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This morning, I am recommending a ratio put credit spread on Tesla, Inc. (NASDAQ:TSLA).
This trade is designed to generate income up front, but we can also collect profits if TSLA falls. Right now, the company is in an interesting and complicated position, so it’s worth taking a closer look…
Trying to Regain Solar Dominance
TSLA used to be the country’s leading rooftop solar company, but it lost its position at the top to Sunrun, Inc. (NASDAQ:RUN). Most people forget that solar energy is a major part of TSLA’s business because its cars and CEO are in the news so frequently.
Now the company is trying to regain its position as a leader in solar energy by cutting prices. Shares of TSLA were up just slightly in premarket trading, and it opened higher today. It seems like traders feel optimistic about TSLA’s renewed focus on solar energy.
But selling solar panels for 38% below the national average might not be feasible in the long term, and the company had a bad earnings report, missing both revenue and earnings per share expectations. I think it could push the stock lower, at least in the near term, and the technical picture doesn’t look good.
A Long Decline
If we look at the chart, we can see TSLA has been in a steady downward trend since December of 2018. Since the beginning of the year the stock has lost almost 27% of its value, and it continues to make lower highs.
There’s a very real possibility TSLA will head even lower now that it has broken below support at around $245, and that’s why I’ve recommended this ratio put credit spread.
Using a spread order, buy to open 1 TSLA May 31st $210 put and sell to open 2 TSLA May 31st $190 puts for a net credit of about $0.20.
Note: There are several May expirations available for TSLA options. Be sure you are opening the weekly options that expire on Friday, May 31, 2019.
About Ratio Put Credit Spreads
This ratio put credit spread is a bearish position. It involves writing (selling to open) two options and simultaneously purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account.
That credit is the income we collect up front. Even if TSLA doesn’t drop we get to keep that premium.
This is similar to a ratio debit spread, which is a way to lower the cost of buying options, as the two options that you sell to open (short) help offset the cost of the option that you buy to open.
Therefore, this ratio put credit spread is a way to earn a small profit while still establishing a bearish put option trade. Many brokers will require the use of margin and/or a set amount of reserved capital and/or a margin account to execute a ratio spread; contact your broker directly for specific requirements.
I mentioned above that we could take profits as the stock declines. That’s because unlike a regular put credit spread, the two short options in this trade will lose value to time decay faster than the one long option.
Eventually, that could widen the spread between our long and short options, letting us buy back the short options at a lower price. If the long option loses less value over time, we can sell it back and collect a profit. If TSLA loses value, it may help widen the spread faster.
Because you are short a naked put in this ratio put credit spread, the risk is that you could be obligated to buy 100 shares of TSLA at the $190 strike price for every 1 contract that you are short of the TSLA May 31st $190 puts. So, this is inherently a higher risk play.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.