Options Corner: Tesla Offers A 65% Probabilistic Edge That Favors The Bullish Trader

Electric vehicle manufacturer Tesla Inc TSLA is struggling this year and it's not a particularly surprising outcome. Overall, the market has only just started to look encouraging after being roiled by the wide-ranging uncertainties of President Donald Trump's tariff policies. Adding to the woes of TSLA stock, CEO Elon Musk's close ties to the administration made for an unwanted distraction. But with Musk regaining focus, options traders should give another look at TSLA.

On paper, circumstances look rather ominous for the vaunted EV leader. Most notably, Tesla's first-quarter earnings report raised fundamental concerns. In particular, revenue of $19.34 billion was down 9% on a year-over-year basis. Further, the sales tally missed Wall Street's consensus target of $21.35 billion.

Conspicuously, the core automotive revenue of $13.97 billion was down 20% against the year-ago period. Management explained the miss in part being attributed to a lower average selling price for its vehicles, which speaks to broader economic challenges mixed with rising competitive pressures.

Throughout this time, Musk had diverted an increasing amount of time on his political endeavors. This development carried two challenges. Number one, any time not devoted to Tesla meant more leadership resources wasted that could have gone toward righting the ship. Number two, Musk's views have leaned toward nationalist right-wing ideologies, a matter that's practically guaranteed to arouse unnecessary controversy.

As such, it wasn't shocking that prominent investors like Cathie Wood trimmed their position in TSLA stock. However, the good news in all of this is that Musk is departing from his Trump administration role. To Wedbush Securities analyst Dan Ives' point, the move represents "music to the ears of Tesla shareholders with Musk now laser focused on Tesla and the autonomous vision ahead."

It could also mean a chance for quick profits.

Quantitative Framework Bodes Well For TSLA Stock

Investors are likely cheering the news that Musk will finally return, so to speak, to Tesla. The decision to depart the controversial government role symbolizes the "why" of TSLA stock. But when it comes to options trading, market participants are more concerned about the "how" — such as how much, how fast and how likely.

In other words, options traders operate in an ecosystem of probabilities, which makes perfect sense considering the framework. In the investing landscape, participants enjoy considerable flex in their speculation. In part, that's why Wall Street analysts give 12-month price targets. That's a long time for a thesis to pan out.

With options? Strategies are successful based on reaching defined profitability thresholds within an allocated time period. Failure to meet both standards may mean that the entire trade goes bust. Therefore, traders require more specific datapoints to finetune their speculative practice.

To accommodate this requirement, it's important to consider market breadth or the pattern of accumulation and distribution. Market breadth is effectively demand and demand is a discrete, binary event. Such events can be categorized and quantified over long periods of time in a way that scalar signals (such as stock prices) cannot.

Subsequently, traders can look back in time and quantitatively determine how specific demand structures spark forward movements, thus enabling predictability. This is also why price (and thus standard technical analysis) is not a reliable predictor of the future. It's difficult to categorize price because it changes so much, especially over time.

Demand, in contrast, is just that, demand. It's either happening or it's not.

As it pertains to TSLA stock, in the past two months, it printed a "6-4-U" sequence: six up weeks, four down weeks, with a net positive trajectory across the 10-week period. Notably, in 65.62% of cases, the following week's price action results in upside, with a median return of 4.1%.

On Friday, TSLA stock closed at $346.46. If the implications of the 6-4-U sequence pan out as projected, it may rise to $360.66 in short order, perhaps in a week or two. Should the bulls maintain control of the market, it's possible that TSLA could rise to $366, perhaps even $370, within the next three weeks.

An Aggressively Sensible Trade For Tesla

Those who want to play the numbers game aggressively but smartly may consider the 350/355 bull call spread expiring June 20. This transaction involves buying the $350 call and simultaneously selling the $55 call, for a net debit paid of $230. Should TSLA stock rise through the short strike price at expiration, the maximum reward is $270, a payout of over 117%.

Primarily, what makes this transaction so attractive is that the market makers have a dim view of TSLA stock. As a baseline, the chance that a long position on any given week will be profitable is 54.19%. That's good but is only a modest 4.19% edge over a coin toss. But what the market doesn't realize is the 6-4-U sequence, which tends to shift the above probability to 65.62%.

That's almost a 16% edge over a coin toss. If one believes in this statistical framework, then there's an obvious incentive to apply a debit-based options strategy to take advantage of these "free odds."

To be sure, traders can get more aggressive with the short (second) leg of their bull spreads by aiming for $360, perhaps even higher. Such a decision will come down to individual risk tolerance. Personally, if market makers are willing to give you triple-digit payouts, taking the lower probabilistic risk may be more prudent.

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