Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
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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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:
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.
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:
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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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:
The net result of this setup is a credit of $181.00 USD.
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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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:
This is a credit spread, where you receive a net premium of $124.00 USD for the position.
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.
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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