With the news that Ford loses more than $60,000 on every EV it rolls onto the showroom floor, traders and investors have turned their eyes back to Tesla as a viable EV company that can withstand the ebbs and flows of the economy over time.
Tesla has been a company that has brought with it a strong investor following, but its stock price has been drifting steeply downward since February 2022. As this year has continued, however, it has held the lows and continues to chop around the key levels of support.
Combine that with higher implied volatility levels, and we find a sweet spot selling premium through the peak summer months when broad trading in the indexes could be choppy.
The trade is a short iron condor with short duration expiring in July. It allows us to make money when the price goes up a bit, goes down a bit or essentially does nothing. This trade is a neutral position and anticipates the stock holding between 150 and 200 over the next 70 days or so. It is similar to the Tesla iron condor outlined Thursday in this space.
- Sell to open TSLA July 21 monthly 200 calls
- Buy to open TSLA July 21 monthly 205 calls
- Sell to open Tesla July 21 monthly 150 puts
- Buy to open Tesla July 21 monthly 145 puts
The total credit collected is $2.25 per spread, or $225 for a block of 100 shares. The strategy is to allow time decay to work in our favor, so we are paid while we wait.
Defending The Tesla Stock Trade
With a Composite Rating of 59, Tesla stock is ranked eighth within the automotive manufacturers industry group, which is quite a bit lower than our normal choice for a short iron condor.
The investor community has been buoyed by the news that Elon Musk has found a CEO for Twitter. That should allow him to redirect his energies toward the automaker. This news has folks buzzing again that the stock will eventually lift out of its doldrums. This is the reason for shorter duration on the iron condor.
We collect $2.25 of a $5 spread between the strikes; this is a big credit for 70 days duration, making it an attractive choice.
The potential high profit line for the Tesla stock trade is calculated in the following way:
The difference between the strikes of the spreads ($200-$205 and $150 to $145) equals $5. Subtract the collected premium of $2.25, which makes $2.75 the risk event.
The break-even prices (before commissions) are $202.25 and $147.75.
Understanding The Short Iron Condor
Using a short iron condor when a chart is carving out a new floor is one of my favorite plays. Once it breaks these ranges, we will be able to revisit the stock and trade it directionally.
Again, it is a neutral strategy that allows us to be paid while we wait for the breach of key levels.
The market currently sits in a unique position with a low volatility reading in the VIX. But underneath, the level of volatility is beginning to rise. This can lead to whipsaw price action. Our goal then is to become more powerful traders in the current environment.
Tesla Stock Trade Management
Identify the key chart levels.
The breakout level is $200; the breakdown level is $150. Our premise is that this chart is likely to fade at a retest of its highs, and bounce off its lows.
Scenarios For Tesla Stock Iron Condor Trade
What could happen:
- The stock moves between the strikes and does not breach and hold above or below our key levels noted above.
- The stock moves past the break-even levels and begins to erode profit margins.
- The ideal motion I like, especially as we have news-heavy cycles, is to wait for the value of the option to erode over time and take the position off once we get to a 50% profit line.
Set an alert for the prices on the edges and when they trigger, give the trade a few days to wiggle through and then make your decisions based on your own risk profiles.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
