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Let's say I believe there is a 50% chance TSLA goes to 300 and I'm a long term Tesla bull trying to accumulate more shares.

I've filled my boots so far, but still have 20k and thinking what's a good strategy to get more shares.

What I'm considering:

  • selling PUTs at 350, expiry in 150 days, or even 300 days. From what I've read they're most likely to expire as whoever bought them would just sell them to someone else and if TSLA stays above 350 at the time of expiration, I would have accumulated 0 shares. Doesn't sound right to me, what's your take?

  • just buying in certain amount every week until I'm happy with allocation

I'm new to this so I wanted to keep it simple.

If I believe TSLA goes to 1k in 2-3 years my main concern would be not accumulating enough.

Job is safe as I work remotely and other cash is secured so I don't worry about hoarding cash.

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AFAIC, the only reason that an investor should sell a standalone short put is to acquire shares at a better price. OK, check that box ---> you want more shares at a lower price.

What I'm considering is selling PUTs at 350, expiry in 150 days, or even 300 days. From what I've read they're most likely to expire as whoever bought them would just sell them to someone else and if TSLA stays above 350 at the time of expiration, I would have accumulated 0 shares. Doesn't sound right to me, what's your take.

That's not how it works. The $350 put will expire if TSLA is at or above $350 at expiration. If below $350, it may be exercised by the owner before expiration and will definitely be automatically exercised by the OCC at expiration (and you will be assigned).

If TSLA remains above $350, you'll collect a fat premium but no shares for your long term bullish outlook. OTOH, if this market collapse continues, you'll acquire additional shares for about $230 to $330, depending on the expiration that you sell. Buying shares each week gets you your shares now but with current market risk. So that's your trade off. Shares now with full upside potential and full downside risk or much less risk via put selling with the possibility of getting shares, or not.

What month to sell is a trickier decision. Time decay is non linear. As a loose rule of thumb, for at-the-money options, option premium is related to the square root of the time remaining. For example, with no change in option pricing variables other than time, a 9 month option that costs $3 will lose 1/3 of its value in 5 months, another 1/3 of it's value in the next 3 months and then the last 1/3 of its value in the last month. Therefore, sellers of premium should sell nearer expirations in order to have the faster decay rate and buyers should buy further out in order to have the slower decay rate.

This square root principle is applicable to ATM. For OTM options, it's distorted and this reward relationship for nearer expirations is poorer. However, these are not normal times. Implied volatility is through the roof. TSLA's IV is normally in the 40 to 50 area and now it's 100 to 200+, depending on the expiration (near term expirations are higher) That's some really fat premium. So OK, all of this option pricing explanation stuff isn't keeping it simple. So how to do that without having to become a Black Scholes pricing quant (g) ? Look at the $350 puts for various expirations:

  • Compare the respective dollar amounts that you'll receive

  • Determine your cost basis if assigned ($350 minus the premium received)

  • Calculate the premium per day that you'll receive (more per day for nearer expirations)

Look at the trade offs. Which choice are you most comfortable with? For example:

  • Sell next week's $350 put for $16. That's $1600 for a week or paying $334 for the stock if assigned.

  • Sell a one month $350 put for $36. That's $900 per or paying $314 for the stock if assigned.

  • Sell a four month $350 put for $68. That's $400 per week or paying $282 for the stock if assigned.

What's more important to you?

  • Receiving a larger premium per week, or
  • Buying shares at a lower cost if assigned?

Try to find a balance between those two and you'll be able to figure out which expiration to sell.

In normal times I'd suggest that you consider selling vertical spreads instead of short puts so that you have some risk management in place. Yes, the premium is less but the spread levels out the poor asymmetric risk/reward of a short put. The current problem now is that with the huge market volatility, B/A spreads are Holland Tunnel wide and it's hard to get a decent fill on a spread (poorer R/R ratio than usual).

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  • Thanks, that's a great answer, my main concern is accumulation of the stock. The length is also a question which led me to post this as I'm worried the option might not get exercised if the length is to high or the other side expects more downside and ends up not exercising if the price rebounds to quickly for them to react. – Data Courier Mar 21 '20 at 19:12
  • Simply put, if I sell a Jan 2021, or mid year PUT and the price goes below strike + premium, am I likely to get exercised? The initial buyer may be only speculating and sell their contact to someone with even higher premium for example. – Data Courier Mar 21 '20 at 19:40
  • The way I understand it there is done risk with exercising do is always better to sell the contract, especially when there is time left and exercising it's not extracting all the value. Therefore longer term options may tend to exchange hands now frequently rather than being exercised before expiration. – Data Courier Mar 21 '20 at 19:43
  • @Data Courier - It makes no sense for the put owner to exercise if there's time premium remaining. So it's unlikely that you'll be assigned. The exception to this is if the time premium of an ITM put exceeds a pending dividend (Dividend Arbitrage). TSLA has no dividend so this isn't applicable. If/when the short put is ITM and there's no time premium remaining or even trading below intrinsic value, you can expect early assignment. This feeds into your concern about writing a put with too much time remaining - share acquisition may be missed because TSLA drops below $350 and then recovers. – Bob Baerker Mar 21 '20 at 20:54
  • If the bid of an ITM option trades for less than its intrinsic value then early assignment to the seller is likely. If one owns the option in this situation, you'd be better off exercising to realize the full intrinsic value rather than selling at a discount and taking the haircut. I explained this in greater detail in another chain so I'll try to find that link --- EDIT: Read this: money.stackexchange.com/questions/116158/… – Bob Baerker Mar 21 '20 at 21:06
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The investor thinks that stock will drop to 300 but would be willing to buy at 300 so the investor wants to begin writing put options for the option-premium income ?

That's a very good plan except for the possibility that a company with a large amount of debt could go bankrupt if a severe recession were to occur. Then one technique for taking a position in a company at risk would be to buy the senior bonds while shorting the stock. If the company were to go bankrupt then the shareholders would likely be wiped-out while the senior bond holders would likely become the new shareholders. To use this technique, accredited investors, for instance, would probably be assured by their wealth managers that the company was in real trouble.

The average investor should just be diversified across their stock positions.

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  • Suggestions about what an accredited investor should do are rather highbrow. The OP is clearly not an accredited investor. The suggestion that he should buy the senior bonds while shorting the stock is also inappropriate because of the reason that if the company were to go bankrupt then the shareholders would likely be wiped-out while the senior bond holders would likely become the new shareholders. LIKELY is a poor word to bet on. If the OP wants to acquire more TSLA, which he clearly stated that he does, perhaps you could help him see the best possible ways to achieve that? – Bob Baerker Mar 21 '20 at 18:03
  • If the investor is interested in a risky high-debt company then the investor should be aware of how accredited investors sometimes position in the situation. The investor should at least be aware. – S Spring Mar 21 '20 at 18:05
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Think about what happens if TSLA is at 250 in 150 days. Or 200. Or 150. You instantly lose $100/share. Or $150. Or $200. Yes, that can happen if you buy the stock now, but you have control of how much you can lose (by selling before you lose too much). With a short put, your only option is to buy-to-close, which puts you at the mercy of the option market.

if TSLA stays above 350 at the time of expiration, I would have accumulated 0 shares. Doesn't sound right to me, what's your take?

Suppose TSLA is at $375 when the options expire. Why would the option holder exercise the put and sell their shares to you for $350 when they can sell them on the open market at $375?

With Naked puts, your maximum profit is the amount you get upfront in premium. If the stock does well (as you predict), then the option will be worthless. If it's less, then you lose a dollar for every dollar that it's below the strike.

If you're bullish on TSLA and are limited in capital, then another option is to buy calls. Yes you have to pay the premium upfront, but your losses are limited to that, and your profits are unlimited. THe risk, of course, with that type of leverage is that you could lose your entire investment.

Or just save up some more, buy the stock, and put in a stop loss order to limit your losses without the cost of an option.

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  • TSLA closed near $427 on Friday. No, the OP as a seller of a $350 will NOT instantly lose $100/share if TSLA is at $250 in 150 days (August). The Aug $350 put is selling for about $70 so his cost basis would be $280 for a $30 loss on a $177 drop in the stock. In that scenario, what's worse, losing $30 at $250 or buying the stock now and losing $177 on a drop to $250 ? And no, the OP is not at the mercy of the option market because he is going into this with the expressed intent to acquire the stock at a lower price (and has the cash available and designated for share acquisition). – Bob Baerker Mar 21 '20 at 18:12

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