Locked in Tencent for years, how to use options to break even?

Here's how to execute it:
1. Choose a timeframe, say, six months, or eight months, but avoid anything shorter than three months or longer than a year.
2. Estimate the highest price your stock will reach within this timeframe.
3. Add 10-20% to this highest price to create a safety margin and determine the strike price.
4. Sell short calls at this strike price.

Note:
It's crucial to have the underlying stock in order to execute this strategy, with the ratio between the stock and options ideally being 1:1. In other words, having naked short call positions is not advisable, as this could lead to potential margin calls. If you insist on taking such risks and end up getting margin called, don't come looking for me...
Remember: Have the underlying stock, have the underlying stock, have the underlying stock. Don't have naked short calls, don't have naked short calls, don't have naked short calls.

Now, onto the analysis:
Since you own the underlying stock, no margin is required for selling short calls, thus your idle capital isn't tied up. Consequently, the option premiums you receive from selling short calls can be likened to interest income, on top of the stock's returns.

The amount you receive depends on your strike price setting and the stock's implied volatility (IV). Different outlooks on the market may lead to different strike price settings, resulting in varying premiums received.

Maybe 320? Possibly.

350? It's uncertain.

380? Many wouldn't dare hope for that.

Let's set the strike price at 400. So, for the September expiry with a 400 strike price, the option premium would be around 3.2.

In other words, by selling a September call option with a strike price of 400, if the option isn't exercised by September expiry (meaning Tencent's stock price hasn't risen to 400), I would net approximately 3.2 Hong Kong dollars in value. Relative to the current price, how much is that? A quick calculation: 3.2/300, roughly a little over 1%. Over five months, that translates to an annualized return of approximately 2.4%.

Is it a bit low? Yes, it is.

If you want to receive more, you'll need to lower the strike price. But doing so comes with risks. If Tencent's stock price does rise above your strike price, you'll face a tricky situation.

Since you've sold the call, if the stock price exceeds your strike price, the call buyer will likely exercise it. Let's say your strike price is set at 350. If six months later, Tencent's price is 370, the call buyer will ask you to sell them the stock at the strike price (350). Since the current price is 370, you'll miss out on the value between 350 and 370, which is 20 Hong Kong dollars.

On the flip side, you could choose not to exercise. But it won't make a difference. If the stock price is 370 at expiry, then the 350 call is already in-the-money, so it will have an intrinsic value of 20 Hong Kong dollars at expiry. This means you'll miss out on the 20 Hong Kong dollars either way.

So, to summarize, your choice of strike price sets the upper limit for your stock returns. Any gains above this price won't benefit you. Therefore, the strike price must be set far enough to allow room for profit from the stock. However, this will reduce the option premium received. It's a balancing act.

For experienced users, you can fine-tune your approach. Let's discuss two points: IV and Delta.

IV affects the amount of option premium received. Why is the option premium for Tencent so low? The answer: Tencent's IV is too low. Currently, it's only around 20, not even reaching 30. The amount of premium received is highly correlated with IV. The higher the IV, the more premium you can receive.

In the Hong Kong market, Tencent, HKEX, and AIA are known for their low IV. Tencent's IV was over 40 a few years ago, but in the past year or two, it has shrunk significantly, hovering around 20. AIA and HKEX have always had low IV.

Baidu, JD.com, and Meituan currently have relatively high IV; Baidu is over 40, and JD.com and Meituan are over 50. These three stocks can fetch more option premium. Kuaishou is also a good option.

That's the first point, regarding IV. Now, onto the second point, regarding Delta.

Since you're selling options, and the option price itself fluctuates with the stock price, you can profit not only from the time value of the out-of-the-money option but also from the delta as the stock price changes.

For example, with the Tencent 240927 400 call, if the Tencent stock price drops after you've sold a short put, the price of this call option will also decrease. Once you feel the drop has bottomed out, close out this short call, and you may have already earned half or one-third of the premium.

Although not significant, it's much more efficient than waiting until expiry. Then, if the price rises again in a few days, sell another short call, and close it out when it drops again. Another small profit. Doing this repeatedly can yield a much higher profit margin than the annualized 2.4%.

Since you own the underlying stock, all short calls require no margin, and even if you're wrong about the direction, you won't lose everything. The worst-case scenario is that the upside potential of the underlying stock is limited, as you've effectively set a ceiling. But as long as your strike price is far enough away, you'll be fine even if you play around. With accurate positioning of highs and lows, achieving 20-30% returns annually isn't difficult.