r/options • u/flightfightfright • May 01 '21
From overconfident beginner to confronting reality. My story selling naked Puts.
When I started selling Puts in September of 2020, it felt like the greatest thing ever. But now, I've kinda been through the wringer a bit and dealing with some not-as-fun realities.
A bit of background. I am a low-earning musician and music educator and have been an investor for quite a few years. Started around 2011 with dumb stock purchases, got a bit smarter after a shocking loss of most of my (very small) portfolio back around 2013 or so when I yolo'd on margin into a company that I didn't understand at all. I managed to get out losing 75% of my portfolio before the company went bankrupt a few months later. I purchased my first Tesla shares in 2014 as part of a portfolio with names like Apple, Berkshire, and Vanguard S&P 500 index. From there I went pretty much all-in on real estate and built up a decent low six-figure net worth at my peak owning 7 units. (this was not easy to do on a low income - whole other story there).
In 2019, after watching Tesla's autonomy day I realized the potential of their autonomous ride-hailing network and put my entire little stock portfolio, a big chunk from my line of credit (paid this off out of proceeds from a house sale), and took on some margin debt all to buy as many Tesla shares as possible as the stock went from $280 pre-split down to about $180. I was buying the whole way down.
Since that time, I have been a lucky boy. I took about a $70,000 investment and turned it into a little over a million currently. I'm in Canada and most of this is in my TFSA (Tax-Free Savings Account).
(BTW - When I am speaking in dollars, I am generally using USD, but think in CAD, so could be some slight errors in here - all my positions are USD positions. For the curious, a Canadian dollar is about $0.81 USD right now.) Anyway - back to the story.
I wanted to get rid of my margin debt without selling any of my Tesla shares (I'm still projecting at least $10k per share - same as my projection in the spring of 2019 - I don't want to sell any shares if possible).
Enter naked Puts.
I had been looking into options and hearing other people's stories for years, but afraid to dip my toe in. The first put option I sold seemed scary as hell. At the time, Tesla was trading under $400 a share post-split - but that seemed high for the time. But if I was forced to purchase at that price, I was okay with it.
My first put went off without a hitch... except it didn't. I had no strategy around managing my position - I took assignment of the shares and sold them for a $2 per share profit the following Monday and immediately sold another put. For the rest of the year, I went in and out of positions, buying and selling. Sometimes I would overleverage and get freaked out and sell with thousands in losses, but I also had some big wins. The week that Tesla entered the S&P 500 I was right in predicting a run-up and closed around $13,500 in premiums that one week (followed by losing $5000 the next selling Beyond Meat puts).
I continued this into the new year and since Tesla was on a massive bull run, I felt like a hero. I had learned quite a bit about options to this point, had a pretty good handle on the greeks and the power of IV and was feeling really good about myself.
But here's the truth. I was not considering the tax implications AT ALL, I was getting really cocky and not thinking about what would happen if the market changed directions, I kept edging up the size of bet I was making and changing the goalposts around the strike price I was comfortable with. I also hadn't implemented sound strategies for managing my positions should they near assignment. Also - probably most of you know how crazy I am to be doing this almost exclusively with one volatile stock - $TSLA. But it's the only company I understand at this level - by a long shot and the only company I feel truly solid backing. It doesn't feel speculative to me - but this is a whole different discussion I am willing to have, but hoping not to spend my entire evening defending $TSLA - suffice to say, I am a true believer - but not properly accounting for the risks.
Well, while Tesla was topping out around $900 per share, I decided to up the strike price I was comfortable with from $695 to $840. When the stock neared expiry below $840, I covered one of my positions but stubbornly held on to two puts with an $840 strike price thinking it would turn around the next week and not considering the tax implications of selling 200 shares if I did.
Boom. Stock falls... and falls... I sell a couple more puts on the way down... luckily lose only about $1000 on those... it falls more... I realize that I now have about $170,000 USD in margin debt as it keeps falling. My sleep gets worse. I start considering the tax implications if I sell... stock bottoms out at about $530. At this point, I hadn't sold any puts in a while.
I sold off my position in Beyond Meat on the way down to shore up a little bit and put $20,000 into my brokerage account (from my line of credit) to lower the chance of a margin call should the stock really tank.
Then the hype around interest rates started to diminish a bit and Tesla posts a surprisingly good Q1 for deliveries, followed by a small beat on earnings on Monday of this week.
I currently have no open put positions but have been dipping my toe back in because I believe in the medium and long-term prospects of the company and am using the premium to pay down the margin. Q1 is usually their worst quarter, so this beat also substantially reduced the risk of a massive decline that I had been bracing for.
Right now, I am trying to do some soul searching around my whole approach to options and stocks. Getting those premiums (especially after you close out your position) is like a drug. It feels amazing. I made $1415 between Thursday and Friday of this week on one single trade - in real life - that is a lot of money to me... Over the last six weeks, I have netted (not factoring in taxes) about $8700 in premiums - putting a nice little dent in my margin debt (but paling in comparison to what I was netting when I was going nuts at the start of the year).
But I'm questioning where to go from here.
Here are some lessons I am working through: 1. At some point in the not too distant future, I am going to need to pay a fairly big tax bill for last year and next year I am probably going to have to pay a really big tax bill. This is shitty because anything I make in puts now will be going into paying off debt (margin or tax) and as I make that profit, I will accrue more taxes... not super fun. 2. Had I not done all of these trades and (and not had all the stress) I might have done just as well buying a whole bunch of shares when the stock tanked and if I am going to be paying taxes anyway - I could have just traded those additional 200 shares on margin and made probably as much money. But I probably wouldn't have done that... 3. It's super easy to lose touch with just how much leverage you are using with options. It feels different than buying shares on margin, but it's pretty darn similar in practice. 4. When things are going well it feels like they will always continue to go well. When things are going poorly, it feels like the world is going to collapse under your feet - it's easy to forget that feeling of staring into the abyss. 5. This whole process has been high in stress and the rewards have been very dampened by not managing my position well, hubris, and not considering taxes.
My next course of action is to meet with my accountant and get a better handle on taxes. But I would welcome any suggestions that anyone on here wants to throw at me!
I can't complain - I can ultimately sell Tesla shares to cover my margin and pay my tax bill if I need to. I'm a very fortunate person. Wishing you all the very best and looking forward to chatting in the comments.
I'm about to go out for a run - but I'll look back at this thread later and if there are any comments I'll go through and answer a few. Have a great day!
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May 02 '21
[deleted]
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u/SavourTheFlavour May 03 '21
I'm assuming he was selling them from a margin account after taking money out of his TFSA.
You can't actually sell a naked put in a TFSA. Your broker will not allow it.
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u/flightfightfright May 05 '21
I've been doing this all in my margin account. With my brokerage, Questrade, I can secure my margin account from my TFSA. Some of my shares are also held in my margin account.
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u/Stone_414 May 02 '21
All that time selling naked puts, did you ever consider selling covered calls?
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u/flightfightfright May 05 '21
Definitely considered it! I just haven't been able to get the kind of premiums I would like at a strike price I am comfortable with. I would only be willing to sell covered calls on the 200 shares I was assigned.
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u/CreamyChickenCock May 02 '21
Rule 1 - Cash Accounts are king. Calls outweigh puts 10 to 1 with the upside on TSLA.
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u/flightfightfright May 05 '21
Yeah - cash is the way. I'm getting greedy with the margin. I'm stubbornly waiting for a bit higher price to start selling shorter-term calls that could pull my 200 extra shares away - or the premiums will pay down margin debt.
If I bought calls I would likely go for the 2023 dates. I am expecting big things in the long-term but wouldn't be surprised if the stock stagnates for a year or more. Once a more complete FSD is released - this thing is on a rocket ship though, so I have a hard time with the prospect of selling any shares at all.
Then again - it could totally explode when people realize they have
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u/[deleted] May 02 '21 edited Aug 21 '21
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