Tesla is giving mixed messages at the moment. It's skirting its 50-day moving average line and staying just above it but has been below its 200-day line almost the entire year. More importantly, Tesla stock is showing some interesting volatility skew at the moment. It has low volatility in short-term options but high volatility in the long-term options. That makes a longer-term iron condor a bit more interesting here.
Why Go Long Term For This Iron Condor?
As a reminder, an iron condor can be set up via a combination of a bull put spread and a bear call spread.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
When it comes to options, we normally look at short-term trades. Anywhere from one week to one month. But with volatility staying low for now, there is more value in selling the longer-term, higher volatility options for Tesla stock.
Longer-term trades also tend to move a little slower than shorter-term trades. That allows more time to adjust or close. On the other hand, it does mean a lower annualized return.
Another advantage is that a volatility spike, should it occur, will have less effect on longer-term options.
Option Trade Setup For Tesla Stock
To set up the option trade for Tesla stock, we'll start with the bull put spread. Using the Nov. 15 expiry, we could sell the 130 put and buy the 120 put. That spread traded for around $1.65 a share.
Then the bear call spread traded around 85 cents selling the 260 call and buying the 270 call. Both of the premiums are credits meaning the trade generates $250 in premium for one iron condor.
The profit zone ranges between 127.50 and 262.50. This can be calculated by taking the short strikes and adding or subtracting the premium received.
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As both spreads are $10 wide, the maximum risk in the trade is 10 — $2.50 x 100 = $750.
Therefore, if we take the premium ($250) divided by the maximum risk ($750), this iron condor trade has the potential to return 33%.
Managing The Trade
If price action stabilizes then the iron condor on Tesla stock will work well. However, if TSLA stock bounces around, the trade will suffer losses.
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $250 so we could set a stop loss at 1.5 times the premium or around $375.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
Also keep in mind the U.S. election is on Nov. five and might bring extra volatility with it. So it might be a good idea to close the trade before then.
According to IBD Stock Checkup, Tesla stock is ranked No. 7 in its group and has a Composite Rating of 40, an EPS Rating of 62 and a Relative Strength Rating of 16.
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 master's degree 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
