Tesla And The S&P 500: Expected Moves And Spread Trading

The long anticipated addition of Tesla TSLA to the S&P 500 this Friday will be a source of volume and volatility in both Tesla and the SPY in the days leading up to and after. We'll look at the expected moves for both and how it's useful in strike selection.

What is the Expected Move?

The expected move is the amount that options traders believe a stock price will move up or down. It can serve as a quick way to cut through the noise and see where real-money option traders are pricing the future of a stock. On Options AI, it is calculated using real-time option prices and displayed on a chart.

Knowing this consensus before making a trade can be incredibly powerful, regardless of whether you’re using stock or options to make your trade. A helping hand with setting more informed price targets as well as a useful basis for starting strike selection. Let’s look first at Tesla into Friday, and then SPY.

Tesla

With Tesla stock near $615 the expected move by this Friday is above 6%. Bullish consensus in for this Friday is around $653 and the bearish consensus near $575.

The expected move into year end for the stock is about 13%. In other words, nearly half of the move expected into year end is being priced for the days leading into the addition.

SPY

With the SPY $370, the expected move by this Friday is about 1.1%. The bullish consensus just above $374 and the bearish consensus jest below $368.

Tesla - Income Generating Strategies

First, we’ll look at a neutral view and income-generating trades. This is “selling the move” to both bulls and bears. A view that both buyers of calls and buyers of puts are over-estimating the size of any potential stock move. Premium (or income) received from selling options is kept if the stock stays within a range.

The Iron Condor is one strategy used for this purpose. The Iron Condor involves selling a call spread and simultaneously selling a put spread, generating upfront income to the seller and offering defined-risk if things go wrong. Basing an iron condor on the current expected move  that range is between 575 and 660 (the short strikes), with breakevens just beyond that ($664 and $571), as seen on the chart below:

In this case the risk is around $400, to make up to $600, with max profit anywhere inside the short strikes, and max loss anywhere outside the long strikes

Tesla Directional Trading – Bullish

Using a bullish price target, we can directly compare two spread trades also based around the expected move: a debit call spread to the bullish consensus, and a credit put spread, to the bearish consensus:

Comparing trade types directly, we can see the difference in cost and probability of a call spread (to the expected move) versus an outright call. And even more importantly, in a stock like Tesla, where upside calls can get skewed higher, we can see that a +615/-650 call spread at a cost of around 12.50 is not that much more expensive than buying the 650 call outright, but the spread has significantly higher probability of profit with a substantially lower breakeven:

Tesla Directional Trading - Bearish

The same concepts apply to bearish spreads to the lower expected move:

Beyond the Expected Move

Those are examples for either positioning to the expected move or inside the expected move. What about outside? For those expecting moves beyond the expected move, you can look to take advantage of the market potentially underpricing the possibilities. In this case, the expected move can still be a useful guide. Taking an example price target, to $700, well outside the expected move:

Zeroing in on the +650/-700 call spread, the trade starts at the bullish consensus but still uses the power of a spread to contain costs. Here's how that looks on the chart:

And as we see on the strikes themselves, the 700 call is being sold around 2.25, lowering cost versus an outright call:

A note about Tesla and this particular expiration

After-hours moves could be wild this Friday so extra precaution about any remaining open positions that expire that day is warranted. The after hours moves could turn what was an in the money or out of the money positions into surprise assignments. As with any options position that involves short strikes, but particularly in this case, short strikes within striking distance into the close can be de-risked from surprises by being closed before the bell.

Summary

The expected move can provide actionable insight to consider before making any trade, particularly into an uncertain event. Whether gut-checking your own expectations versus the options crowd, generating trade ideas from option market signals, or for more informed strike selection. To learn more about expected moves, Options AI has a couple of free tools including an expected move calculator as well as an earnings calendar with moves, both free to use.