Anatomy of a Trade – $TSLA: Electric Charge

by CC November 4, 2015 11:18 am • Education

Tesla (TSLA) reported q3 earnings last night that missed estimates but indicated orders will be higher next quarter. The stock is up over 10% this morning. Yesterday we detailed some event trades and I wanted to go over them again and discuss trade management. The first was a stock alternative/ replacement that looked to define risk to the downside into the event while keeping you in the game if stock if was to go higher:

Stock Alternative/Replacement – Buy the TSLA ($211.50) Nov 210/235/260 call fly for 6.25

Rationale – This trade defines risk to 6.25 and targets its mid point (and max gain) right where the 200 and 50 day moving averages converge. Its potential payout is 18.75 at that point. The risk here as a stock alternative is if TSLA squeezes much higher than that because profits begin to trail off above that mid point. Those looking to avoid that situation may want to do the 210/240 call spread outright. That’ll cost about $11 with a payout potential of $19. Of course, your breakeven is even higher than the fly and you’re buying more elevated vol, but there’s no fear of actually losing money on a massive move higher.

With the stock at 231.50 the fly is worth about $13. That’s slightly more than a double on the original trade but not as good as if you were simply long stock. But it has the chance to be much more profitable if the stock goes sideways to slightly up from here. At 235 on November expiration this trade would be worth $35. The theta on the position means its gains about 30c a day in value given no moves in the underlying or implied vol. That collection rate increases exponentially the closer it gets to November expiration. As far as trade management it’s probably best to sit on this and allow for more money to come in, with a stop in the trade if the stock were to reverse and head lower. The call spread alternative mentioned (210/240) that cost $11 yesterday is worth about 18.50. That is more bullish ere than the fly so is more of a stock decision than the fly here. If you did that you would want to stay in it if you think the stock has more room to the upside over the next few weeks. If you think the move today is what you wanted, you would just want to close for a profit.

The next trade idea was a simple event hedge versus an existing long position

Hedge vs Long Stock – Against 100 shares of TSLA ($211.50) Buy 1 Nov6th weekly 200 put for $4

Rationale – If you’re long TSLA and want to be able to hold it long term you should protect yourself at potential breakdown levels into volatile events. You want to lose this $4 with the stock higher, but be glad you had it just in case. The weekly 200 puts protect you at the breakdown level of $200 (where there is no support below, for a long way). The weeklies make sense just to play the event itself as dollar cheaply as possible.

As we said, with a dollar cheap hedge you’re rooting for the stock to make a move higher much more than what you spent for the hedge. And that’s what happened here. The hedge is worthless and cost $4 of the $20+ move higher. Not bad if you are in the stock for the long term and simply worried about a big move lower putting your gains at risk.

The final trade ideas were directional. Both were calendars and looked to take advantage of the pumped implied vol in the weeklies to finance December directional positions:

Directional – Calendars

Bullish: TSLA ($211.50) Buy the Nov6th/December Regular 230 call calendar for 4.40

Bearish: TSLA ($211.50) Buy the Nov6th/December regular 190 put calendar for 4.10

Rationale – Vol is pumped and it’s a tough way to make a living picking a direction using long premium strategies into an earnings event. For those with a directional inclination, and think the stock could move in line with the implied earnings move, then one way to express this view is with a calendar, selling the weeklies to own December. Both of these trades finance December with a sale of about 2 dollars in the options expiring this Friday. The ideal situation for these trades is for TSLA to move in line with it’s implied move and have the weeklies expire near worthless. Massive moves in either direction put these trades at risk, but you are only risking the premium spent for the structure.

The bearish calendar is worth about $2 here. That can simply be closed for the loss or rolled higher if you’re even more convinced of weakness in the stock from here on out. The bullish calendar was perfectly placed. It is worth around $8 here but has great potential if the stock were to move higher over into year end. As far as management you’d want to turn this into a vertical spread in December at some point this week. Ideally the stock is right around $230 on Friday (when the weeklies expire) At that point you could close the weeklies for next to nothing and sell a higher strike call in December, like the 250s. Its possible to then have a 20 wide call spread for a credit or close to free (depending on when you do the roll).