Sold my 1st put - opinions - advice ?

[joesxm3]

My plan is to take some dead cash that is sitting in my brokerage account and try to generate some yield on it.

My strategy is to sell an out of the money put contract, hoping it is not executed, and to bank the premium as yield or interest on my cash.

Tesla (TSLA) stock was at all time high and is likely heading down, so I suppose this is the opposite of the ideal direction, but I picked a strike price that is 35% off the current price, so I think it is not very likely to have the shares put to me.

TSLA was trading around $1050. I sold the 1/23/2022 put contact, strike $650 for $1025. I had to lock up $65,000 of my cash, i.e. cash covered put.

So, it seems if the contract expires, I will have earned 1.57% for a roughly 2.5 month period, compared to the 0.5% per year on a CD.

I would like to buy some TSLA stock and my buy target would be between $650 and $750, so ending up with the stock is not a disaster. However, 100 shares is a bit larger position size than I would normally do.

The scenario that I should probably make a plan for is what to do if the price drops below $650. As I understand it, the contract buyer may not sell to me as soon as it hits $650 because he has time let it drop farther.

When should I start thinking about doing a "buy to close" transaction to bail out of the trade, probably at a loss?

Any thoughts on whether this strategy makes sense, or advice on how to be managing the trade over the next couple months?

Thanks.

Joe

 

[Rowej]

It makes perfect sense, but you could also have done a put credit spread and not tied up as much capital since there is a 90.4% chance it will be out of the money, you could have sold the 650 put and bought the 450 put and collected about $600. However you would have only needed $20,000 in cash. That would have given you about a 16.7% annualized return.

 

[MRG]

If I don't want the equity to be assigned to me I "roll" it out on on time to collect the time premium and wait for the equity come back up above my strike price. That works well if the equity is frequently traded and the strike is within reason.

I play different, in I mainly sell weekly puts 1-2 weeks out. I try to collect .75-1% weekly on some more volatile names. A regular play is PLTR, I've been playing $25 strikes for months both ITM, OTM and last week didn't roll them forward, they expired worthless right before earnings and a big drop. If I play them this next week it's gonna be at ~$21-22?

When I have bought puts, calls back I've been foolish. YMMV.

 

[joesxm3]

Thanks for the responses.

I will look into the idea of the credit spread. I will have to check how much option power I have to do complicated trades. I may have training wheels on my account.

I plan to reduce the time duration on future trades, but I am just coming of the ACA income limit this year and I have used up most of my available AGI to stay under the amount I told ACA to get my subsidy. I don't want to let the tax tail wag the dog, but I figured it best to have my gain occur in 2022 this trade.

Nice to hear that PLTR is a good one to play with. That is one I already hold enough to write some covered calls as well as puts and I would not mind if I had to buy more PLTR.

With this Evergrande stuff popping in China, I may sit tight with this one trade until I see if there will be any huge impact on the US markets.

Thanks again.

 

[Retireby45ish]

To answer your question if it drops below 650 you will almost certainly NOT get assigned until the expiration date. The buyer would lose out on optimal decision making (and almost everyone is a professional in these markets) so it’s a 99.5% chance they even if it goes well below 650 nothing happens to the put until it expires. Tho with so many people dabbling in options it might be 95% these days.

Good luck! sounds like a sound strategy if you planned ti buy it when it moved down anyways.

 

[SecondAttempt]

TSLA was trading around $1050. I sold the 1/23/2022 put contact, strike $650 for $1025. I had to lock up $65,000 of my cash, i.e. cash covered put.

So, it seems if the contract expires, I will have earned 1.57% for a roughly 2.5 month period, compared to the 0.5% per year on a CD.

I don't think your trade is entirely unreasonable but your comparison to a CD makes no sense. You need to factor in risk quantitatively!

 

[joesxm3]

I don't think your trade is entirely unreasonable but your comparison to a CD makes no sense. You need to factor in risk quantitatively!

I did try to evaluate risk before I wrote this contract. What I meant was that the money in my cash allocation (~30%) is earning no yield and just sitting there waiting for a large market crash so it can be used to purchase something.

My equity allocation is about 25%, with most of that in mutual or index funds.

Here is how I evaluated the other possibilities, from risky to safe.

1. Bitcoin - much more risky.
2. Bonds or bond funds - no yield but have risk.
3. Individual stocks - market very high and possible downturn unless the government keeps propping them up, which I feel cannot continue forever, but has continued much longer than I expected.
4. Index fund - similar to individual stock, but less ability to hedge

5. Selling the put contract - I picked a strike price 35% out of the money and accepted the lower premium to reduce the risk.

6. Bank account or CD - basically bleeding value due to money printing.
7. Series I-Bonds - bleeding less value but limited amount to buy.

Does this list make sense?

Being new to options trading, am I overlooking some aspect of risk with regard to my selling the put contract?

 

[MRG]

I did try to evaluate risk before I wrote this contract. What I meant was that the money in my cash allocation (~30%) is earning no yield and just sitting there waiting for a large market crash so it can be used to purchase something.



My equity allocation is about 25%, with most of that in mutual or index funds.



Here is how I evaluated the other possibilities, from risky to safe.



1. Bitcoin - much more risky.

2. Bonds or bond funds - no yield but have risk.

3. Individual stocks - market very high and possible downturn unless the government keeps propping them up, which I feel cannot continue forever, but has continued much longer than I expected.

4. Index fund - similar to individual stock, but less ability to hedge



5. Selling the put contract - I picked a strike price 35% out of the money and accepted the lower premium to reduce the risk.



6. Bank account or CD - basically bleeding value due to money printing.

7. Series I-Bonds - bleeding less value but limited amount to buy.



Does this list make sense?



Being new to options trading, am I overlooking some aspect of risk with regard to my selling the put contract?

+1
I am doing the same thing with ~60k I had from a 2% CD that expired. I think your risk is limited to Musk having s*x with a goat on the internet. Arguably that wouldn't do much.

 

[Exchme]

Seems like your risk perceptions are a little odd, engaging in options trading while mostly not investing in the stock market. The magic of the stock market is that it is not a zero sum game with a winner and a loser on every transaction, it goes up over time.

Attempting to time the market for when to jump in can leave you on the outside looking in forever as when prices do go down, there will good reasons for that too. Ask yourself if you actually jumped in during the 2009 or even March 2020 crashes when it would have been a great time to do so? And if you did jump in then, what was your reason to jump back out? Whatever that signal to get out was, it wasn't very accurate as the market has continued to rise.

Perhaps there are a few investors in the world that can really time the market, but the odds are that you (and I) are not them. I'll bet you would have made a lot more money in your investing career by just setting a typical asset allocation, buying the total stock and total bond market per that allocation and occasionally rebalancing (or just buying a target date fund that does the work for you), resisting any urges caused by media hype.

 

[LarryMelman]

I agree with exchme, an interest in options trading when your stock allocation is very very low, does not make sense.

I disagree that index funds are less risky than individual stocks. I know that's not a popular attitude here, but the indexes are wildly overvalued due to the top few stocks (Google, Apple, etc). It is very easy to select individual stocks with a lower risk profile. But enough about that.

I played the put-selling game a few years back. I had spreadsheets to calculate the effective yields, and it required a lot of effort to maintain and update them. But the main thing I remember, is that you have to be willing to own the stock at the strike price of the put. i.e. it has to be a stock that you'd want to buy. Someone with only a 25% equity allocation (with none in individual stocks of any kind, and obviously none in speculative stocks like Tesla) probably shouldn't be trading options in Tesla.

You do say "I would like to buy some TSLA stock" but I caution against buying a single individual stock "just because".

 

[joesxm3]

I think you are jumping to assumptions about my risk tolerance and investment goals.

My intention with this thread was to learn more about the safer types of options, i.e. selling puts and selling covered calls. I don't want to get it side tracked into the endless debate about market timing versus indexing etc. However, I will explain a little.

As far as the historical good times to be in stocks, I was around 80% stocks in 1987, 2000 and maybe a little lower in 2008. My total portfolio dropped by around 50% each time.

In 2008 I listened to El Arian when he said to "back up the truck and fill with emerging market stocks" and I was able to recover the 2008 losses pretty quickly. However, that was in large part because I had a high salary and was able to pump in fresh money to buy the stocks.

I ended up retiring (tormented out of my job) in 2016. Once I felt that I had saved up enough to be FI, I took the attitude that "now that I have won the game, I don't need to be taking excessive risks."

I admit in hind sight that dropping to a 20% equity allocation was not the right move. Around that time I was at a business dinner with a really rich Indian guy and asked him about my allocation. He said "the FED will never let the market drop." I should have listened to him.

As an aside, back in the 1980's I should have listened to the venture capitalist who told us that he had just invested in a small coffee shop company stock from Seattle.

Lately I have decided that the world is undergoing massive technological change and is likely to continue at an accelerating rate for the next 10 years. Because of that I have been aiming to accumulate a larger equity allocation focusing on disruptive companies. However, I do not intend to buy them at the top and will be patient and try to buy on dips.

So, my choice of TSLA was not on a whim, and I would be happy buying TSLA for 640 and holding it for the next 10 years.

One other thought, is that I am probably being forced farther out on the risk curve than before because of the artificially low interest rate policies. I figure that doing this type of put selling is less risky than trying to get yield by buying lower quality bonds or bond funds.

 

[Sniggle]

To me, that is a long horizon to lock up that much money in a put. The world is spinning pretty fast, and lots can happen between now and then. Because the Put is so far out, Theta will not really start to decay until the new year, so the value of the Put should remain pretty stable into January unless TSLA goes to $1500 or $500.

- If TSLA goes to $1500 in the next month, and the option value drops to $3, would you take that 50% profit (buy to close) over a shorter time frame?

- If TSLA drops to $500 next month, would you look to close it out for a loss or would you hold and pray? How much of a loss are you willing to accept?

It does appear the odds of it expiring worthless are very good, so in the end you may achieve the 6% annual return you aimed for.

(For full disclosure - I am sitting on a two 11/19 950 TSLA put right now, bought on Monday for $8.50)

 

[joesxm3]

I realized that my risk list was subjective rather than quantitative, so I tried to look at the risks more specifically. Please let me know if these ways of looking at the risk make sense.

For the year, TSLA seems to have support around the 550 level and for the past few months around the 620 level.

My choice of 650 seems to be way below the 200 day moving average.

My choice of 650 is near the fifth or so fibionacci layer. As I understand it, these layers are thought to be resistance levels so to get to 650 it would have to breach several fib support levels.

So, based on these metrics, it would seem that dropping to 650 is a low probability.

An earlier post mentioned rolling forward based on time. I looked at the option chain and it seems that if I had to buy another month it would cost $500 at my current level and would cost $1800 at the current stock price. So, I guess I could quantify risk this way as being $1800 a month if I had to keep rolling, plus the risk of the stock price never going back up during the rolling.

If I decided to close the trade in a loss, it seems that it would cost about $11,000 to close it at the money and about $21,000 to close it if the price were $100 under my strike price. These are based on today's option chain and the TSLA price of about $1060. I am not sure if these would be less if the share price were half what it is.

I suppose there is the risk of being assigned the shares and having them drop considerably before I could do something. But that would seem to be the same risk I would take if I had bought the stock directly.

Does any of this make sense? Is there a better way to assess risk quantitatively?

Thanks.

 

[joesxm3]

To me, that is a long horizon to lock up that much money in a put. The world is spinning pretty fast, and lots can happen between now and then. Because the Put is so far out, Theta will not really start to decay until the new year, so the value of the Put should remain pretty stable into January unless TSLA goes to $1500 or $500.

- If TSLA goes to $1500 in the next month, and the option value drops to $3, would you take that 50% profit (buy to close) over a shorter time frame?

- If TSLA drops to $500 next month, would you look to close it out for a loss or would you hold and pray? How much of a loss are you willing to accept?

It does appear the odds of it expiring worthless are very good, so in the end you may achieve the 6% annual return you aimed for.

I do worry that things are currently in a real state of flux.

I am trying to get a grip on whether I am letting my desire to preserve my ACA credit and the 0% LTCG on the $28,000 of realized gains I have so far (my ACA income estimate was $40,000). I have some other risky investments that I probably should be taking some profits from as well.

I think we are probably talking about less than $8000 of ACA credits, so I might be in stupid thinking mode on this. I have to crunch the numbers.

I picked the long duration only to move it to 2022. If not for the tax worry, I would close the position early for half the gain. Since I probably can absorb $1000 gain without going over the limit, I may close it anyway and consider it a quick dip into the options world as a training exercise.

If TSLA drops to $500, I would think that it is likely to go back up and I probably would hold the option open. The one problem is that 100 shares is a bit large of a position size for me. If I had bought TSLA directly at 650 and it dropped to 500, I would probably add to the position.

Thank you for the help. I realize that options are complicated and that I have a lot to learn and need to be careful.

[edit] BTW - I bought 15 shares of TSLA back in the summer for $600. At the time I did not have as strong a long-term conviction in TSLA as I do now and was afraid of the downdraft in growth stocks. Last week I sold 10 shares for $997 with the intention of buying them back lower. So my selling the put is sort of like a really low limit order.

 

[LarryMelman]

As far as the historical good times to be in stocks, I was around 80% stocks in 1987, 2000 and maybe a little lower in 2008. My total portfolio dropped by around 50% each time.

Yes, the market will do that. So what?

In 2008 I listened to El Arian when he said to "back up the truck and fill with emerging market stocks"

Around that time I was at a business dinner with a really rich Indian guy and asked him about my allocation. He said "the FED will never let the market drop." I should have listened to him.

As an aside, back in the 1980's I should have listened to the venture capitalist who told us that he had just invested in a small coffee shop company stock from Seattle.

You seem to base your strategies on tidbits of advice here and there. Listening to this person or that.

Lately I have decided that the world is undergoing massive technological change and is likely to continue at an accelerating rate for the next 10 years. Because of that I have been aiming to accumulate a larger equity allocation focusing on disruptive companies. However, I do not intend to buy them at the top and will be patient and try to buy on dips.

You are market timing. Based on trends real or imagined, and the ability to know where "tops" and "dips" are.

I am not that smart. I own individual stocks, and I have a dividend growth focus. But I'm diversified across all sectors, I don't pretend to know what trends or stocks will be popular. It works for me.

 

[joesxm3]

My point was that after having a 50% drop in portfolio value three times while working and able to replace the losses with newly earned cash, I decided that I did not want to have my nest egg cut in half one more time once I had enough to stop working.

What I did not count on, that is driving my current thinking, is the massive currency debasement and low interest environment. Some may debate the true interest rate, but be it 6% or 15% non-productive assets are a melting ice cube.

 

[NW-Bound]

Tesla is a stock I stay away from, not going long nor short, nor do options on. But it looks to me your bet is reasonably low risk, as shown by the low premium of the put.

Compared to your 1.57% over a 2.5 month period, I have been selling puts to get 0.5-1% per week. Of course, my deals are riskier, in the sense that the probability of assignment is higher. But these are companies that I feel more comfortable owning, and in fact already own some shares. I play calls/puts to add/trim shares of companies that I intend to hold long term, and make extra money when the market goes bonkers up and down.

There are many ways to make money, and to lose it. A guy has to find an approach that he is comfortable with. I don't think yours is bad, although Tesla is not a company I play this game on.

 

[joesxm3]

Well, after having the input on this thread I think one aspect of risk that I had not properly understood was that the stock would not be put to me the minute that it hit the strike price.

I underestimated the potential pain of having the stock drop below the strike price and hoping that it would come back up in time.

I still think that I like the idea of selling puts and covered calls, but I just closed my position for a $285 profit.

I think my technical analysis was sound and it probably would not have hit 650, but I agree that the time duration was longer than I would have liked to have. Also, although I could have absorbed the loss, I think the position size was larger than it should have been for my first shot at an option trade.

It was a good learning experience and now I am familiar with the mechanics of placing and exiting the trade. I will let this sink in and plot my next move.

Thanks again for all the help. Any additional explanation, hints or advice will still be appreciated.

Joe

 

[NW-Bound]

I do shorter duration options. A month feels like an eternity to me. And I do market timing, by looking not just at the stock but also the sector it is in, as well as the entire market.

I like to sell OTM puts on stocks that I already own, and usually when the price goes down for consecutive days with no discernible bad news. I guess the sellers want to get out to raise money to buy something else, because I don't see any change in fundamentals that make them sell. It could be they know something I don't, but quite often the stocks would reverse direction and go back up.

When a put gets assigned, or gets deep in-the-money, I immediately sell an OTM call at the same strike price or even a bit higher, in order to reduce concentration on that stock.

I have stocks in all different sectors, and usually find some puts or calls to sell every day. While other investors run to and fro, I run in the reverse direction, fro and to.

 

[Sniggle]

I am relatively new to this game, and I follow the NW Bound approach of lots of smaller positions, across many sectors, for short duration.

To use a baseball analogy, I am only trying to hit singles with my option trading, looking to snag around .5% premium per week on cash covered puts and covered calls, and trying to have at least 2% between the current stock price and the strike price either way. Theoretically, this should align with a return of between 26% and 30% annually....but of course there are a few strike outs in there and ground outs

The term I have heard used to describe this type of option trading is 'The Wheel', because you often are moving to one side and then another on the same stock. For instance, let's say on a Monday you buy Micron (MU) at 72 and sell calls at 73, for a premium of .75. On Friday close MU is at 73.5. Your 100 shares are assigned, and you made $175 in 5 days on an investment of $7200, for an ARR of 126% (.75 premium and 1 in price increase). The next Monday you sell a MU 72 Put expiring on Friday for .5. On Friday MU has dropped to 71.8, so you are assigned 100 shares at a price of $72, for a profit of $30 dollars for 5 days, for an ARR of 21.6%. Rinse and repeat until the IV drops to a point where the premiums are insufficient, or the stock surges or falls. Rounds and round it goes.

This method means that I can miss out on big gains in a stock, and it also result in a not insignificant amount of assignments (stock either sold or purchased at expiration). So it takes some work and attention, but so far I am having fun with it.

For what they are worth, lessons I have learned:

- Sell Calls on days the stock is up and sell puts on days the stock is down. This can mean waiting for the stock momentum to swing, and then getting your order in at the right time.

- Don't hesitate to roll an option forward toward expiration if the stock momentum is such that the option premium is good. You will have to buy to close, so it will cost you a little of the premium you initially collected. I use 20% as the most premium I am willing to give up to roll it forward.

- Only sell put on stock you would not mind owning, because if you do it enough you will get assigned.

- Look at the charts and the resistance lines, the typical movement at earnings, other patterns when deciding to jump in on the stock. If the stock has broken out and has risen sharply, selling put can be risky if the stock retraces.

- Puts and Calls have much higher premium in the earnings week, and therefore much more risk and reward selling puts or calls this week. The charts can give you a good idea about the maximum potential movement on good or bad earnings.

- If you have a stock that is just not going anywhere and you want to dump it, sell in the money covered calls as a way to get a point or 2 and sell the stock. (sell 72.5 calls on a stock you own at 73 current price for 1.75)

- Keep track of you stock basis. The basis will drop the more call and puts you sell on it over time.

- Sometimes you will do a Buy Write (buy stock, sell call at same time) and the stock will not perform well. It may take several weeks of laddering up selling calls to get to the point where the strike price you are selling at is above the cost basis. The stock may surge and you may end up being assigned, leaving you with a loss. Such is life. Either stick with wheel on that stock and sell Puts, or move on. There will be losers (most often in my case it is because I get stupid).

 

[HarveyS]

My point was that after having a 50% drop in portfolio value three times while working and able to replace the losses with newly earned cash, I decided that I did not want to have my nest egg cut in half one more time once I had enough to stop working.

FWIW, the market rebounded each time and you would have replaced the paper losses without adding newly earned cash. It would have taken longer, of course, and limited your overall performance. But, the market recovered and your portfolio would have too, even without new cash. Assuming you were buy and hold.

And consider your actions in Feb and March 2020. Did you load up on equities when the market dropped? Did you sell and reduce your AA away from equities? Without having newly earned cash, how did your portfolio perform?
Perhaps thinking about this will help you decide what actions to take now.

From my understanding of your investment, it seems to me you are taking an oversized risk for an undersized reward.

 

[joesxm3]

FWIW, the market rebounded each time and you would have replaced the paper losses without adding newly earned cash. It would have taken longer, of course, and limited your overall performance. But, the market recovered and your portfolio would have too, even without new cash. Assuming you were buy and hold.

And consider your actions in Feb and March 2020. Did you load up on equities when the market dropped? Did you sell and reduce your AA away from equities? Without having newly earned cash, how did your portfolio perform?
Perhaps thinking about this will help you decide what actions to take now.

From my understanding of your investment, it seems to me you are taking an oversized risk for an undersized reward.

I realize that the market rebounded, but the mental pain of waiting for the rebound is a lot more when you do not have a paycheck to replace the losses.

My boss who used to go to Vegas with $50k for blackjack several times a month stopped going after he retired because he said the worry of not replacing losses affected his playing style.

I had been waiting for a market drop to increase my asset allocation. However, in February and March 2020 I was in the middle of trying to rescue my mother from the nursing home before it was wiped out by covid, so I missed out on adding equities. I was also just becoming interested in bitcoin and I missed out on opening an account and buying some at $1200.

I have been on a 25% or so equity allocation for several years, so I would not have sold anything during the drop even if I had the time. I did, however, reduce by a percent or two while the market was high. I typically only make a 1% or 2% adjustment at any one time to mitigate my stupid tendencies.

I don't track my portfolio very accurately. However, the gross value has increased by a total of 16% since I retired in 2016. That includes subtracting off living expenses. If I counted the living expenses as gain, it might be about 33%.

I guess that means roughly a 5% annual gain. I realize that is low compared to most of you, but it was my "safe" target, like the idea of living off a bond paying 5% yield in the old version of retirement.

I should point out, that during the two market corrections since I retired, my portfolio only went down by about 5% each time if I recall.

 

[OverThinkMuch]

joesxm3 - If you have a "cash settled" account, you might still find a bull put spread locks up $65,000. I tried something similar in my Roth at Vanguard, and they locked up the maximum loss from the put I sold - ignoring the put I bought as insurance.

Some of the terms you use are for charting and technical analysis. That's not the foundational education you need for options, especially uncovered ones. I'm no expert myself, but I usually hear "delta" used to represent the chance of an option being exercised. There are also situations where the price goes up, helping you, but you lose money. Out of the money puts are all potential - all time value. Volatility can have a bigger impact on time value than a price move.

 

[joesxm3]

joesxm3 - If you have a "cash settled" account, you might still find a bull put spread locks up $65,000. I tried something similar in my Roth at Vanguard, and they locked up the maximum loss from the put I sold - ignoring the put I bought as insurance.

Some of the terms you use are for charting and technical analysis. That's not the foundational education you need for options, especially uncovered ones. I'm no expert myself, but I usually hear "delta" used to represent the chance of an option being exercised. There are also situations where the price goes up, helping you, but you lose money. Out of the money puts are all potential - all time value. Volatility can have a bigger impact on time value than a price move.

Thanks for the info about volatility being important.

The guy I watch for info was asked about a selling a TSLA put with a $950 strike and he said that it would be a good way to buy TSLA if you could get a premium around $200. That is quite a difference from my tiny premium.

I have been wanting to get a better understanding of the "greeks". As you point out, I have yet to get a solid grounding, which is why I am taking it very slowly.

My guy was constantly pressed to make an options course for select patreon supporters, this week he said it was not going to happen because he could not figure out a way to put "training wheels" on it and he is too worried that novice trades will get raped if they do not have a really good grasp of what is going on.

I will still move forward, but with baby steps. Most likely sticking to covered calls at first.

 

[OverThinkMuch]

Earlier this year I bought "Understanding Options" (2nd ed) on kindle for $12.49. Now it's cheaper, unless you want the $18 paperback. I wanted a well written introduction, and that's what I got. When you're dealing with new investment approaches that put $65,000 at risk, spending $20 on education is probably worth it.
https://www.amazon.com/Understanding-Options-2E-Michael-Sincere-ebook/dp/B00GWSXX8U

I skipped over cheaper e-books since there's a higher risk of poor communication and someone obviously getting paid by the word. There's also some textbooks, but the prices hit $50 and up rather quickly.