I've received a few messages and DMs asking specifics about my recent short call selling and diagonal spreads on TSLA so in the interest of being thorough and not repeating myself i will lay it out here
the below explanation will be using the after hours pricing on saturday 3oct
Short Calls -first im not selling short calls "naked", i have Jan2022 long calls (LEAPS) as the base... if youre unfamiliar refer to a standard covered call. where you buy 100 shares of the stock and then sell a short call against it. for instance, buying 100 shares of TSLA costs $41500 and then you could sell the Oct09 expiring 430strike call for $10.50 credit ($1050) .. not bad, nice $1000 bucks for one week if the stock stays under 430 at expiration you keep that $1000 and mentally subtract it from the cost basis of your stock.
Now instead of using that $41500 to buy the stock, buy LEAPs. which are just options expiring over a year from now.. lets look all the way to Jan2022 (the Jan2023 Leaps are available too). Look at the Jan2022 350 call. it is priced at about $170 ($17000) per contract. so if you had that $41000 available to invest you could buy Two of the Jan2022 350 calls. as we all know a standard option contract controls 100shares. so you would be controlling 200 shares. Now look at the "delta" of that option.. its at about 75. which means as the common stock moves up or down , these options will move up or down about 75% as much.. stock goes up $10 , option goes up about $7.50
Now since you have 2 contracts you can sell those same Oct09 430 short calls against them. your broker considers it a spread and will not require additional margin, specifically a diagonal spread since the expiration dates are different.. are you seeing this ... buy the Jan 2022 long 350 calls at $17000 each (x2) and sell the Oct09 430 short call for $1050 credit (x2) . you are bringing in $2100 in credit with the long 2022 calls as "the base" like i like to say.
So i currently have 4 Jan2022 long calls on TSLA , a 300strike, two 350 strikes, a 400 strike . bought at separate times. the 300 strike when TSLA was selling off after the split. having four calls lets me SELL 4 short calls to bring in income.
thats the breakdown of WHAT im doing , the other questions ive received are what strikes to pick and which opex. couple factors i consider.. we have all seen how much TSLA can move up or down so the challenge is picking a strike that will not just get blown thru but then again also collecting enough premium to make it worthwhile. i mentioned "delta" before, delta is also a reference to the probability of the stock making it to that strike price...lets look at the Oct09 485. if you sold 2 of those to go with the Jan2022 long calls from above you would collect $2.00ish ($200 each), the delta is about 6. meaning only a 6% probability the stock makes it to 485 by friday opex... pretty safe if you dont want your stock called away if you had a standard covered call but is that $200 ($400) worthwhile to you personally based on your circumstances and based on the amount you have invested and also for one weeks worth of effort. a good generic level to sell short calls is about the 30 delta. a 16delta is about a one standard deviation move for reference
i am personally starting my selection process looking to collect $1000 per contract. nothing magical about it besides its easy math and $1000 per looks sweet on the confirmation. the premiums of the options increase or decrease based on the movement of the stock of course and also the volatility of the stock. i call it "juiced" . if the stock rips higher the calls increase in price so best case is to sell the short calls on positive days. you get better premium and for that $1000 goal i have i can chose a higher strike price.. maybe the 450 level vs the 430 level.
if the pricing im looking to collect lines up with some technical analysis level then even better. like below there seems to be some resistance near 455/460area so if i can sell the short call at that level or higher AND make that goal premium that would be ideal. i am currently focusing on weekly options assuming i can be more nimble if a quick move takes place but last week did sell one of my four for the week after (2weeks out) to as an experiment
be mindful of when earnings are. they are upcoming for TSLA. the premiums of the options expiring immediately after earnings will be alot higher than normal because of the uncertainty of which way will the stock move so if the opex includes earnings i will wait until the day of / day before to sell since the IV (volatility) will increase going into the earnings event. if there is alot of hype about something that increases the IV as well. use the Battery Day as an example..the premiums got juiced running up to that event almost as much as an earnings date. weve all seen some stocks move up to 100points running into a hyped earnings date so by waiting till the last day i will base my short sale strike selection on the most current levels vs having sold the week prior when the previous weeks options expired.
Put Sales - lets switch to the other side. selling short Puts. based on your broker and the stock, figure you needing about 20% of the stock price on hand to sell a Put. thats the price of the stock at the strike price you want to sell. if trying to sell a short put this time i look at the chart first to get an idea of where to select my strikes. so looking at the same chart below. the best case for me and my style would be to be at or below the low near Sep8 around 330 ish. thats best case, 2nd best is at or below the low near 350. what gets my attention for Put selling is when a stock sells off. for TSLA that would be 5% or more. when a stock sells off quickly the IV spikes and the premium of the puts increases short term. you can sell a Put at anytime of course but what im trying to do is capture that short term premium juice AND a strike level that matches my amateur chart work. for me the chart levels come first for put sales. so friday TSLA sold off $30+, i have a defined level im looking at (350 level) , but the premium for the standard Oct350 Put was only in the $3-$4 range... not enough of a spike..so no trade. another selloff like that and it gets interesting and possibly puts the 330level in play. if i went out further in time that would include earnings. if the opex includes earnings the value of the Put might even increase as time goes by even if stock goes sideways or up since the IV increases also.to the point of increasing more than the time decay. i have a post-it note on my desktop at home that says "wait until a big down day to sell a put"
dont overdue it selling puts. they are not free trades. i mentioned earlier to figure on having at least 20% of the stock price available to sell the put. during the selloff in march TSLA margin requirement was increased i believe to 70% at one point. meaning you now needed to have 70% of the cost of the stock available. i ended up taking a loss on TSLA short puts to not have to sell other positions to increase my available margin. my short strike never did get breached and if i would have had more buying power it would have expired with a profit. it takes events like that to learn your lesson and hone your strategy
Ratio Spreads - lets reverse course and switch back to calls. Ratio Spreads are probably my favorite trade. super high probability for profit. Ratio Spreads are also called Catch Up trades. It is buying one call, and selling two higher calls. TSLA pulled back 30 friday and you dont want to sell short calls for some reason or dont want to limit your upside near the short call. Again you have the Jan2022 350 long calls from above. with stock at 415 from closing... the Oct 415 call is at $25ish, the Oct 450call is at $12.50 ish. you could buy one 415 ($2500) and sell 2 of the 450s for ($2500total) bringing the total trade to near zero. you can move the strikes around to even bring in a credit or debit if you want. in the case of having the 2 long 2022 calls already, you could buy two Oct415 calls and sell four Oct450 calls for also near flat. each 1x2 per long Jan2022 contract. again this is not a free trade. the long 2022 call is the base so your broker treats the added 1x2 as two spreads... (a long 2022 350 call and short 450call and long 415 call short 450call)
at Oct opex your profit range for the ratio is 415-485,with a max profit of $3500 at 450 if it pinned there. in reality i look for about 70% of max profit on the ratio to take profits and move to the next opex with new positions. note that this is just the ratio spread. the long Jan2022 call is gaining in value as stock increases. you gain on the Leap and gain on the ratio so you make more than just an outright long position with no added risk. my experience is that i undershoot the strikes i select and the stock blows thru the top range. at that point i adjust the ratio, close it and sell short calls or just exit all legs and start over. but its not a bad problem to have
so lets bring it back to me. currently have 4 Leaps and one next weeks short 435 call(at near 50% of max profit). so i have 3 short calls to sell or i could do my ratio trade on the remaining three. if i had to enter ratio spreads right hear right now with a gun to my head i would go with the Oct420/450 1x2 (3 lots) so buying 3 selling 6.. midpoint pricing after hours is $2.42 credit (thats per lot so $700+credit) . my profit range at opex in 2 weeks would be 420-480.. yes you can add the credit received to that range but i keep it simple. so in a nutshell , the ratio cant lose money (because i put it on for a credit) and legit makes a profit anywhere between 420-480 at opex. flip side if stock closes at 419 on opex the ratio expires and all i have to show for it is the original $2.42 credit received. and flip side #2 is that i could have sold 3 short calls at $1000 each times 2 weeks... lots of ways to play it
hope this helps
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