Tesla (TSLA) stock is back above the 50-day moving average, even though the stock closed at a high yesterday.
Using a combination of options strategies, we could potentially buy the stock at a significant discount, or make a healthy profit if the stock trades sideways.
Here’s the deal:
Sell to open the TSLA on December 15th placed with a strike price of $225, which traded around $4.55 yesterday.
Next, add a bear-call spread:
Sell to open the December 15 TSLA call with a strike price of $275, which traded around $2.80 yesterday.
Buy to open the December 15 TSLA call with a strike price of $280, which was trading around $2.20 yesterday.
The put put brings about $455 in option premium, and the bear call spread adds another $60 in premium. In total, the combination of the two trades generates $515 in premium.
This is how the business views a business initiative. The blue line represents the profit or loss at expiration and the purple line shows today’s trade.
The position starts with a delta of 22, which means it is roughly equivalent to owning 22 shares of TSLA stock. This figure will change as the business progresses.
This is what the business could look like in about two weeks.
Possible Scenarios For This TSLA Stock Option Trade
Let’s run through a few scenarios of how this trade could look at expiration on December 15th.
– If TSLA stock trades sideways and ends up between $225 and $275, the sold put and bear call spread will both expire worthless. The total profit will equal the received prize of $515.
– IF TSLA falls below $225 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at $225. However, our net cost basis will be $219.85, thanks to the $515 in option premium received. That is 8.6% below the closing price on Tuesday.
– If TSLA rallies above $280, the bear call spread will suffer a full loss of $500, but this will be fully offset by the $515 premium received, leaving the trade with a small gain of $15.
Company Details
TSLA is currently rated Weak Buy. The Barchart Technical Opinion rating is 16% Buy with a Weakening near-term outlook on maintaining the current direction.
The market is in very overbought territory. Beware of trend reversal.
Out of 26 analysts covering TSLA stock, 7 have a Strong Buy rating, 2 have a Moderate Buy rating, 14 have a Hold rating and 3 have a Strong Sell rating.
Implied volatility is 45.05% compared to a twelve-month high of 95.99% and a low of 42.67%. That gives TSLA stock an IV percentile of 5% and an IV rank of 4.46%.
Tesla is the market leader in sales of electric car batteries in the United States, with about 70% market share.
The company’s flagship Model 3 is the best-selling EV model in the United States.
Tesla, which has managed to gain the reputation of a gold standard over the years, is now a much bigger entity than what it started out as since its IPO in 2010, with its market cap set to cross $1 trillion for the first time in October 2021.’
The EV king’s market capitalization is more than the combined value of legacy automakers including Toyota, Volkswagen, Daimler, General Motors and Ford.
Over the years, Tesla has shifted from developing niche products for wealthy buyers to making more affordable EVs for the masses.
The company’s three-pronged business model approach of direct sales, servicing and charging of its EVs sets it apart from other automakers. Tesla, which is heralded as the revolutionary clean energy car manufacturer, is much more than just a car manufacturer.
Summary
Although this type of strategy requires a lot of capital, it is a great way to generate income from stocks you want to own.
If you end up getting assigned, you can start selling covered calls against the stock position.
You can do this on other stocks as well, but remember to start small until you understand a bit more about how this works.
Mitigating Risk
With any options trading, it is important to have a plan for how you will manage the trade if it moves against you.
Some traders like to add deep out-of-the-money long to reduce risk. For example, a December 15 put option with a strike price of $200 could be purchased for approximately $100. Buying this put would limit losses below $200 and reduce total capital at risk.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for educational purposes only and not a business recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
More Stock Market News from Barchart
At the date of publication, Gavin McMaster did not hold (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.