The question that now hangs over Tesla is if the stock will be recharged when the company reports third-quarter earnings late Wednesday or if it will simply pause after an extraordinary rally.
So far, the verdict in the options market is that Tesla’s stock (ticker: TSLA) will race higher on the report and extend what has been one of the most extraordinary rallies in 2020.
Tesla is up about 424% this year and 765% over the past year. Over the past 52 weeks, the stock has ranged from a low of $50.04 to a high of $502.49.
Such dramatic movements guarantee that Tesla’s options are among the hottest, most seductive names in the equity derivatives market. For a fraction of the price of the underlying stock, anyone can buy a bullish call option and wager that the stock will rally higher. The stock has surged ever higher, and many people—even those who arguably know next to nothing about options, or even Tesla’s financials—have made a great deal of money buying upside call options and selling the calls at a profit after the stock has surged ever higher.
Not surprisingly, Tesla’s bullish calls are unusually active ahead of Wednesday’s earnings. Investors are buying October $460, $470, and $500 calls that would pay off if the stock surges. The trading reflects a speculative frenzy that Tesla’s stock trades ever higher.
Aggressive investors can thus consider a November bull spread that captures the earnings report and provides a few weeks for investors and analysts to slug it out over what the report means for the company and the future of electric vehicles, self-driving cars, and everything else that Tesla represents.
With the stock at $439, investors could buy Tesla’s November $445 call and sell the November $470 call. The spread—that is, buying a call and selling another with a higher strike price by expiration—costs $9.80. If the stock is at $470 at expiration, the spread is worth a maximum profit of $15.20. If the stock declines on the earnings news, the trade fails.
In candor, it probably doesn’t matter what numbers Tesla reports when it releases the quarterly financial report.
Investors and speculators are largely looking for something thematic and enticing like recently released news that Tesla will start next week to ship cars made in its Shanghai plant to European markets.
Without doubt, the Tesla investment thesis is much more focused on the future than on what happened in the past. This will be true until it is proven false, but so far it is the operating fact, and the bull spread is one way to play the name without paying too much money or taking on too much risk.
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Originally Posted on October 21, 2020 – Tesla’s Earnings Will Be Dramatic. How to Play It With Stock Options.
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Disclosure: Options Trading
Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the "Characteristics and Risks of Standardized Options" also known as the options disclosure document (ODD) or visit ibkr.com/occ
