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What are your options - Tesla Earnings Trade Setups
Koen Hoorelbeke
Investment and Options Strategist
Summary: The article discusses Tesla's upcoming earnings release for Q2 2023 and suggests three potential trading strategies based on different market views. The market expects a significant up or down move of around 8% in Tesla's stock price following the earnings announcement.
Tesla Earnings Preview: 3 Trade Setups
Tesla Inc. (TSLA) is set to release its earnings for the quarter ending June 2023 on Wednesday, July 19th, after the market closes. The market is expecting some volatility, with an at-the-money (ATM) straddle suggesting an expected move/range of approximately +/- $22.61 by this Friday. Based on last Friday's close this means the market expects an up- or down-move of around 8%.
With Tesla's Implied Volatility (IV) Rank at 21.64%, we are focusing on strategies that receive a credit upfront and profit from a potential collapse of IV post-earnings.
It's important to note that the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Here are three trade setups to consider based on your market view:
Bullish: Vertical Put Spread
If you're bullish on Tesla, consider a vertical put spread. This strategy involves selling a put option while simultaneously buying another put option at a lower strike price. The goal is for the stock to stay above the strike price of the sold put.
Here's the setup:
- Sell to Open: 21-Jul-23 275 Put
- Buy to Open: 21-Jul-23 270 Put
The maximum risk for this trade is $292, which is the difference between the strike prices of the two options ($275 - $270 = $5) times 100 (since each option contract represents 100 shares), minus the net premium received.
The maximum profit is the net premium received, which is $208.
The breakeven point for this trade is $272.92. This means that you will start to make a profit if TSLA's stock price is below this level at expiration.
The probability of profit is 62.82%. This is calculated based on the delta of the short leg.
The trade has 4 days to expiration (DTE) and the implied volatility rank is 21.64%.
The position greeks are as follows: Delta is 0.083, and Theta is 0.116. These values indicate the sensitivity of the position's value to changes in the stock price and time decay, respectively.
Neutral: Iron Condor
If you think that Tesla will stay in the expected move range right after the earnings, consider an iron condor. This strategy involves selling a call spread and a put spread on the same stock with the same expiration date. The goal is for the stock to stay between the strike prices of the sold options.
Here's a possible setup:
- Buy to Open: 21-Jul-23 315 Call
- Sell to Open: 21-Jul-23 310 Call
- Sell to Open: 21-Jul-23 250 Put
- Buy to Open: 21-Jul-23 245 Put
Reason | High Implied Volatility (IV) due to numbers out on 19th July after market close |
Expectation | Limited movement in Tesla shares after releasing the figures and imploding IV |
BEPs on expiry | Profit between $248.89 and $311.11 |
Max Risk | If you get a premium of $1.11 the max risk/loss would be $5 - $1.11 = $3.89 per share. 1 contract = 100 shares. Max Risk/Loss = $3.89 * 100 = $389. |
For Who? | Only for clients to adhere to the view that the numbers will not cause a move outside the expected move in the share price of Tesla |
Trade set up | Sell the Iron Condor in the last 1 – 4 hours of trading on Wednesday 19th for around $ 1,45 - $1,50 (stagger in case of bigger positions) |
Closing | A GTC (Good Till Cancelled) order to close the position at $0,30 (stagger in case of bigger positions) |
Emergency | If there is a big move in the underlying outside the bandwidth of the long strikes, monitor closely and close position latest on the 21th of July 2- 4 hours before expiry |
Probability of Profit | 79.12% |
Expected Move | for 21th July ’23, based on ATM straddle: +/- $22.61 |
IV Rank | 21.64% |
Bearish: Vertical Call Spread
If you think that Tesla will drop after the earnings-release, consider a vertical call spread. This strategy involves selling a call option while simultaneously buying another call option at a higher strike price. The goal is for the stock to stay below the strike price of the sold call.
Here's a possible setup:
- Sell to Open: 21-Jul-23 285 Call
- Buy to Open: 21-Jul-23 290 Call
The net premium received for this trade setup is $154 (the difference between the premium received from the sold call and the premium paid for the bought call). The maximum risk for this trade is $346, which is the difference between the strike prices minus the net premium received. The maximum profit is the net premium received if TSLA stays below the strike price of the sold call ($290) at expiration.
The breakeven point for this trade is $291.54, which is the strike price of the sold call plus the net premium received. This means that TSLA needs to be above $291.54 at expiration for the trade to be profitable.
The trade has a probability of profit of 61.79%, and the implied volatility rank is 21.64. The position delta is -0.0706, and the position theta is 0.0727. These Greeks indicate the sensitivity of the position to changes in the stock price and time decay, respectively.
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