I bet if you ask most investors, they’d admit to frustrations from missing out on perfect entries into Tesla Inc (NASDAQ:TSLA) trades. Some stocks don’t give you too many of those, and TSLA stock is one of them.
When it’s in rally mode, Tesla stock seems overvalued, thereby scaring off potential longs. Conversely, on red days, most are scared from catching the proverbial falling knife.
We occasionally get lucky when chasing perfect prices in TSLA, but more often than not, finding perfect entry points is too tricky for most.
For those reasons, I trade TSLA stock strictly using longer-dated options where I can build room for error. Instead of risking money chasing price targets, I find it easier to identify levels where price is not likely to go. Then it becomes much easier to sell risk against those levels.
Time will do the rest of the work for me.
When I see price moves that I deem unwarranted, I use them as opportunities to sell risk based on my homework.
Case in point: the recent Goldman Sachs downgrade of TSLA stock. The stock fell on headline fear, so I shared a trade on how to catch the falling knife. It paid me more than $1 per contract in pure profit.
Now I want to reset another Tesla trade in a slower moving account that I manage. So in this case I will go out further in time than the last time.
How to Trade TSLA Stock Here
The trade: Sell the TSLA Nov $170 put for $7 per contract. This is a bullish trade where I need the stock to stay above the sold put to win. In case Tesla falls below it, I am committed to buying the shares at $170, even if they go lower.
I can mitigate the open-ended nature of this risk by using a credit put spread instead.
The alternate: Sell a TSLA Nov $170/$165 credit put spread for 85 cents per contract.
Both trades have the same 90% theoretical chance of success. The difference is that the spread offers a finite risk profile at the cost of lower potential profits. Still, the spread if successful, will yield 18% on money risked.
Selling downside risk is risky, especially in markets that are near all-time highs. So I never risk more than I can afford to lose.
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.