Fari Hamzei was recently a guest on #PreMarket Prep, a daily trading idea radio show hosted by Joel Elconin and Dennis Dick.
Speaking about Tesla Motors Inc TSLA ahead of its earnings report Wednesday, Hamzei acknowledged that EPS ultimately trumps charts, however, the chart for Tesla currently says “buy me.”
Hamzei observed that the recent bottom in the stock was on January 14, which was a -3 sigma low. Following the low was a +3 sigma move. The strong move higher, according to Hamzei, is an indicator to buy the stock.
To be on the safe side, however, especially due to sales concerns, traders can hedge the position by using call or put spreads. The option positions do not need to symmetrical and this is “where the art comes in, not the science,” said Hamzei.
As an example, Hamzei suggested that a trader could buy 20 contracts on the upside and 10 or 12 contracts on the downside.
As for choosing strike prices, Hamzei would base the decision on the sigma charts to see how the prices move and then look for specific option chains with sufficient liquidity.
Lastly, Hamzei would analyze the option Greeks to understand the combined Delta, for example.
Hamzei cautioned that after the trader makes a decision, there is no guarantee that both legs will be filled. Traders have to enter the position though a “workable procedure” in order to move forward.
Ahead of releasing its earnings, Tesla Motors Inc traded at $210.20, down 2.82 percent.
Listen to the show here:
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