Tesla Inc (NASDAQ:TSLA) and Twitter Inc (NYSE:TWTR) may not be competitors, but you can trade them as if they are. Let me explain.
I am a fundamentally driven trader. Meaning I like to set my risk based on solid fundamentals. Tesla and Twitter are both perceived as risky bets. This is not a slight against either of them; I am merely saying that their fundamentals have yet to grow into their valuations. Tesla has a few obstacles ahead it. I get the potential but for now it’s a speculative play in my book.
A few days ago I suggested closing TSLA long profits and roll into TWTR longs. I did so because I didn’t have room for both speculative trades in my portfolio. The move turned out to be an instant win as that day marked the high in TSLA and a coincided with a spike in TWTR.
Click to Enlarge Tesla Stock has a cult following. But on Thursday it caught a downgrade that caused a 3.9% drop.
It won’t be long before TSLA fans start touting great entry points. Personally, I reiterate my skepticism in its fundamentals so I won’t be buying the stock.
On the other hand, I remain a fan of the TSLA stock price action. So, I like selling risk in Tesla options.
I am always looking for opportunities to cautiously catch the falling knife. The easiest way I can do it is by repeating what has worked in TSLA, which is to sell risk against extreme opinions. I am not reckless so I always leave plenty of room for error since I never assume that I will pick the perfect time of entry. In this case, I will nibble with a first tranche trade then add to it as price unfolds.
The Trade: Sell TSLA Jan 2018 $185 put. This is a bullish trade for which I collected $11.50 to open. The 30% price buffer gives me an 80% theoretical chance of success. My breakeven point is $173.5 per share. Selling naked puts is dangerous and is not suitable for all investors especially on a speculative high-priced stock. So I can modify this trade to carry less overall dollars at risk.
The Alternate: Sell TSLA Jan 2018 $185/$180 credit put spread. For this collect $1 to open. If successful, this trade yields more than 25% on money risked. Selling a spread limits my maximum risk to the width of the spread less what I collect to open.
I am not required to carry these trades through expiration. I can close them at any time for partial gains or losses. Selling naked puts is dangerous especially in markets hovering at all time highs. I only do it if I am willing and able to own the stock at the strike sold.
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.
