Fundamentally, nothing has recently changed for Tesla Motors Inc (NASDAQ:TSLA). We still have expert opinions falling on both sides of the fence. I make my money by selling risk via Tesla options against both extreme opinions. Somewhere in the middle lies the truth.
I have been a long-time critic of Tesla stock fundamentals as a car company. But I am like a lot of traders warming up to the idea that the TSLA story is not one about cars. But until this becomes consensus, car headlines will move the stock so I can’t ignore that aspect of its business.
Click to Enlarge Technically, Tesla stock has made a nice recovery. This could tempt those trapped long at these levels to exit. To offset that, there could be plenty of fans looking to chase this runner. So the drop is a potential, but not a forecast.
So to trade a stock that has potential, I will set a trade that gives it space to run on both sides and let time help me profit.
The Trade: Sell the Tesla stock March $210/$205 credit put spread. This is a bullish trade for which I collect 65 cents per contract. As long as TSLA stays above $210 per share, this trade can yield 14% on money risked. This gives me a 15% buffer from current price.
I usually like to hedge my bets. In this case, I can set a bearish side while knowing that Tesla stock fans could cause me grief on this side. The TSLA dip buyers should be enough support for the bullish trade alone. I do not rush into the hedge; I watch the price action for the next few candles.
The Hedge (optional): Sell the TSLA March $290/$295 credit call spread. This is a bearish trade for which I collect an additional 60 cents per contract. This trade has a 85% theoretical chance of success for a 10% yield on money risked. I could hedge this trade through earnings by sacrificing a few pennies in a debit call spread for the earnings week contract at $290.
If I take both credit spreads, I would be set in a sold iron condor. Since I can only lose on one side or the other, the money at risk falls. Total potential yield if Tesla stays between both spreads sold would then be 29% on money risked. This is a range-bound trade with +/-15 % buffer from current price.
Cautionary note about earnings. The short-term reaction to earnings adds a temporary gambling element to trades. Wall Street often overreacts to headlines.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
