Tesla Motors Inc (TSLA) will announce earnings after market close today. Undoubtedly TSLA has been THE MOMENTUM stock of the year so naturally the expectations are high. Shorts as percent of float is about 26.7% but based on short interest ratio it is roughly 1.6 days equivalent volume.
Options are implying a move of $20 in either direction. 52wks high is $194.50 and 52wk low is 29.33. I am expecting a move of roughly $30 in either direction i.e. to 205/145. So how can one trade TSLA earnings using options? There are various ways. Some of the most popular ways are-
- Buy a call or a vertical spread (If you are bullish)
- Buy a Put or a vertical spread (If you are bearish)
- Sell Straddle/Strangle (for a range bound move expectation)
- Buy straddle/Strangle (assuming a much wider move than priced by options)
And then there are more strategies that you may want to check out here.
There is no easy pick. Whichever strategy you choose, there is a directional risk as well as implied volatility risk (if you are a volatility buyer).
Here is one more alternative. It is called REVERSE IRON CONDOR. This trade makes money as long as the underlying makes a big move in any direction. If however, underlying doesn’t move by the expiration date, the trade will lose all the premium paid.
Here is a trade structure for TSLA-
- Buy to open Dec 165/160 Bear put vertical @2.10 AND
- Buy to Open Dec 180/185 Bull call vertical @1.80
- Total cost/maximum risk: $3.90/$5 spread
- Maximum gains: $5.00-$3.90= $1.10 or +28%
- Breakeven points 161.10 and 183.90
What are the risks-?
- If TSLA doesn’t move beyond 161.07 and 183.93 by Dec expiration, all the premium paid will result in full loss.
- There is IV risk; however, if TSLA moves beyond those breakeven points, the trade will still be profitable.
This is just one of the ways to trade earnings. You may structure a similar trade but use Nov-8 expiry or any other expiry set. The closer it is, bigger the impact on trade. There is a trade off with respect to time, move and implied volatility drop. Or you may choose any other alternative strategy. There are numerous possibilities.
Alternatively, if you think TSLA is not going to move as much, you might sell this condor vs. buying. Your gains will now be $3.90 for each $1.10 risk. Hers is how the risk reward chart will look like-
Whichever strategy you choose, assume that earning event has 50/50 probability at best (for win/loss). If you are comfortable with this kind of ratio, only then you should think of going through earnings.
Disclaimer– I don’t have any TSLA positions as of this writing. But I can change my positions any time without any prior notice. You should do your due diligence, consult your advisor, before investing any single dollar on any trade mentioned on this page/blog.
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