Tesla broke above its 200-day moving average yesterday for the first time in six months. Tesla stock is also now back above its 21- and 50-day moving averages with improving relative strength. With Tesla reporting deliveries that beat analysts' estimates this morning, that sent the stock surging.
But with a low IBD Composite Rating of 59, it may be better to use options to take a bullish exposure without risking too much capital. One way to do that is via a bull call spread.
Tesla Stock Today: Creating The Bull Call Spread
A bull call spread starts with buying a call and then selling a further out-of-the-money call. Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Here's how we could set up a bull call spread for Tesla stock.
Going out to the September expiration, a 240-strike call option is trading around 19.30, and the 245 call is around 17.50.
Buying the 240 call and selling the 245 call creates a bull call spread. The trade cost would be $180 (difference in the option prices multiplied by 100), and the maximum potential profit would be $320 (difference in strike prices, multiplied by 100 less the premium paid).
Managing The Trade
A bull call spread is a risk-defined strategy. If TSLA stock closes below 240 on Sept. 20, the most the trade loses is the roughly $180 premium paid.
Potential gains are also capped above 245, so no matter how high TSLA stock might go, the most the trade could profit is $380.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 241.80.
In terms of trade management, if the stock dropped back below its 200-day line, I would consider closing early for a loss.
According to IBD Stock Checkup, TSLA stock ranks No. 6 in its group and has a Composite Rating of 59, an EPS Rating of 62 and a Relative Strength Rating of 32.
Tesla is due to report earnings in mid-July, so this trade would have earnings risk if held through then.
Update On Past Trades
As a trade update, the bearish butterfly on PDD Holdings has done very well and can be closed for a nice profit.
Same with the bull put spread on Arm Holdings.
Please 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 X/Twitter at @OptiontradinIQ
