On November 20th we positioned for consolidation to $200 in Tesla (TSLA) shares with a near the money put calendar. Here was the original trade and rationale:
TRADE: TSLA ($220) Buy Dec 31st / March 200 Put spread for $9
-the ideal scenario is that the stock grinds a bit lower towards $200, the Dec 31st 200 put expires worthless, and the short leg offsets decay in March, while the stock’s movement towards the strike adds deltas to the position.-On Dec 31st expiration I will look to turn into a vertical spread by selling a lower strike put in March expiration.
Rationale: Forget valuation, it doesn’t interest me in a stock like this, but financing long premium directional trades in a high vol name like TSLA makes sense.
The stock is unchanged more or less from our entry and at 220 the calendar is now worth about 10.50. The decay of the Dec31st put has been the major factor for the slight profit but another factor has been that implied vol in March has spiked alongside the broader market vol spike:
A calendar is long vega (long vol), so a vol spike is exactly what you are rooting for along with a move towards strike. But, it also means we can’t sleep on the trade. If the market did find footing here than March vol can easily come in, and if it coincided with a move higher in TSLA shares it the trade could quickly become a loser.
Therefore we’ll need to protect against vol coming in by rolling the short put out a month. Here’s the update:
Action: Bought to Close 1 TSLA ($220) Dec31st 200 put for 1.70
Action: Sold to open 1 Jan 200 put at 4.30
New position: Long TSLA ($220) Jan/March 200 put calendar for 6.40 (currently worth 7.90)
We have now reduced premium risk from the original $9 to $6.40. We have altered the risk/reward in other ways though as prior to the roll the position was about -15 deltas, after the roll it is about -8 deltas. So if the stock was to make a quick move to 200 in the coming 2 weeks it will be less profitable than had we not done the roll. But implied vol is our concern here as the short Dec31st put no longer offered much protection against that happening, whereas the Jan short put does.