Tesla Option Trade Could Offer a 29% Return in Four Weeks

A bull put spread, a strategy designed to limit risk, can provide a potential return if Tesla’s stock price remains stable or rises, and sometimes even if it drops slightly. One of the key benefits of this strategy is that it defines the worst-case loss scenario in advance, offering some degree of predictability for investors.

Currently, Tesla’s stock is trading at around $226 per share. By using an options trade with an October 11 expiration date, an investor could sell a 200 strike price put option and purchase a 195 strike price put option. This trade would generate an approximate premium of $1.15 per share.

If the trade is successful, the investor stands to make a premium of $115 (as each options contract covers 100 shares) while risking a maximum loss of $385. If Tesla’s stock price remains above $200 at the time of expiration, the options would expire worthless, netting the investor a 28.9% return within four weeks.

However, there are risks involved. The maximum loss of $385 would occur if Tesla’s stock price closes below $195 at expiration on October 11. The break-even point for the trade is calculated to be $198.85, which is derived by subtracting the $1.15 premium from the 200 strike price. If Tesla’s stock drops below this level, the trade would start to incur losses.

To manage risk, it’s advisable to set a stop loss at the point where the loss matches the premium received from the trade. In this case, if the loss reaches $115, the trade should be exited to prevent larger losses. Following this approach helps to minimize the risk of significant loss should Tesla’s stock decline sharply.

Tesla continues to perform well compared to its peers. According to the IBD Stock Checkup, the company ranks third in its industry group with a Composite Rating of 67. Tesla also has an Earnings Per Share (EPS) Rating of 57 and a Relative Strength Rating of 81.

However, it’s essential to remember that trading options can be risky. Investors must be prepared for the possibility of losing their entire investment. This information is provided for educational purposes only and should not be considered a recommendation. Always conduct thorough research and consult with a financial advisor before making any investment decisions.