I recently wrote up several Tesla Inc (NASDAQ:TSLA) trades where profits came too fast. This is a good problem to have. So why am I booking profits instead of riding Tesla stock higher? Simple: I don’t trust the fundamentals.
Before you send in the hate mail, I am not dissing Tesla or its prospects. I am merely acknowledging the hurdles it has to grow into its valuation. Having said that, I reiterate that I am a fan of the price action in Tesla stock.
Usually I like to sell risk against extreme opinions. So logic here would be to want to sell calls or call spreads against this mega spike. Not this time. Earnings are coming and these are binary events. For the short term, trading earnings is more gambling than investing. I don’t know how traders will react to earnings regardless of the quality of the numbers themselves.
So today, I want to invest some of my profits in going long TSLA stock for a breakout to new highs. I want to ride the so-called “animal spirit” that is the meme of 2017.
Click to Enlarge Technically, TSLA stock already hit my target from the $258 per share breakout as noted on the chart. From here, we would need a game changing event and earnings could serve that purpose. Wall Street has a crush on Elon Musk and his conference call could be a treasure trove of catalysts.
The Bet: Buy the TSLA March $330 call. This is a bullish trade for which I pay $1.60 per contract to open. This is my maximum potential risk. If TSLA spikes to new highs this level should be within target.
I could modify this trade for a more moderate bet by turning it into a spread. So I’d buy TSLA March 31 $315/$320 debit call spread for 60 cents per contract. If TSLA rallies past my spread I stand to gain more than $4 per contract. The spread makes the trade more reasonable as it is closer to current price. So I don’t require as big a move as buying calls at $330.
Often I like to lower my out of pocket expense and in this case I could sell some puts against TSLA stock levels I deem safe.
The Bank (optional): Sell the TSLA Jan 2018 $200 put. For this I collect $14 per share. I need TSLA stock to stay above my strike sold or risk being put the stock. I only sell naked puts if I am willing and able to own Tesla stock at $200 per share. Anything below $186 per share would constitute losses on this leg alone.
I am not required to hold my Tesla options trade open through their expiration. I can close any of these trades at any time for partial gains or losses.
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.