Tesla broke above the 50-day moving average Tuesday and is showing improving relative strength. Tesla stock also received a new buy rating from Deutsche Bank with a 295 price target. Traders who are willing to bet that Tesla will stay above 200 for the next few weeks could look at a bull put spread trade.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if Tesla trades sideways or higher and even sometimes if it trades slightly lower.
With Tesla stock trading around 226, if we use the Oct. 11 expiration, we can sell a 200 put and buy a 195 put for around $1.15.
Tesla Stock Trade Could Return 29% In Four Weeks
Selling this spread would generate roughly $115 in premium with a maximum risk of $385.
If the spread expires worthless, that would be a 28.9% return in four weeks — provided Tesla is above 200 at expiration.
The maximum loss would occur if Tesla closes below 195 on Oct. 11. That would see the premium seller lose $385 on the trade.
The break-even point for the trade is 198.85. which is calculated as 200 less the $1.15 option premium per contract.
Stop Loss For Tesla Trade
I would set a stop loss if the loss is equal to the amount of premium received. In this case, it would be $115.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, Tesla stock is ranked No. 3 in its industry group. It has a Composite Rating of 67, an EPS Rating of 57 and a Relative Strength Rating of 81.
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
