Tesla Inc (NASDAQ:TSLA) has been making headlines, one right after the other. Just this morning (Tuesday), it almost hit $280 per share on news that China’s Tencent Holdings Ltd (OTCMKTS:TCEHY) is buying a 5% stake.
At these altitudes, it’s frankly risky to chase a momentum-fueled, “hopium”-filled story like that of TSLA stock … especially when equities across the board are near all-time highs.
However, thanks to options markets, you and I can still profit from Tesla stock.
I’ve recently shared how to go long TSLA, and how to catch it as a falling knife. Most recently I shared how to trade it for the long-term. All have yielded fast profits. But what about now as Tesla nears its all-time highs?
Shorting TSLA stock here would be a proxy to shorting the equity markets in general. So let’s implement a macroeconomic thesis to bet bearishly on short-term markets by temporarily shorting Tesla.
Yes, I know. I should be tossed in the slammer for even entertaining the notion of shorting Tesla. But calm down. I’m merely betting against the short-term stock price action, not its future prospects.
That said, I am bearish Tesla as an automaker. But as a tech company that now has solar under its wing, I can’t refute the potential in TSLA stock, especially in the alternative energy arena.
Today, we’ll do a pair trade that will profit from a short-term dip in Tesla stock, and we’ll do it for free. We’ll leverage Wall Street’s perceived value of the stock to finance the bearish bet.
How to Trade TSLA Stock
The bet: Buy the TSLA May $270/$265 debit put spread for $2 per contract. This is a bearish position that would double our money if the stock falls below the spread. This is our maximum potential loss, and it would also capture the next Tesla earnings report.
To hedge my bet, let’s sell downside risk against the value in Tesla shares. This will eliminate our out-of-pocket risk.
The bank: Sell the TSLA Jan 2018 $155 put and collect $4.50 per contract. This 40% price buffer gives us a 90% theoretical chance of success.
As long as Tesla stays above the January sold put, any premium we capture from the debit put spread would be pure profits.
Translation: This pair trade can profit even if TSLA stock does nothing.
Nicolas Chahine is the managing director of SellSpreads.com. Learn options as easy as 1-2-3 here. 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.