Hedging TSLA w dual options

[Vara La Fey]

Hey all. I'm a total noob to trading, but spent 7 years wholesaling local real estate (writing and selling purchase contracts). I pursued, and often devised, some pretty creative ways of finding distressed sellers. So now that I'm studying trading, I get ideas for Plays that I don't know how to begin actually executing - even tho I merely dry-run at this point. Here's just such a play idea:

Tesla is the talk of the town, and seems pretty volatile. I think TSLA will either go huge in the next few years, or leave a smoking crater. And to a lesser extent, I think they will do that at the Q3 reports, since Musk has more or less promised profitability, which would be a true milestone in the co's completely unprofitable history.

Ok. It seems to me that if Q3 shows profit, TSLA should jump. If Q3 makes a liar out of him, TSLA should fall. Nobody knows which will happen, least of all me. So my best (and only) guess is to hedge them using both calls and puts. (If there's a more elegant way, I don't yet know of it.) My plan is to calculate strike prices on the calls and on the puts so that whether TSLA shows a profit or not, the "winning" options will pay the premium costs for both options and make me profits on top of that. Because I expect significant change in share prices either way.

Yes, I understand that all my premiums are gone if the prices stay stable. But my bet is that they won't.

In the next couple months, I want to dry-run my "dual option hedge" several times in 1-2 week lifespans just to learn how (or even whether) it works at all. If it does, I will throw a several hundred into it on the last week before Q3 hits the fan. Right now, Cboe's LiveVol ware is showing a bloody lot of current TSLA puts and calls that I presume are for sale.

Why haven't I heard of anyone doing this, either with TSLA or at all? I've not seen a mention of this strategy anywhere. If there's something inherently (or legally) impossible about it, please let me know now so I don't waste 2 months dry-running it.

Thanks.

 

[Vara La Fey]

Update: I dry-selected a put and a call, did up the xls, watched the TSLA stock, but never dry-triggered, even tho on several brief occasions my put was mildly in the money after deducting both sets of premiums. I didn't dry-trigger cause I soon realized that I'd dry-bought contracts where those premiums were kind of expensive. Contracts were available cheaper, but in my total first-run confusion I didn't wanna deal with that. Turns out premium price has a hugely magnified effect on the stock prices I needed. Well, duh. This kind of noob confusion is why I dry-run.

Would anyone please tell me why options contracts range from something like $1 to $15 for the same strike date and strike price on the same stock using the same Cboe Livevol site? Is there something in a real-life run that will bite me if I choose the $1 ones? Would it be something that my dry-runs wouldn't show? Why pay $15 when I can pay $1?

Thx.

 

[gtopmafia]

Im a bit confused by what you are saying but ill try my best to explain;

Different options have different prices based on their strikes depending on if they are in, at or out of the money. A option that is in the money has a high chance of staying in the money and therefore will be more expensive.

Options are priced based on two characteristics. Intrinsic value + time value the closer you are to expiration the cheaper the options as there is less time for the option to come into the money. There is another important attribute which determines an options price and that is volatility. This can't really be measured so what we use is implied volatility which will be the markets expectation of actual volatility.

The individual components that make up the theoretical price of an option are known as the greeks.

Delta measures the expected increase or decrease in price based on a one dollar increase in the underlying. If you are Long a call or long a put you will have positive delta. Delta ranges between -1 and +1.

Gamma is similar to velocity and measures the increase in delta as the underlying moves in price.

Theta measures the time value of options. If you are long a option you will have negative Theta every day your option will decrease in value because of Theta which increases at a increasing rate as you approach expiration.

Vega measures the increase or decrease in a options value based on a 1% increase in the Implied volatility.

RHO is the interest component and reflects a 1% increase in the interest rate which usually is .25 basis points and is rather irrelevant unless you are doing long dated options which you are not.

So to explicitly answer your questions as best as I can;

Are you sure that the option contracts have the same strike price and date? if so are the calls the same value or are they different likewise are the puts the same as the puts? puts will be valued differently to calls especially if there are a lot of people hedging (just to clarify what you want to do is speculation not hedging, if you own the stock but are scared of downside losses you would hedge with puts).

I will have a look at that site later but it could maybe be that you are comparing historical trades??? I doubt it though but if there is a big change in IV then prices will move quickly. But i am assuming you are taking all your prices from the same moment in time?

 

[Vara La Fey]

Are you sure that the option contracts have the same strike price and date? if so are the calls the same value or are they different likewise are the puts the same as the puts? puts will be valued differently to calls especially if there are a lot of people hedging (just to clarify what you want to do is speculation not hedging, if you own the stock but are scared of downside losses you would hedge with puts).
I will have a look at that site later but it could maybe be that you are comparing historical trades??? I doubt it though but if there is a big change in IV then prices will move quickly. But i am assuming you are taking all your prices from the same moment in time?

Thanks so much for the explanations. I've bookmarked an article or 2 on the greeks and will add your explanations to my notes file. Not sure I'm ready for greeks yet, and not sure I should proceed without them. I'm still trying to figure out whether closer-together strikes or lower premiums get me into the money faster (so far it seems to be lower premiums).

I dunno how to answer about my Strangle demos. Here's my convo with a Cboe Livevol rep, and maybe it'll make sense to you:

"The Market Tab is a live data stream of option trades across
products and all exchanges. This feature is not available in
the Core version." [Core is the version I'm using - Vara]

"Ok, thanks. Are the options in the "Trade Tape" tab already
sold, or just delayed from real-time?" [I only have Trade Tape.]

"Those are real time."

Ummm, ok. The rep is quick but very terse. Cboe Livevol is for hardcores, and I'm still an infant. :-(

I do take all the options' premiums at the same time from the same filtered result set. As to when they were written and marketed in relation to each other.... noooo idea.

I can't find the same kind of price variation now, so I prolly mis-read the fields. It was all new to me, and was scrolling pretty quick. Then I learned how to work the filters, and it's been quieter since.

So you only "hedge" on assets you own. Thanks. Maybe I should just call "my" little strategy the Strangle Elon. I actually like Elon, but.... errrr....

And FWIW, 3 of my Strangle Elon puts are ever so slightly ITM. $134, $89, $44. I picked them from the Trade Tab in Livevol fri eve after market close. Mistake? I sooooooooo need a broker with a paper account (and a zero min bal). Cause right now I'm exporting rows from an exchange, culling them, then number-crunching the culls in an un-fed spreadsheet. That can't be too realistic. :-(

 

[gtopmafia]

Just to clarify hedging isnt when you just own a asset although you could perfect hedge by using a delta ratio (not the same as a option delta but similar). so you could hedge a airline company with oil or a stokck with an index.

Hedging is the idea of limiting downside. What you want to do is basically be direction neutral capturing a big move either up or down - thats not hedging thats betting on vega and gamma.

 

[Vara La Fey]

Just to clarify hedging isnt when you just own a asset although you could perfect hedge by using a delta ratio (not the same as a option delta but similar). so you could hedge a airline company with oil or a stokck with an index.

Or hyperinflation with gold bullion, stashed in Singapore or some such....?

Hedging is the idea of limiting downside. What you want to do is basically be direction neutral capturing a big move either up or down - thats not hedging thats betting on vega and gamma.

Direction-neutral, exactly. I've been running 6 strangle/straddle/etc pairs this week, all on TSLA, all were experiments, and all would have made money after paying their premiums this morning when word got out about TSLA's new CFO jumping ship.

3 of them already had made money when I dry-closed them yesterday aft: 866, 821 and 776 respectively. At morning low today, the weakest would've been right around a 300% return. At the time I actually would've dry-closed them this morn (I'm in Vegas, 3 hrs behind the market), they were just over 200%.

Oddly enough, it was yesterday when I thought of running two of them: a bill-payer that I close when it meets my min goal, and a free spirit that I get greedy with, closing it only for the pot-o-gold or for loss mitigation.

It really would have worked.

Anyway, I bye-byed Schwab yesterday (they have no paper acct), and registered for Ameritrade's paperMoney (the dry-run version of thinkorswim, which everyone seems to love). Time to start learning paperMoney, the greeks, and interactions and latencies and commissies and whateversies and all kinds of thingies.

Thanks for the guidance.