On June 11th, when shares of Tesla (TSLA) were in the midst of a nice little rally after making multi-year lows the previous week, I detailed a put calendar strategy (Tesla Stalling?) to set up for a bearish trade into their Q2 earnings in July:
For those looking to set up for an earnings disappointment in late July, but worried about a short entry here… one might consider a put calendar, selling a short-dated out of the money put and using the proceeds to help finance the purchase of an out of the money longer dated put of the same strike… for instance…
Bearish Trade Idea: TSLA ($215) Buy June – August 195 Put Spread for $13
-Sell to open 1 June 195 put at $2.50-Buy to open 1 Aug 195 put for $15.50
Break-even on June expiration:
The ideal scenario is that TSLA stock is near 195 on June expiration and the short 195 put expires worthless or can be covered for a small amount and you are left long August 195 put for $13 or about 6% of the stock price.
The max risk of the trade is $13 on a sharp move higher than current levels or a sharp move below the $195 strike price.
With the stock closing at $221.86 on Friday’s close, the near-dated short June 195 put expired worthless leaving long the Aug 195 put for $13.
With the stock now $224 as I write, the August 195 put is worth about $10, for a loss on the trade of about $3 mark to market.
So let’s consider our options… If you thought the stock is likely to hold and possibly reignite its rally of the last couple weeks then it would make sense to close the trade for a loss now as the $195 strike is fairly far out of the money.
But If you thought the stock might consolidate around here and any commentary in early July on Q2 deliveries might cause another leg lower but not more than 10% lower, and the real event for the stock will be their Q2 earnings in the last week of July, then it makes sense to stick this one out, and further reduce the premium at risk by selling the July 195 put against the Aug 195 put that was left long.
With the stock at $224, the July 195 put can be sold at $4, against the original calendar that cost $13, this would result in a max risk of $9 on the trade. The idea here is that as we get closer to July expiration, with the stock above $195 to buy to close the short July 195 put and then sell a lower strike put in August against the long 195 put and turn into a vertical put strike, further reducing the premium at risk while also zeroing in on the earnings event.
Action: TSLA ($224) Sell to open 1 July 195 put at $4
New Position: TSLA ($224) Long July – Aug 195 put calendar for $9
Break-even on July expiration:
The ideal scenario is that TSLA stock is near 195 on July expiration and the short 195 put expires worthless or can be covered for a small amount and you are left long August 195 put for $9 or about 4% of the stock price.
The max risk of the trade is $9 on a sharp move higher than current levels or a sharp move below the $195 strike price.