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Higher probability trading in Tesla - TSLA
4 min read

Higher probability trading in Tesla - TSLA

Higher probability trading in Tesla - TSLA


Making trades in a volatile and high priced stock poses unique challenges. We see more and more of these types of stocks in the market, a combination of ego and peer pressure by management in refusing to split, and enabled by a source of retail buyers through the fractional share market. For those looking to more actively trade these shares the reality is it takes a lot of money and nerves of steel. And the high underlying price has an effect on the options available, as calls and puts often look like stock quotes, but ones that can go to zero.

Tesla- TSLA is a prime example and will be the example here. Let's see what the options market tells us about the stock, and what is possible in the options.

The Set-Up

As it often does, TSLA has had a wild few months. Here's an update 3 month historical/ 3 month expected move using OptionsAI technology:

The stock was above $900 in February, below $400 in March and is now within striking distance of its prior highs. Looking out 3 months the options market is pricing a bullish consensus past $1000 and bearish consensus ~$600. Seems on brand!

Ways to Play

Here's where defining risk and using multi-leg strategies is most useful. Retail traders will often look for out of the money calls or puts to keep costs down. But those are low priced for a reason, they're low probability. Having a plan (a price target and a time frame) provides many more options than simply buying lotto tickets. Being bullish on TSLA after this run higher is not a great set-up to buy the stock or buy an out of the money call. Any moves higher from here are more likely to be within or inline with the expected move. Using $1000 as a target, here's some trades generated by OptionsAi technology (all based on a 1 lot in options or in the case of stock, 100 shares):

I want to focus on the 830/1000 call spread. It costs $55, and that certainly seems like a lot, but let's focus on the components of that trade. Here are the current prices on those two strikes, expiring July 17th:

This $170 wide spread costs $55, but it is selling a 1000 call at nearly the same price (~$47). In other words, using a spread to target $1000 only costs slightly more than buying the $1000 call outright. And the difference in probability? It's massive. The 830/1000 call spread breaks-even around $885 in the stock, giving it a probability of profit percentage in the 40s. The 1000 call? It breaks-even at ~$1047, giving it only ~27% probability of profit. Well, what about profit potential? The call spread is capped at $1000, what if the stock goes above $1000? The call spread makes up to $115 at that level. The 1000 call would need TSLA to get to $1162 to do the same thing. Are you willing to let $47 ride on that?

Moving on to a bearish target, here's a $650 target in July, in line with the bearish consensus and about a 22% move lower, from OptionsAi technology:

And the potential trades:

In this case the put spread is $170 wide so the $660 sale isn't bringing in as much money as the call spread detailed above, but what if we changed that put, and simply targeted $700?

In that case we get the cost of the put spread down to ~$55 range, with the sale of the $700 puts around $46 :

This is one of the simplest ways to see the strength of spreads versus out of the money calls, where the spread can often be priced very closely to the lotto ticket. Of course the reward is defined as well as the risk, but as you can see on the probabilities, any dreams of that lotto ticket paying off is exactly why we call it that. Look to breakevens, and probabilities of breakeven to establish trades with similar costs yet better odds.

See a part of OptionsAI technology with your own price target and demo trades in AAPL HERE

Actionable Insights from the Options Market

Earnings event expected moves
Unusual activity alerts
Spread trade education

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