they did. I'm definitely looking forward to seeing what happens tomorrow and Monday.

 

[adiggs]

$1.25 credit for a $700p/$600p spread. So my plan should be to throw in an order at $1.35 and see if it executes in all this volatility? That's an astonishing 9 day return on $10k for about 1 in 5,000 risk.

I really need to look into this world much more. Not sure I want to have a huge pile of cash sitting outside TSLA, but this makes a very strong case for maybe jumping in and out as SP takes these big legs up then stays flat for a couple years.

If TSLA hits $1300+ after 4Q earnings, I think I'd be comfortable playing this game for the next few years.

I would consider 750/650 for next week. Should be extremely safe. Or I would do 2x 750/700 for more premium. Roll it if SP hits 760. You can do it! Water is warm!

A really crazy idea to be thinking about @TheTalkingMule is that if you have enough value / cash, then maybe further growth in the TSLA share price doesn't matter, and maybe TSLA options is a more conservative and easy to live with portfolio.

Using your example and even rounding down a small bit, 1% on the spread each week, with a 1 year in 10 (1 in 5000 in weeks) occurrence of the spread going ITM, and ignoring compounding, you earn 50% per year. 50% on a $2M pile of cash gets you $1M of income per year - that'd work for most everyone, though I wouldn't be comfortable if that was exactly how much I had. I figure that anybody getting close to choosing to retire will have >$2M, so its not like that is an outrageous sum.

You've got all of your income settled, you'll be beating TSLA returns in some years, and since it's cash you don't need to agonize over when to sell each share to raise living expenses (I KNOW this is an issue for me).


BUT since nothing is free, there is a significant investment in knowledge and experience to make this work. Without that its also probably a good way to lose a lot of money.

Good thing we have this thread going - I know my learning rate is WAY higher with this resource in my life, than it would be if I were doing this in isolation.

 

[BornToFly]

$1.25 credit for a $700p/$600p spread. So my plan should be to throw in an order at $1.35 and see if it executes in all this volatility? That's an astonishing 9 day return on $10k for about 1 in 5,000 risk.

I really need to look into this world much more. Not sure I want to have a huge pile of cash sitting outside TSLA, but this makes a very strong case for maybe jumping in and out as SP takes these big legs up then stays flat for a couple years.

If TSLA hits $1300+ after 4Q earnings, I think I'd be comfortable playing this game for the next few years.

Just to emphasize what @adiggs just said. Don't use cash. You margin from your shares. Best of both worlds. Just make sure that if the stock drops (to say 600), that you still have enough margin to cover your spreads.

P.S. - Unlike using margin to buy shares, you aren't paying any interest on the margin you are using to back your spread sales.

 

[Cherry Wine]

Volume on the $750 put strike expiring 10/29 is at 143,000. (OI is 19,000) Highest put OI for next week is at $800 at 24,000.

 

[adiggs]

Just to emphasize what @adiggs just said. Don't use cash. You margin from your shares. Best of both worlds. Just make sure that if the stock drops (to say 600), that you still have enough margin to cover your spreads.

P.S. - Unlike using margin to buy shares, you aren't paying any interest on the margin you are using to back your spread sales.

I really need to understand this idea (selling the spreads using the margin from owned shares) better.

The first thing I get - I want to own actual shares for this purpose - not long dated leaps. Which makes sense as well - the shares are the real 'tangible' asset that the broker will rely on to keep itself whole.

The second thing is that if I had $900k in the account then the account would be setup as 1000 shares and some rounding error cash (or a few more shares - whatever).

And then you get as much margin as that would provide. I think 50% is the number I've seen (is it 40% now?) applied to the cash value, would provide $450k worth of margin, with which I would be selling 45x$100 wide spreads each week.

Or wait - I don't want to use all of that margin by a long streak.


So questions - do I have the idea here right?

And on the final point - how would you be managing an account worth ~$900k and holding just about all of it as shares?

 

[MP3Mike]

The second thing is that if I had $900k in the account then the account would be setup as 1000 shares and some rounding error cash (or a few more shares - whatever).

And then you get as much margin as that would provide. I think 50% is the number I've seen (is it 40% now?) applied to the cash value, would provide $450k worth of margin, with which I would be selling 45x$100 wide spreads each week.

Or wait - I don't want to use all of that margin by a long streak.

E*TRADE currently allows 100% of cash and 60% of TSLA value, but you probably only want to use half unless you are really comfortable with your trades. So you could sell 27x$100 spreads.

And on the final point - how would you be managing an account worth ~$900k and holding just about all of it as shares?

Like any other account. Sell the BPS, or BCS/IC/etc., and then buy them back at your profit target or let them expire. It can get you a ~1% extra return on the value of your TSLA shares each week.

 

[corduroy]

Just to emphasize what @adiggs just said. Don't use cash. You margin from your shares. Best of both worlds. Just make sure that if the stock drops (to say 600), that you still have enough margin to cover your spreads.

P.S. - Unlike using margin to buy shares, you aren't paying any interest on the margin you are using to back your spread sales.

On the other hand, cash gets you 50% more margin than shares, so even more income potential. And cash won't go down with black swans and FUD, so there's a sleeping better factor.

 

[BrownOuttaSpec]

I really need to understand this idea (selling the spreads using the margin from owned shares) better.
....
And then you get as much margin as that would provide. I think 50% is the number I've seen (is it 40% now?) applied to the cash value, would provide $450k worth of margin, with which I would be selling 45x$100 wide spreads each week.

So questions - do I have the idea here right?

And on the final point - how would you be managing an account worth ~$900k and holding just about all of it as shares?

Yes, that is the right idea. That's what I do. I was a buy and hold kind of person and then I found this thread and didnt have a lot of cash but I had a few shares. I wanted to get into the BPS/IC strategy and so I upgraded my account to Options level 3 and now trade with margin from my owned shares.

I think @Yoona did some math like 15-20 pages ago that explained that after holding 2,000 shares you don't get enough margin and it makes more sense to have cash but maybe that was just their brokerage. (Not that I have 2000 shares yet)

Edit: I think it was this post: Wiki - Selling TSLA Options - Be the House

 

[UltradoomY]

I really need to understand this idea (selling the spreads using the margin from owned shares) better.

The first thing I get - I want to own actual shares for this purpose - not long dated leaps. Which makes sense as well - the shares are the real 'tangible' asset that the broker will rely on to keep itself whole.

The second thing is that if I had $900k in the account then the account would be setup as 1000 shares and some rounding error cash (or a few more shares - whatever).

And then you get as much margin as that would provide. I think 50% is the number I've seen (is it 40% now?) applied to the cash value, would provide $450k worth of margin, with which I would be selling 45x$100 wide spreads each week.

Depends on the broker with the margin amount - most are 40-50% for TSLA but they can change it with very short notice and really mess up a position or create margin call territory. (again see below - good idea is to not use more than 30%)

Or wait - I don't want to use all of that margin by a long streak.

No, because your margin would decrease along with the share price if it was going down. Making a bad situation worse. 30% of available margin use backed by shares is a strong move.

So questions - do I have the idea here right?

You got it!

And on the final point - how would you be managing an account worth ~$900k and holding just about all of it as shares?

I was in a similar situation earlier this year to this figure and was able to make a comfortable $5k a week to add back to my position.
Some weeks it was more but not less. It's certainly a way to continue on without large pockets. and $5k a week is $250k a year. Not bad cheese if you can live with less than that and still add to the war chest.