Tesla bounced back on Friday, closing up 8.2% on the day. It looks like this mini downtrend might be over. So, if you are looking for a more conservative way to play Tesla stock using options, consider the bull put spread.
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 stock trades sideways or higher. You can even sometimes land a profit if the stock trades slightly lower.
Traders who think Tesla will stay above 350 for the next few weeks could sell a Feb. 21-expiration 350-345 bull put spread for around $1.25 per set of options, or $125, according to recent trading. In this trade, you sell the 350 strike put (the higher-priced option strike) and buy the lower-priced 345 strike put for protection on the downside.
The 50-day moving average in Tesla stock has risen to 357. Plus, there is also strong technical support at 375.
Tesla Stock Today: The Bull Put Spread
Selling this spread in Tesla stock would generate roughly $125 in premium. The trade also carries a maximum risk of $375.
If the spread expires worthless that would be a 33% return in seven weeks — provided Tesla stock is above 350 at expiration.
The maximum loss would occur if Tesla stock closes below 345 on Feb. 21. In this case, the premium seller loses $375 on the trade.
The break-even point for the trade is 348.75, simply calculated as 350 less the $1.25 option premium received per contract. I would set a stop loss if the loss is equal to the amount of premium received, or in this case $125.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to IBD Stock Checkup, TSLA stock ranked No. 1 in its group and has a Composite Rating of 91, an EPS Rating of 78 and a Relative Strength Rating of 96.
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
