Close out losing strangle on TSLA?

lazy_eyed_ladykiller

Junior member
11 1
Hey guys I believe this is the right place to ask, but please feel free to move if it doesn't fit the criteria. I used to trade purely 3-6 months options and equities over a long period. I have been at it for about 6 months. After making some money and losing some money along the way, I started exploring some advanced strategies. Slowly I have been playing with straddles and strangles and have made some great returns. Well, my newbieness got the best of me yesterday and I initiated a strangle on an earnings report for TSLA. I should have known the sellers had priced in a move already, and despite seeing the high IV, I still went long on a strangle and paid the price this morning. In hingsight I should never have played this, but c'est la vie.

I went long 1 Nov 22 247.50 call for 6.80$, and 1 Nov22 227.5 Put for 12.10$. I strongly believed TSLA was going to miss the ER and so my put was ATM (TSLA closed yesterday at 230.00$).

This morning, much to my dismay, TSLA beat earnings and it surged up to a HOD of 246.00$.

My options of course got the IV crush. My put went from $12.10 down to 2.60$ at one point before closing at 3.60$. My call went up to a high of 7.50$ before closing at 4.85$ (TSLA closed at 240$).

Throughout the day TSLA was moving completely sideways with both of my options OTM, with the call becoming close to ATM. Unfortunately this sideways action ensured a roughly $1000 loss no matter which one I would get rid of. Basically the worst case scenario happened, and TSLA landed in the deadzone.

On the daily chart, it does not look as if TSLA will gap fill up, but may keeo going down to the 220s$ in the coming days. I decided to keep my position open until at least one of the options go deep in the money before Nov 22nd. But now I am worried if I made the right decision. As theta is going to kick in strongly in the coming days, and I am worried the market makers will ensure a continuous sideways action tomorrow as well to close out the Nov 7th options.


I am at an impasse. I could have sold one option and hoped TSLA continued in the direction of the other, but I could not pull the trigger. No matter what action I would taken today, I was going to lose 1000$ (roughly).

I immediately attempted to get rid of my put this morning at market open, as TSLA went to a LOD of 229$ , but I due to the crappiness of my broker, I could not refresh the bid and asks and could not see the price of any of my options! their trading desk also did not return my calls. This is the last trade I make with them (Virtual Brokers). If I had known the put opened at 5.60$ today, I most certainly would have dumped it, and it would have greatly lessened my loss as the call gained some value. Only at 9:50AM was I able to see the opening price and the prices in general, by the time, I was pretty much locked in 1000$ loss.

Please give me advice as to what to do. Should I keep this position opened tmr and perhaps next week in the hopes that one of the options will go ITM and I can lower my losses, or close it tomorrow ASAP as it is a lost cause?

Thank you.
 

ACstudio

Active member
138 14
1st....never ever never BUY a strangle. Always sell. If capital requirements are an issue then sell an iron condor. Always sell high volatility...never buy it.

2nd...yes your are in the rapid slope of theta decay. You will see the sharpest decline in the period from 25-10 days to expiration.

3rd...when you BOUGHT the position your risk was defined at entry. That's the amount you expect to lose if you are wrong.

4th....if you intended for an earnings play you need to play the nearest expiration and sell premium...not buy.

The good news...you bought a monthly and have 15 days to expire for a hope of price move. The bad news....you paid like 18.90$....so your break even is far away from your strike price. Your going to need a 1-2 standard deviation move to the upside to break even.

I don't buy premium but here is where your at and what you can expect. You are currently long 15 deltas. If you sell the put you will reduce your break even point by 3$ but then will be long 40 deltas.
If you leave them on and sell the 245 call and the 230 put you will collect back over 8$ in premium and be short a couple of deltas....so you will be hoping the stock stays down. Then If the stock moves up look to buy back the put vertical and sell another with the short strike at around somewhere near -.30 deltas...or anywhere you can collect another 1$ or so in credit.

So you might be able to cut your losses in half by doing that....about a 60% chance.
But if you sell the put you have now that only gets back 3$ ..... then you have a 80-90% chance of losing the rest.
If you leave it on...you have over a big chance of this being a full loser.
If you take it off now you lock in about a 10$ loss.

I know a lot of big players out there still recommend buying strangles...I've seen the articles. But trust me...they either don't trade or have done 0 research on how they play out over 100's of occurrences. It a bad bet 80% of the time...all of the time.

Maybe Lloyd can check me on the above or some other input...I just looked at the numbers and threw that out there....but that's what it looks like to me.
 

lazy_eyed_ladykiller

Junior member
11 1
1st....never ever never BUY a strangle. Always sell. If capital requirements are an issue then sell an iron condor. Always sell high volatility...never buy it.

2nd...yes your are in the rapid slope of theta decay. You will see the sharpest decline in the period from 25-10 days to expiration.

3rd...when you BOUGHT the position your risk was defined at entry. That's the amount you expect to lose if you are wrong.

4th....if you intended for an earnings play you need to play the nearest expiration and sell premium...not buy.

The good news...you bought a monthly and have 15 days to expire for a hope of price move. The bad news....you paid like 18.90$....so your break even is far away from your strike price. Your going to need a 1-2 standard deviation move to the upside to break even.

I don't buy premium but here is where your at and what you can expect. You are currently long 15 deltas. If you sell the put you will reduce your break even point by 3$ but then will be long 40 deltas.
If you leave them on and sell the 245 call and the 230 put you will collect back over 8$ in premium and be short a couple of deltas....so you will be hoping the stock stays down. Then If the stock moves up look to buy back the put vertical and sell another with the short strike at around somewhere near -.30 deltas...or anywhere you can collect another 1$ or so in credit.

So you might be able to cut your losses in half by doing that....about a 60% chance.
But if you sell the put you have now that only gets back 3$ ..... then you have a 80-90% chance of losing the rest.
If you leave it on...you have over a big chance of this being a full loser.
If you take it off now you lock in about a 10$ loss.

I know a lot of big players out there still recommend buying strangles...I've seen the articles. But trust me...they either don't trade or have done 0 research on how they play out over 100's of occurrences. It a bad bet 80% of the time...all of the time.

Maybe Lloyd can check me on the above or some other input...I just looked at the numbers and threw that out there....but that's what it looks like to me.

Thank you for the advice. I tried to short like you said to get out, but I did not have the margin. I ended up closing it on Friday for a net loss of 1100$. A lesson in the school of hard knocks. Never again will I buy strangles with high IV. I will stick to things more inline with my budget now and go back to the basics until I play with the bigger options. Thanks again
 
 
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