Coming into its earnings, Tesla Inc (NASDAQ:TSLA) had a mini correction. But that wasn’t all bad news, since the fall came after a 30% spike in Tesla stock over mere days.
Experts often raise cautions over the need for more capital and that this could be dilutive to the stock. Others debate the success of this model or the other. I believe that the trade on TSLA stock is simply tied to Elon Musk the CEO and that’s it!
Wall Street will buy what ever Elon has to sell. This means that dips will be bought and valuation is irrelevant for now. I don’t short it outright similar to how I traded Amazon.com, Inc. (NASDAQ:AMZN) in its early days.
So I sound like a perma-bull in TSLA stock. Quite the contrary. I think that there is a chance that it could be under $100 in the next two years, but I don’t trade it that way. I’d much rather check my ego at the door and trade the price action that is here now.
No, this also doesn’t mean that I will buy Tesla stock in the open market. I’d rather sell Tesla options to generate income where I always leave room for error. There are hundreds of ways I can set a trade and almost at any price level.
Tesla is not merely an auto industry story. It’s a future-tech “hopium” filled bet. The potential is vague enough that we cannot refute it for years and therein lies the current opportunity. Sell bullish premium since there is upside bias in the stock thanks to the perception of value.
I don’t personally want to own Tesla stock, so today I will sell puts below levels where traders are likely to defend it.
Click to Enlarge Technically speaking, Tesla stock was vulnerable, but after this earnings spike it has upside potential to challenge the highs. My trade doesn’t need that to come to fruition. All I need is for price to stay above my risk to win.
The recent fall in TSLA had decent volume so the test of support was legit and I can count on it to hold through 2017 as long as the macro environment remains intact.
The Trade: Sell the Jan 2018 $250 put and collect $9 per contract to open. Here I have an 80% theoretical chance of maximum gains if the Tesla stock price stays above $250 per share. Otherwise, I accrue losses below $241.
The Alternate Trade: Sell the Jan 2018 $250/$240 credit put spread where I have the same odds of success, but with more limited risk. If it wins, the spread delivers over 25% in yield.
In either setup, I can profit without a rally, which is much better than risking $330 buying shares here and without any room for error.
Just recently, I shared a similar trade which brought me easy profits, so today’s addition is a rinse and repeat. Tesla stock is binary, so traders either hate it or love it.
Therefore any trade is just that and never an investment. I book profits or losses early, so I don’t get stuck in a potential mess.
Investing is risky, so never bet more than you can afford to lose.
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.
