Tesla Motors (NASDAQ:TSLA) has become a haven for momentum traders of all stripes. Both volatility junkies and rocket ship enthusiasts have enjoyed its supercharged trajectory of late.
Since April kicked off, shares of the Silicon Valley-based electric car company have reached terminal velocity, climbing as much as 72.5%. Were it to continue ascending at such a torrid pace — a virtual impossibility, if you ask me — it would rise more than 550% by year’s end.
Click to Enlarge So let’s just say drawing a trendline beneath its current trend and projecting it into the future to estimate the stock’s future path is a fool’s errand.
And if you think there’s a consensus among the denizens of Wall Street that Tesla’s stock is poised for more growth, think again. With more than 40% of its float currently being shorted, there is a mass number of naysayers.
With the future of the stock hotly contested, many shareholders will be watching tonight’s earnings announcement with rapt attention. Further adding to the drama, Tesla is looking to record its first ever quarterly profit. Analysts expect earnings to come in at 3 cents per share.
The options market is all aflutter in anticipation of the big event. Implied volatility has risen to its highest levels since TSLA came public in 2010. With the stock trading around $57, the May weekly straddle is pricing in a roughly 12% move by the end of trading Friday.
Click to Enlarge With implied volatility having risen to the stratosphere, the knee-jerk reaction for most observers is to conclude options are extremely expensive and should thus be sold. And yet, expensive doesn’t have to mean overpriced.
When you consider that TSLA is up more than 70% in a short span, has an incredibly high short interest and is expecting a historic earnings release tonight, it’s altogether possible that the stock could move the expected 12% by the end of the week, if not more.
If you own 100 shares of TSLA and aren’t willing to roll the dice on earnings, you could enter a collar strategy to fireproof your position. A collar consists of selling a covered call and using the proceeds to purchase a protective put. If the premium received from the short call is sufficient to pay for the put, the collar can be entered at no cost.
With TSLA trading at $57, you could sell the May weekly 58 call for $3 and buy the May weekly 56 put for $3. Since the long put option gives you the right to sell your shares at $56, your downside risk is reduced to a mere $100 total. Of course, the short call option obligates you to sell your shares at $58, which limits your profit potential to an additional $100.
However, with the collar in place, you can safely watch the earnings fireworks from afar knowing that regardless of the outcome, your position should experience little change — for better or for worse.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.