When To Exit A Winning Tesla Trade

One of our “euphoria” trades last month was a bullish bet on Tesla, Inc. TSLA hitting $395 by December 27th.

With Tesla shares blowing past that into the $400s this week, one of our subscribers asked when he would be able to exit the trade. Our friend David Janello, PhD, CFA, a veteran options trader, wrote the guest post below in response.

Authored by David Janello, PhD, CFA at Nuclear Option Trading

The Best Way To Exit A Winning Vertical Spread

We got a very intelligent question from a reader over at the outstanding Portfolio Armor Substack. In this case, the reader had just put on a winning vertical spread trade in TSLA. He was wondering how to estimate the exit price now that the spread was deep in the money.

The trade in question was a long TSLA 390-395 Call Vertical Expiring on December 27th. This recommendation came out when TSLA was well below the strike and the stock blew above the top strike of the vertical generating an unrealized profit. The reader wanted to know when the vertical spread would trade at 4.50.

The best way to estimate the future value of the vertical is to use a technique called Previewing, and compare the current pricing to various scenarios in the future.

The December 27th Vertical

Let's start off with where the Dec 27 Vertical is trading today, December 13:

As we see in the screenshot, with TSLA trading at about 425- per share, the Call Vertical is quoted at 3.90 at the midpoints. This is still 1.10 away from maximum value of the spread, which will happen if TSLA closes at or above 395.00 at expiration on December 27. In other words, the market is telling us that there is a non-zero chance that TSLA might fall below 395- before then and is marking the price accordingly.

Let's look at a couple of comparison quotes to get a feel for what might happen to this spread as the clock ticks down toward expiration.

Here is the same spread expiring on December 13th.

A December 13th Vertical

As we see here, the spread midpoint is now quoted 4.93, and is approaching maximum value since we are close to expiration.

Let's look at the spread expiring on December 20th:

We see that the same spread expiring on December 20, the spread is quoted 4.20. That’s close to our reader’s 4.50 target. Another day or two of time decay should bring the spread close to 4.50.

So, to answer the readers question of "what will it take for my spread to hit 4.50". The answer is that if he or she waits for another 7-8 trading days, that the spread will probably trade for about 4.50 if TSLA stays flat here.

How To Estimate The Impact Of Moves In Tesla

You can do this by looking at spreads above and below the 380-385 strikes over the same expiration dates. Note that the spread midpoint prices are a bit erratic. This is because the size of the options in each leg is astronomical. It’s over 43- per contract per leg.

What is a good estimate for the price swings in TSLA stock over this time period? Using the ATM Straddle price offers a good estimate of the range of the stock going forward. The TSLA Dec 20 425.00 Straddle is quoted at 14.22, which suggests that TSLA will move +/- 7 points over the next week.

As I mentioned in the book The Nuclear Option: Trading To Win WIth Options Momentum Strategies, previewing is a great way to visualize future scenarios. You don’t need to calculate Greeks and theoretical values.

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