Tesla (NASDAQ:TSLA) reports earnings later today after the markets close and traders are gearing up for the fireworks. But if history has taught us anything, it’s that Tesla stock doesn’t need an event like this to spark a big move. It’s volatile enough during normal trading sessions. Ironically, most of its quarterly announcements have generated snooze fests.
It’s not that earnings don’t matter. It’s just that traders have been extremely effective at pricing in the results by the time they become public. After all, the stock is up a whopping 108% since its last quarterly release. Maybe this time will be different.
Like me, you may be wondering if the fundamentals have improved sufficiently to justify such a meteoric rise. Might a disappointing showing pull the rug out from the admittedly overbought stock? Maybe. Of course, the counterpoint is that the Tesla rocket ship has been fueled by hype and hopes for the future way more than actual earnings or sales. So why should a single earnings announcement change anything?
I always find the options market quite helpful when building expectations into a known event like this afternoon’s. Let’s take a closer look.
The Expected Tesla Stock Move
By looking at the 29 Jan Weeklys options, we can build an at-the-money straddle to nail down market expectations for this week. With TSLA stock closing near $880 on Monday, the long straddle was priced at $85. That translates into a 9.7% move by week’s end. If you back out the two trading sessions following the report (Thursday & Friday), then the expected earnings gap shrinks to around $61 or 6.9%.
Is that a big move? Are traders expecting a sharp jolt (higher or lower)?
On Monday, Tesla stock rose $53 intraday. Yesterday, there was less than $5 upswing. Moreover, it’s average true range (ATR) is nearly $40, so $61 is hardly noteworthy. Now, you may be concerned about the uncertainty surrounding Wednesday evening’s festivities, but the market certainly isn’t.
Three Earnings Trades
If I had to pick a direction into earnings, I’d lean bullish for obvious reasons. Bull puts would be my play of choice because they create a wide profit range with a high probability.
Bull Put Trade: Sell the Feb $700/$690 put vertical for 80 cents.
For those looking to sidestep a directional bet, you could play volatility instead. Volatility strategies fall under two banners: long vol and short vol. You simply have to ask yourself whether you believe (and are willing to bet) that Tesla stock will move more than $61 or less than $61 after the event.
Bear in mind, roughly two-thirds of the time, prices tend to remain within the expected range. The challenge is that the one-third that prices move more than expected, they can really move.
For those banking on Tesla remaining inside the range — or simply chilling out for the next few weeks — “iron condors” are the way to go.
Iron Condor Trade: Sell the Feb $670/$660 bull put and the Feb $1,170/$1,180 bear call for a total net credit of around $1.70.
Your max gain is $1.70 and will be captured if TSLA sits between $670 and $1,170 at expiration. The max loss (and cost) is $8.30.
A third and final option is to bet on a big move. In essence, you are betting the crowd has it wrong and that Tesla is poised to surprise either to the upside or the downside.
Inverted Condor Trade: Buy the Feb $790/$780 bear put and the Feb $1,020/$1,030 bull call for a total net debit of $5.30.
If Tesla sits between $790 and $1,020 at expiration, you’ll eat the max risk of $5.30. But, if we see a move above $1,030 or below $780, then you could capture the max reward of $4.70.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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