- Tesla made headlines today, surpassing Toyota in to become the most valuable car car manufacturer int he world.
- It's been a straight line higher for the stock since its March lows near $360 in March.
- The risk of shorting stock is too much for most traders, and the cost of puts and even put spreads are really expensive for anything with decent odds.
- We look at some ways to go short inexpensively with defined risk, using multi leg options.
Heres the 3 month expected move chart via Options AI technology:
And the 1 month:
Way's to Play
First let's look at the cost of puts. The July 17th expiration 1100 puts are nearly $50, meaning a 1 lot would put $5000 dollars at risk and not breakeven until 1050 in the stock. Going down the chain is even worse, with the July 17th 1000 puts $17 and needing a massive reversal to be in the money. Buying put spreads improves things a little, and obviously selling call spreads improves probability but I wanted to take a look at a trade that has good risk/reward while keeping costs low, and of course, with defined risk.
Here is an Iron Condor, used not as a neutral trade, but as a way to draw the line in the sand just above here in the stock. I'll go through what's going on here below:
What's happening in this trade? It is essentially drawing a line in the sand with the stock here (Any close above $1126 in the stock on July 17th and it loses money). But below that level, it makes money, and it makes a max gain anywhere between $1120 and $950. The tradeoff here is it then begins to lose money again below $944. But that's a pretty big range for TSLA to reverse towards without getting hurt.
What are the components of this trade and how does it work? Here are the 4 strikes involved, via Options AI:
This is selling the 1120/1130 call spread (~$5.50), and adding another dollar of short premium to that with the sale of the 950/940 put spread ( ~$1).
What that translates to as a package is about $350 in risk for the potential of $650 in gains anywhere below 1120 in the stock.
For those looking for a way to fade TSLA over the next few weeks from today's all time highs it's a structure worth considering. Of course it's a knife's edge because the stock continuing higher from here is an almost immediate max loss with only 2 weeks to expiration. But any reversal from here and this structure is in good shape for a long way below in the stock, and offers a great payout if that were to happen, especially when compared to short stock or long puts.