While equity markets were hesitating recently from highs, Tesla Inc (NASDAQ:TSLA) was powering to new all-time highs. Breaking $300 per share seemed like an impossible feat back when it was under $200 as recently as December.
I have been outspoken against TSLA’s success as a car company. I still think that it needs several miracles for it to grow into its valuation. But all along, I set aside my feelings and successfully traded the price action. I went long Tesla upside potential and I successfully caught it as a falling knife.
Click to Enlarge Yes, I recently shared a short TSLA trade just before the spike, but you can call back the posse. Even that trade made me money. Why? Because just as I did in all other successful Tesla trades, I used the perceived value of TSLA stock to generate income.
Selling puts to finance my recent attempt to short it saved me from incurring any losses. In fact, if I exit the setup, I net a credit of 50 cents per contract.
How to Trade TSLA Stock
I will stick with what has been working for me all year. I will sell downside risk against perceived value but I will also hedge it by selling opposing upside risk as well.
The Long Side: Sell TSLA Jan 2018 $210/$200 credit put spread for $2 per contract or better. This trade has an 85% theoretical chance of success. I need Tesla stock to stay above $210 per share this year.
To balance the trade, I will do the opposite on the bearish side.
The Short Side: Sell TSLA Jan 2018 $440/$450 credit call spread for an additional 80 cents per contract. Taking both trades means that I would have sold an iron condor with an 85% chance of yielding 35% on money risked. I left myself more than a 30% buffer on either sides of current levels.
This rally has been so impressive that I can expect it to continue. And for that reason, I want to cover the potential spike situation off earnings by spending a few bucks on buying cheap temporary debit call spreads.
Learn options as easy as 1-2-3 here. 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.
