I've found success over the past few weeks using the following covered call strategy.
With $TSLA, I've been selling multiple covered calls 1-2 weeks out about 5% above current strike price. Given that this is a very volatile stock and I want to keep my shares, I will either roll out to a higher strike the following week or to a lower strike at an earlier week. I collect a premium with each trade and can retain my shares. The only issue is that I have to be very vigilant of the price, which I try to manage with price alerts and order limits.
I've made significant returns using this strategy, but I'd like to know what I'm missing, as this seems too good to be true. Please strawman this approach. Thanks!
Posted by Boberts227
8 Comments
Do you close the trade after you make a certain amount of profit or just let it run? When do you decide to roll?
Plot the value of the position as a function of implied vol under the BS model
Don’t think you are missing anything. As long as you are actively managing the trades, covered call writing can be a good way to generate income. There is always some risk of assignment if the stock gaps open and the calls are ITM but you can always buy them back.
Too good to be true means that the stock is cooperating and you’re managing it well. That won’t always be the case so consider how you’re going to manage your position when that happens.
Sounds like you’re on to something. But remember, Mr. Market is a fickle beast. A few weeks of success doesn’t guarantee future returns. What if Tesla’s price suddenly plummets? You could be stuck rolling down and out for a while, eating into those premiums.
Have you considered the potential tax implications of frequent options trading? Might be worth a look.
The call part just limits your upside.
The main downside risk is the shares.
Big jump in price due to some catalyst is a risk and then you will either have to come up with some cash to BTC or sell the shares well below market value. I had something like that happen with my SBUX. It was drifting along making me a little consistent premium on a regular basis and then one day the CEO gets replaced and the stock spiked enough that I got caught eating a chunk of change to close it out. All the usual proverbs apply. It works until it doesn’t; pennies in front of steamrollers; yada, yada, yada.
Tesla, in particular, is prone to unpredictable catalysts. Maybe Musk goes full Hitler or maybe he invents a robot-taxi fleet that revolutionizes modern cities. Nobody knows with that guy.
Would you sell naked puts on TSLA? IF you do not know the answer here, you are not ready.