Tesla has had an interesting last month as it tried to make new highs only to find selling pressure following a combination of earnings and an odd flame war between Elon Musk and a New York Times writer. It has since recovered and is back near its highs.
About a month ago, with the stock at 37.50, we initiated a 40 strike call calendar, selling March to buy June for 1.60. Here’s Enis from the original write-up:
Bought the TSLA ($37.50) Mar / Jun 40 Call Calendar for $1.60
-Sold 1 Mar 40 call at $1.60
-Bought 1 Jun 40 call for $3.20
Based on where I expect June vol to go in the next month, I think this trade will be profitable as long as TSLA is trading between 34 and 46 by March expiration. That’s a very wide range of potential profitability, with earnings as the only main event that could move the stock outside of that wide range. I expect the stock’s 40% short interest to act as support on the way down, in addition to the important 35 support area that could attract natural buyers. In short, I like the risk/reward of playing for TSLA to settle in that wide range by next month’s expiry.
With the stock having rallied back to 38.50+ from a recent low of 34 the structure is currently priced at around 2 dollars. The March calls expire on Friday so ideally the stock will stay in these upper regions of its recent range which would allow the March 40 calls to decay while June stays bid.
Speaking of June, the current vol of 43 is quite historically low in the name as shown here on a two year chart (IV30 red vs HV30 blue)
So what to do now?
Because June IV is so low that gives us a few options on this structure. Like I said before we’d ideally like to see March expire worthless or be able to close it for cheap near 40 in the underlying by Friday. At that point we could either take the profits from the trade and move on or look to continue to spread the June option, most likely with another calendar structure.
What’s interesting about the rolling calendar idea is June definitely captures TSLA’s next earnings report while April definitely doesn’t and May may miss it by a few days as well. This was one of the things that initially drew us to this trade as June was an awful long time to be able to get that structure for the price we did.
The risk to the trade is a sharp move down or up in the stock before Friday. June has actually gone down IV-wise more than we initially figured but so has everything in the market (see VIX). What this structure did do was protect from the vol collapse we’re seeing by being short near term gamma, as I wrote about on Friday.
We’ll check in Friday with updated plans.