Traders absolutely fall in love with some stocks because they make traders money time and time again. (Of course, the flip side of the coin is that some traders never want to play with again.) The following is a trade idea on Tesla Motors (TSLA) — a popular stock that has made traders a lot of money, and a stock that they should consider once more.
Tesla Motors (TSLA — $188.64): Put Credit Spread
The trade: Sell the TSLA Oct 165/170 Put Credit Spread (selling the Oct 170 put and buying the Oct 165 put) for 70 cents or better.
The strategy: The maximum potential profit for this trade is 70 cents if TSLA is trading above $170 at October expiration. The maximum loss is $4.30 ($5 – $0.70) if TSLA is trading below $165 at October expiration. Breakeven is $169.30 at expiration based on a credit of 70 cents.
The rationale: Tesla stock has been one of those stocks that investors would have loved to own about six months ago. TSLA has moved from about $40 to where it is currently trading in that time frame. Tesla has been exploring ways to continue to grow. It’s expected to roll out its new 90-second battery swaps later this year, and it’s also playing with other options such as apps.
Click to Enlarge As mentioned, Tesla stock has been progressively moving higher for about six months. If we take a look at a smaller time frame — like a 20-day chart — TSLA has a pivot level right around $170, which now is potential support for the stock in case it does decline. Consequently, that is where the put spread is located.
Another important component of this trade idea is the implied volatility. The current IV is for Tesla stock higher than the historical volatility, which possibly makes options and their premiums overpriced. This is a good thing especially when selling premium like in this trade.
Can anything hold Tesla back?
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.