14march
been awhile but wanted to post some thoughts about how it all started. ive received a few new followers on twitter with some questions to my trading method with TSLA. i have to admit that although i follow less than 100 people on twitter it might be just 1 or 2 that buy Leaps / sell calls / diagonal spreads like i do
so heres how it started. remember Lenny Dykstra, ex MLB player.. he did a short stretch with Jim Cramers website in the mid 2000's and had a column. he had a unique method, pick a stock that was unfairly sold off, buy ten deep in the money calls a few months out(near 90delta), thus controlling 1000shares, and selling after a $1 move . getting you a $1000 profit. not looking for home runs , just constant and repetitive singles.
buying Leaps at that time was almost unheard of in the pre-twitter world. if the stock continued to move down he would buy another block of ten Leaps and average down. the downside to this method is number one you need to be able to have the cash for a ten lot purchase. which i did not, which makes it really stock specific. regardless i became intrigued with the buy a deep in the money leap to participate in a bullish move, both from a cash available standpoint and leverage. as in you could buy 2-4 Leaps for same price as 100 shares of stock
Now Lenny crashed and burned with some legal problems and a quick read of his twitter stream it seems like he is not active in the market
So that brings us to TSLA. at roughly 700 a share now, again my bank account is not big enough to swing around 100-1000 size share trades and be somewhat diversified, so again im participating using Jan2022 Leaps, currently have 5 again at various strikes.
Im not a full time trader and still work like alot of other slaves so besides stock appreciation i ALSO want to generate premium from my positions. if i had the stock id be selling covered calls. cant do that unless you have 100 share increments. but if you have Leaps you can sell shorter dated calls against those leaps just like covered calls. your broker considers it a spread trade so no additional margin or buying power is needed. buying leaps and selling shorter dated calls is also called "poor mans covered calls" , indeed, thats exactly what im trying to do.
but i want to ramble on about something ive seen a couple of TSLA mega bulls say and do recently about exercising their Leaps into stock come opex time and use me an example. so a popular thought by the megateslabull is to never sell stock, pay no taxes, use margin to buy more Leaps.
refer back to what i said earlier, i use Leaps for the leverage vs buying stock. simple example if you were just starting a TSLA position today:
stock near 700 ($70000 for 100 shares), the Jan2023 500strike call is going for about $343 ($34300) per contract.. so simple math for the same $70000 for stock you could buy two 500strike calls. and now you could sell two short calls against your position vs just one if you bought the shares. lets say the April2021 800 call for $25ish ($2500) . obviously bringing in $5000 in premium credit vs just $2500 as a covered call. and you have 20months to keep selling premium. now remember this example for later
so the megateslabull come opex time will convert the Leap previously bought months /years prior to stock. now use my situation as an example. blind squirrel sometimes finds a nut happened to me and i bought a jan2022 300 strike call at $143 last year. currently worth $415 ($41500). there is some time value in there but right here right now at least a triple. FOR THE SAKE OF THIS EXAMPLE LETS PRETEND 415 IS THE CLOSING PRICE AND EXPIRES NEXT WEEK.
i have 2 options for expiration. i can close the position in some fashion (close/roll) and have $27200 in capital gains and $41500 cash added to account OR do what megateslabull is doing and exercising the call and converting to stock. that means in my case i would have to pay the strike price or $300 ($30000) and now i own 100 shares with a cost basis of the $30000 plus the premium of the Leap at purchase time, $143, $14300 = $443 cost basis on shares worth near 700. converting the Leap to stock is not taxable and my account value does not change. is this necessarily the best move for ME though? i still have a "position" of 100 shares like i did the Leap which controlled 100 shares, i can still only sell a one lot short call against, my cash balance is $30000 lower in account, but i save the capital gains on $27200 which just for easy math lets say $5000 for long term cap gains tax. Summary - $30000 less cash, only 100share position allowing a one lot short call sale going forward, but not pay $5000 in long term cap gain tax
here is the other option that i believe might make more sense for ME .. again for pretend that option expires next week... so instead of converting to stock, i take profits on the 300Leap so $41500 cash hits my account and using that $30000 i would have needed to convert the Leap to stock i instead BUY 2 of the Jan2023 500 strike call at $343 each (so about $69000ish) . now i have control of 200 shares via Leaps again vs 100 shares of stock and can sell two lot of short calls against. remember those April 800 calls x2 brings in near $5000. that pays the long term cap gains tax.
remember my strategy is not to accumulate shares, but to maximize the few dollars i do control for both stock price appreciation AND premium via shorter dated call selling. you could argue that accumulating LEAPS should be more of the priority because it allows you to sell more shorter dated calls against. My thinking might be different if i had multiple millions in the account im sure.
Im running Leaps on TSLA, LEN Lennar, NFLX Netflix , AAPL Apple and the thought goes thru my head often if i should be squirreling away cash in order to convert come 2022 and 2023 opex but my math always comes back to rolling into more Leaps. altering the grand strategy just to not pay taxes limits my ability to bring in more premium. i started keeping a more detailed journal the last 2 years and the biggest part of my gains are coming from the premium im bringing in on various positions. i will never be that furu that buys that 2dollar call times 100 and now its worth 50 and then take a screenshot of how much im up and on the side talk about starting a service. cant figure why someone would want the bullshit of a service if they are killing it in the market. or are they?
just some things to consider. your situation might be different leading you to take the other side of what im doing. free country
