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Tesla (TSLA) earnings preview, expected move, directional and neutral spreads.
4 min read

Tesla (TSLA) earnings preview, expected move, directional and neutral spreads.

Tesla (TSLA) earnings preview, expected move, directional and neutral spreads.

  • Tesla (TSLA) reports Q2 earnings after the close Wednesday (~4:10pm)
  • Options are pricing an expected move of 12% by this Friday, just over half of the move expected over the next month, which is about 20%.
  • The trading day following the prior earnings (in April) TSLA was higher by as much as +8.5% intraday before reversing and closing -2.5%.
  • On the day following the last 4 earnings, TSLA stock has closed higher twice and lower twice.

The Set-up

Here is the 1 month expected move chart for TSLA, with this Friday's expiration highlighted (+/-12.1%), via Options AI technology:

That's nearly $200 in either direction. The prior earnings in April the stock had a $100 range intraday between its high and low (about 11%) but only closed down -2.5%. The most it moved in either direction that day was +8.5%. The stock then went sideways for a few weeks before launching higher in early June and nearly doubling.

Ways to Play

Neutral - First let's look at neutral strategies that isolate the earnings itself, expiring this Friday:

The fly is quite a lot of risk so we'll focus on the Iron Condor, which is 10 wide (the call spread and put spread are each 10 dollars wide, so risk is the total credit received from the 10). Here's how it looks on the chart, with breakevens set near the expected move:

Educational note - The reason the max gain of a condor is the total credit received of both spreads, whereas the max risk is the width of 1 spread (the wider of the two if they are not equal width) is because the stock can only be beyond the range in one direction on expiration, not both. Therefore one side will always expire worthless, at max gain, even if the other side is max loss.

Bullish - For those thinking directionally the expected move can be used to help determine strike selection. Here's some trades based on a bullish price target looking out a bit further in time beyond earnings, to August expiration. The bullish consensus is about $1930 in August:

Here's a closer look at the long call spread (+1590/-1910) to the expected move:

The +1590/1910 call spread breaks even near $1687 in the stock. It costs about $97, which when looking at the individual strikes is "striking" because it is selling the 1910 calls at about the same price:

In other words, a call spread to $1910 can be bought for about the same price as buying the 1910 call outright. That breakeven is lower in the stock by more than $300. ($1687 vs $2007).

Let's now zoom in on the bullish short put spread (-1590/+1270):

This is a high probability trade, that needs to risk more to make less. For those concerned about a collapse of implied volatility following an earnings event short spreads can be a way to express a directional bias while also selling vol.

Bearish - Going the other direction in August, (bearish expected move about $1275) we can see these trades, via Options AI technology:

We see the bearish short call spread is on the other side of the advantage of the bullish long call spread above. It has to buy that really far out of the money call (1920 strike) to define its risk. But those calls are really bid up and a high implied vol, which severely damages its risk reward profile. (It is selling an at the money call at a lower vol than it is buying its out of the money call.)

The long put spread (+1600/-1285) has a much lower breakeven, and therefore a worse probability of profit, but it does not have the same issues of unfavorable IV skew as the short call spread above.

Also, the strikes of that spread can be moved to make the put spread a bit more in the money, moving the breakeven closer to where the stock is trading, and taking advantage of the skew on the upside strikes:

Tesla is likely to move a lot today before the event so exact strikes will change, but the overall percentage expected move should be roughly the same for all these examples.

Previously:

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