Trade Highlight #2

This time I’ve selected quite a similar trade to the previous one. The reason behind this decision is that there are a few key differences. These contain volatility, selling a combination separately and risk management.

Last week we discussed my Short Strangle trade on Tesla. If you haven’t seen that post yet you can find it here.

Here is the trade that I want to highlight:
-P TSLA 31 MAY 2019 $170 $0,94
-C TSLA 31 MAY 2019 $197,50 $0,56
The key difference compared to last week is the lower premium I collected. This is because I was more cautious and decided to sell my call later. This trade started with just the put, I sold it on Tuesday the 28th of May. As there were only four trading day left instead of five, the premium was obviously lower. Also the volatility of Tesla shares themselves went down. The big stock price drop was finished.

As the share price of Tesla went from around $195 to $185 on the 30th of May, I decided to make a combination out of my trade. I sold the call at that point as well. What this meant was that I hoped Tesla would not swing bigger than 8% down, or 6,8% up in one day. This didn’t happen and so I got to keep my $150 or €136,79.

The reasoning behind the trade was the same as the last time around. Tesla has a lot of volatility (albeit it was lower than with the last trade) and I wanted to capitalize on that within a week.

Long story short

I’ve traded a Short Stangle on Tesla again, however this time around I wrote the two options on separate days. This goes to show that when you are not sure how a stock will behave throughout the week, you can make option combinations on separate dates.

Volatility is one of the biggest factors for the option premiums. It was definitely lower than last time around, but still high enough to make such a short trade very interesting.

For four days of having a sold put and one day of having a sold call, I gained $150. This while maintaining a healthy margin of safety.

For any questions regarding options, leave them down below in the comment section or simply hit me up on any of my social media channels!

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2 Comments

  1. Thanks for the update, really interesting to read. I’m still learning. Seems like the more I dive into it, the more there is to know. And considering how risky these things are, I really want to know what I’m doing before I actually do some serious trades.

    Just to get a feel for the process of writing options, I have actually sold (my first) a covered call on 100 Ford shares (1 contract). I got a $15 premium for that one. Too bad the transaction fee Binck charges me hovers somewhere around $3.28. Took a 20% bite of the premium, haha. Oh well. It’s for educational purposes anyway.

    I’m still wondering though. In regards to those TSLA options you discussed above, you said you maintained a healthy margin of safety, and got to collect some nice premiums in the process. But why would anyone ever buy an option like that? Seems to me options are most attractive to sell, and not to buy..?

    Take care.

    SD

    • DutchIndependence

      Hi SD, great to hear you’re dipping your toes into the water! The reasons people could be buying those options are for example; A) They suspect the stock will either move up or down and want to speculate on the move without getting a obligation, B) They want to buy stocks right now as they suspect the price will go up, but simply don’t have the cash now. So they buy a call and get the right to buy those shares later, C) They buy the entire combination and suspect a big move in the stock price either way, they would stand to make money if the share price goes under/above the strike prices + the paid option premium.

      Hope this helps ever so slightly!

      DI

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