You would be hard-pressed to find a more talked-about stock as of late then this automobile company. The question is: how can an option trader take advantage of this suddenly volatile stock? Here is a trade idea that possibly can.
Tesla Motors Inc. (TSLA): Put Credit Spread
Click to EnlargeThe trade: Sell the June 80/85 Put Credit Spread (selling the June 80 put and buying the June 85 put) for 0.45 or better.
The strategy: The maximum potential profit for this trade is 45 cents if TSLA is trading above $85 at June expiration. The maximum loss is $4.55 ($5 – 45 cents) if TSLA is trading below $80 at June expiration. Breakeven is $84.55 at expiration based on a credit of 55 cents.
The rationale: Since March of this year, Tesla has basically tripled its value. Probably the main reason was the companies’ earnings. After suffering through many years of not making money, the company posted a profit again. Sales increased to over $550 million in the first quarter compared to just over $30 million in the first quarter last year. The company posted net income of over $11 million compared to almost a $90 million loss last year, which includes paying off a loan it had borrowed form the Dept. of Energy.
When a stock surges in this manner, usually the volatility increases as well. In fact, it has surged higher, making option premiums relatively expensive from previous levels. The way an option trader can try and take advantage of this is to sell premium with a put spread. The stock has surged over $100, which might now act as support for the stock, and it has an additional pivot level around $85 which could act as support and keep the stock from heading lower. Even if you don’t like Tesla cars, if the stock stays above $85 by expiration, you just might change your mind!
No positions held at the time of publication. If you are interested in a free trial of my LIVE options trading room visit: http://markettaker.com/options_insider_trial/