TSLA Stock Put Spread Profits If Support Holds

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Tesla (TSLA) stock has been on fire lately and is currently showing a best possible Composite Rating of 99 and an RS Rating of 99.




X



The EPS Rating is the only red mark on the checklist with a value of 76.

Implied volatility for TSLA stock is currently 71% which is not as high as we’ve seen previously, but still quite high on a relative basis. High volatility can provide higher option premiums than normal when focusing on option selling strategies.

A bull put spread is a defined risk option strategy that profits if the stock closes above the short strike at expiration. To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.

Bullish TSLA Stock Option Trade

Traders who think TSLA stock will not drop below 700, could look to sell a Feb. 19 700 put and buy a Feb. 19 695 put.

Yesterday, this spread was trading for around $2.00 which means a trader selling this spread would receive $200 in option premium and would have a maximum risk of $300. That represents a 66.67% return on risk between now and Feb. 19, as long as TSLA stock remains above 700.

If Tesla stock closes below 695 on the expiration date, the trade loses the full $300. The break-even point for the bull put spread is 698 which is calculated as 700 less the 2.00 option premium per contract.

If Tesla’s stock price drops below 700, I would close the trade early for a loss. Traders that think TSLA stock might pull back in the next few days may prefer to wait for a better price on the spread.

Earnings for Tesla stock is set for Jan. 27, so this trade would have earnings risk.

It’s important to remember that options are risky and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ

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