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What are your options - Tesla Q4 earnings

Options 10 minutes to read
Koen Hoorelbeke
Koen Hoorelbeke

Investment and Options Strategist

Summary:  The article provides an analytical overview of three distinct options trading strategies applied to Tesla (TSLA) stock in the context of its upcoming earnings release, against the backdrop of heightened Implied Volatility (IV). Each is designed to exploit the IV environment to potentially benefit from the post-earnings volatility contraction. These strategies serve as examples of how traders might position themselves in anticipation of Tesla’s earnings report, with considerations for risk and market expectations.

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What are your options: Tesla Q4 earnings

Introduction

Ahead of Tesla's earnings release, the market has observed an increase in Implied Volatility (IV), which is characteristic prior to such corporate announcements. The elevated IV reflects market anticipation of the forthcoming financial results and their potential impact on the stock’s valuation. Given Tesla's projected slowdown in revenue growth and the decrease in expected earnings per share, the options market is pricing in significant uncertainty.

This heightened IV environment is an important consideration for options strategies. In the context of the expected volatility contraction post-earnings, we analyze three options strategies on Tesla:

  1. A short put vertical spread suggests a bullish outlook, positioning to benefit from premium decay should the stock price remain stable or increase.
  2. An iron condor strategy, indicating a neutral market stance, aims to capitalize on limited stock price movement and the potential for premium capture.
  3. A short call vertical spread portrays a bearish perspective, anticipating a potential decline in the stock price.

These strategies are constructed to take advantage of the current elevated IV, with the expectation of IV reduction after the earnings announcement, a typical occurrence that can favor strategies involving the selling of options premiums.

For a detailed assessment of Tesla's financial outlook and market positioning, refer to the analysis by Peter Garnry in the related articles section at the bottom of this page.

Important note: 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.

  
2024-01-24-00-TSLA-Chart
Chart of Tesla, showing (some of) the strike levels discussed in the article below, also showing a 1 standard deviation probability envelope

Bullish Strategy

2024-01-24-01-TSLA-Bullish

Bullish trading setup: Bull/short put spread

In the first trade setup, the above screenshot presents a short put vertical spread on TSLA, which is an options strategy entailing the sale of a put option while simultaneously purchasing another put with the same expiration date and a lower strike price. Here's the detailed setup:

  • Sell to Open: 1 Put with a Strike Price of $197.5, Expiry 16-Feb-2024
  • Buy to Open: 1 Put with a Strike Price of $192.5, Expiry 16-Feb-2024
  • This configuration results in a net credit (premium) of $152.00 USD.

Financial implications:

  • Maximum Risk (Max Loss): The max risk you're exposed to is $348.00. This scenario unfolds if TSLA's price plunges below $192.5 by the expiration date, causing both puts to be in-the-money. The loss is the spread between the strike prices ($5) minus the premium received ($1.52 per share).
  • Maximum Profit (Max Gain): The max profit is capped at the premium of $152.00. You achieve this if TSLA stays above the sold strike price of $197.5 by expiration, rendering both puts worthless.
  • Break-even Point: The break-even for this trade is $195.98, which is the higher strike minus the premium received per share ($197.5 - $1.52).

Market analysis:

  • Premium: The collected premium is substantial, reflecting the options market's implied volatility for TSLA. High premiums are typical with stocks like TSLA, where substantial price moves can occur.
  • Stock performance: Considering TSLA's market behavior, your trade suggests confidence that the stock will remain flat or appreciate, staying above your break-even at expiration.
  • Volatility: Given the option Greeks shown, you benefit from a decline in volatility and time decay, which is characteristic of a credit spread strategy.

Strategic summary: This bullish position on TSLA implies a forecast that the stock will not decrease significantly and is likely to maintain or increase in value, staying above the break-even level. By employing this credit spread, you're taking advantage of the received premium, which provides a cushion against modest drops in the stock price. Your obligation is to purchase TSLA shares at $197.5 if it falls below this level, but you've hedged with the right to sell at $192.5. The net credit received bolsters your stance as long as TSLA's price stays above $195.98 by expiration.

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Neutral / Range Bound Strategy

2024-01-24-02-TSLA-Neutral

Neutral trading setup: Selling (short) an iron condor

In the screenshot above we can see a short iron condor setup on Tesla Motors Inc. (TSLA), which is a neutral strategy that benefits from a stock trading within a certain range. Let's get into the specifics:

  • Buy to Open: 1 Put with a Strike Price of $185, Expiry 16-Feb-2024
  • Sell to Open: 1 Put with a Strike Price of $190, Expiry 16-Feb-2024
  • Sell to Open: 1 Call with a Strike Price of $235, Expiry 16-Feb-2024
  • Buy to Open: 1 Call with a Strike Price of $240, Expiry 16-Feb-2024

The net result of this setup is a credit of $181.00 USD.

Financial implications:

  • Maximum Risk (Max Loss): Your maximum risk is calculated by the difference in strike prices of either the puts or calls ($5.00) minus the net premium received ($1.81 per share). Multiplied by 100 (as each contract represents 100 shares), you get $(500 - 181) = $319.00.
  • Maximum Profit (Max Gain): The maximum profit is the net premium received, which is $181.00. This is realized if TSLA closes between the short strike prices ($190 and $235) at expiration.
  • Break-even Points: There are two break-even points for an iron condor. Subtract the net premium from the short put strike to get the lower break-even ($190 - $1.81 = $188.19). Add the net premium to the short call strike for the upper break-even ($235 + $1.81 = $236.81).

Market analysis:

  • The premiums for this strategy are indicative of a decent level of implied volatility, which is typical for TSLA options. You're benefiting from that volatility by receiving a higher credit upfront.
  • The delta values are close to neutral, indicating that the position is relatively balanced with respect to the stock's price movements.
  • Theta is in your favor, as time decay works for you, eroding the value of the options you sold.
  • A stable gamma near zero suggests that the delta of your position won't change dramatically for small moves in the stock price.

Strategic summary: The iron condor shows that you expect TSLA to stay within a range leading up to expiration. By capturing the premium, you're betting that the stock will close within $188.19 and $236.81 at expiration. You've got to watch TSLA closely for any breakout from this range, which would put your position at risk. This trade requires active management and a solid exit plan if the stock moves against your anticipated range.

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Bearish Strategy

2024-01-24-03-TSLA-Bearish

Bearish trading setup: Bear/short call spread

The above screenshot shows a bearish trade setup on Tesla Motors Inc. (TSLA) using a short call vertical spread. Here's what your trade looks like:

  • Sell to Open: 1 Call with a Strike Price of $225, Expiry 16-Feb-2024
  • Buy to Open: 1 Call with a Strike Price of $230, Expiry 16-Feb-2024

This is a credit spread, where you receive a net premium of $124.00 USD for the position.

Financial implications:

  • Maximum Risk (Max Loss): Your maximum risk is determined by the difference in the strike prices ($5.00) minus the premium received ($1.24 per share). On a per-contract basis, that's $(500 - 124) = $376.00.
  • Maximum Profit (Max Gain): The maximum profit you can achieve is the credit received, which is $124.00. You'll secure this if TSLA is below the lower strike price of $225 at expiration.
  • Break-even Point: Your break-even for the trade is the strike price of the short call plus the premium received, which is $225 + $1.24 = $226.24.

Market analysis:

  • The premium you've collected suggests an adequate implied volatility in TSLA options, which can be expected given TSLA's usual market behavior.
  • The delta of the short call is positive, meaning you expect the value of the call to decrease as the stock price goes down, which is in line with your bearish outlook.
  • Theta decay is working for you, with the value of the options sold decreasing as time passes.
  • A small gamma implies that the delta of your position won't change quickly with small movements in the underlying stock price, providing some stability to the position's value.

Strategic summary: By initiating a short call vertical spread, you're indicating a bearish stance on TSLA, expecting the stock to trade below $226.24 by expiration. You benefit from both time decay and a drop in implied volatility, provided TSLA's stock price doesn't rise above your break-even point. It's essential to manage this position actively, particularly if TSLA starts to rally, as that could threaten your maximum profit scenario and push towards the maximum loss.

2024-01-24-04-TSLA-Overview
© barchart.com

Conclusion

In conclusion, the strategies outlined—comprising a short put vertical spread, an iron condor, and a short call vertical spread—demonstrate calculated approaches to the options market under current conditions characterized by elevated Implied Volatility for Tesla. Each strategy aligns with specific market expectations and investor sentiment ahead of Tesla's earnings release. They are designed to potentially benefit from the anticipated volatility contraction. As always, traders should consider these strategies within the context of their own risk management framework and the unique market dynamics at play.

For continuous insights and updates on market/options strategies, interact with me/follow my social media account on Threads.

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Related articles:

Previous "What are your options" articles: 

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