Tesla (TSLA) – What You Need To Know In The Options Market

Tesla TSLA stock is back in the news following a sell-off over the past few weeks and a bounce higher in the past few days. We'll look at what the options market is expecting in terms of the magnitude of upcoming stock moves. We'll also look at how spreads might be used in a high-premium environment to reduce capital outlay – whatever your trading view.

• Tesla options are pricing about a 10% move by March 19th, about $65 in either direction
• Options are pricing about a 14% move into April 1st, a little more than $90 in either direction.

Here's the bullish and bearish consensus with the stock near $665, via Options AI:

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Options are pricing a Bullish Consensus of about $765 and a Bearish Consensus of about $575.

Using the Expected Move to Help Create Options Spreads

Using Tesla as an example, we can see how the expected move might be used to help guide strike selection on options spreads, both debit, and credit. We can also see how option spreads can be used to help reduce capital outlay and potentially improve probability of profits (versus buying outright calls or puts).

Bullish – Debit Call Spreads

With TSLA trading near $665 we can use the 14% expected move (by April 1st) to generate spreads, both debit and credit and then compare those to outright calls and puts. Here's an example of bullish spreads based on the expected move via Options AI:

We see two credit spreads, and one debit spread. We'll focus first on the April 1st 662.5/755 Debit Call Spread. This spread is trading at approximately $34. Here's how that trade looks on the Options AI chart, with a breakeven near $697:

With this Debit Call Spread a trader is able to position for a move higher at a cost of about $34. The trade needs the stock to be above approx. $697 on April 1st in order to be profitable.

With spreads, a trader can directly compare the costs and breakeven (and probability of profit) to a call of a similar price. For instance, the April 1st 700 calls trade at about $39. In other words, a trader can consider a debit call spread, with a breakeven of $697, versus a call, with a breakeven of $739 where the spread is trading at a lower price than the call.

Here are those two trades side by side for comparison:

TSLA 662.50/755 call spread (April 1st)

TSLA 700 call (April 1st)

 

Note that by selling the higher strike call to help finance the purchase of the at-the-money call, the breakeven price (at expiry) can be lowered to a level closer to where the stock is currently trading. This in turn helps increase probability of profit in return for capping potential upside (beyond the bullish expected move).

The difference in the implied volatility of the at the money call and the out of the money call is not quite as dramatic as a meme stock like Gamestop where a trader would need to go really far out of the money to find a call trading at the same price as a call spread but it it is still relevant. Read here for the specifics on GME and other high volatility stocks.

Bearish Debit Spreads – The same process can be applied to Bearish Debit Spreads, with the TSLA April 1st 670/580 Debit Put spread trading at about $32:

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Directional Credit Spreads

Next, we'll focus on credit spreads. A credit spread an be used to express a directional view by selling premium to others. Using a bullish view as an an example, we can use a credit spread to "sell to the bears". This trade is bullish, but may be best though of as being bullish, by not being bearish:

Again, the expected move can help with strike selection for those looking to set their credit spread at the bearish consensus:

In this example, the credit spread collects about $215, as long as the stock is above $568 on expiry. With this credit spread, more has to be risked ($785) than the potential reward ($215). But, because the trade only needs the stock to be above approx. $568 on expiry, it carries a higher probability of profit.

This "bullish by not being bearish" stance is one way traders can express a view in a $600 dollar stock without the higher costs associated of trading options nearer to the current stock price. On a credit spread, the defined ‘risk', can be thought of similarly to the ‘cost' one would associate with a long option or a debit spread.

Remember, this should be balanced with an understanding of other risks specific to spreads (such as assignment and execution risk).

Bearish Credit Call Spread – The same view can be expressed for bearish positioning, in this case with the April 1st -765/+770 credit call spread:

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Iron Condors – Using the expected move to sell a credit to both the Bulls and the Bears

Finally, let's consider the scenario where a trader believes that the options market is overpricing the move in both directions and believes that a stock will stay within the expected move. Rather than not bearish" or not bullish like the directional Credit Spreads above, this trade, an Iron Condor, ‘sells the move' to both the bulls and the bears. An an example, here's an Iron Condor, selling at a $1 credit:

The Iron condor, which involves simultaneously selling an out-the-money Credit Call Spread and Credit Put Spread seeks to collect the premium (income) received if the stock stays within its expected move.

An Iron Condor is a strategy some traders utilize when they expect implied volatility to go lower. But in this case, with so little time to expiration, the best way to think of this strategy is that if the stock stays within the expected move, it is profitable. If the stock moves beyond the expected move, it is unprofitable.

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Note

Please note, any stocks and/or trading strategies referenced are for informational and educational purposes only and should in no way be construed as recommendations. The strategies depicted represent just a few of the many potential ways that options might be used to express any particular view. All prices are approximate at the time of writing. Option spreads involve additional risks that should be fully understood prior to investing.

Learn / Options AI has a couple of free tools, including an earnings calendar with expected moves, as well as education on expected moves and spread trading.

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