Tesla (TSLA) had a huge day yesterday closing 7.82% higher and closing back above the 21-day moving average.
The Barchart Technical Opinion rating is a Hold. Short term, the outlook is falling.
Rather than just buying the stock, investors can use the options market to find smart ways to trade Tesla stock with an attractive risk to reward ratio.
Implied volatility is hovering around 64%. The twelve-month low for implied volatility is 48.64% and the twelve-month high is 95.99%. The IV Percentile is 44%.
Let’s take a look at a few different option ideas on TSLA stock given the above parameters.
Bull Call Spread
The first strategy is a bull call spread. A bull call spread is created through buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
A bull call spread is a risk defined trade, so you always know the worst-case scenario. Bull call spreads are positive delta (bullish) and positive vega (benefit from a rise in implied volatility).
Going out to May expiration, a 200-strike call option was trading around $19.00 yesterday, and the 210 call was around $14.55.
Buying the 200 call and selling the 210 call would create a bull call spread. The trade cost would be $445 (difference in the option prices multiplied by 100), and the maximum potential profit would be $555 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk defined strategy, so if TSLA stock closes below 200 on May 19, the most the trade could lose is the roughly $445 premium paid.
Potential gains are also capped above 210, so no matter how high TSLA stock might go, the most the trade could profit is $555.
In terms of trade management, if the spread dropped from $445 to $220, or if the stock dropped below 175, I would consider closing early for a loss.
Let’s take a look at another potential option strategy.
Bull Put Spread
A bull put spread is a defined risk option strategy that profits if the stock closes above the short strike at expiry.
To execute a bull put spread an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Typically, it’s better to use a bull put spread when the IV percentile is higher, but let’s look at an example.
Assuming a trader believes TSLA will stay above 175 between now and April 21, they could sell a 175-170 bull put spread.
Selling this spread results in a credit of around $1.15 or $115 per contract. That is also the maximum possible gain on the trade. The maximum potential loss can be calculated by taking the spread width, less the premium received and multiplying by 100. That give us:
5 – 1.15 x 100 = $385.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 29.87%.
The spread will achieve the maximum profit if TSLA closes above 175 on April 21st in which case the entire spread would expire worthless allowing the premium seller to keep the $115 option premium.
The maximum loss will occur if TSLA closes below 170 on April 21st, which would see the premium seller lose $385 on the trade.
The breakeven point for the Bull Put Spread is 173.85 which is calculated as 175 less the $1.15 option premium per contract.
Let’s look at one final trade which is a long call.
Long Call Option
One of the benefits of call options is that they provide leverage (this can be both a good and a bad thing).
Assuming an investor wanted to buy 100 shares of TSLA stock, they would have to invest around $19,700 at the current price.
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option.
One call option gives the investor exposure to 100 shares.
If an investor were to buy 1 TSLA 180 call option expiring on May 19th, they would only need to invest around $3,020 rather than $19,700.
The breakeven price for this call option is equal to the strike price plus the premium paid, which would make the breakeven price 210.20.
The most the trade can lose is the premium paid of $3,020, which would occur if TSLA finished below 180 on May 19th.
However, if TSLA stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
There you have three different bullish trade ideas for TSLA stock, but you can use these strategies on any stock with a bullish rating.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
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On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.