[ad_1]
Tesla — just the word these days conjures up all kinds of emotions. Love it, hate it, or waiting to see how it all turns out, its chart shows that market participants are willing to stay invested over the long haul. Tesla (TSLA) has firmly positioned itself in the growing field of artificial intelligence from the carmaker’s inception. As Tesla stock approaches a new buy zone, traders may be wondering how they might participate in the continued upward trajectory, while limiting risk exposure.
X
Tesla Stock And The AI Trend
There are several tools for that in the option toolbox and the one I will choose today is the butterfly spread with calls. This position provides levers that can be adjusted as a chart holds (or loses) key price points. Tesla stock ranks No. 6 in the IBD Stock Checkup within the auto manufacturers industry group and has a Composite Rating of 81.
Options Trading Turns 50; What It Means For You
Tesla stock is another example of using technical analysis to find ideal buying opportunities. I favor breakout stocks that come back to retrace a key upward trending support line. This retest of rising support requires a little history for TSLA stock as market participants came in at a breakout level from 2020. You can confirm this on a monthly chart with a 50-month simple moving average line.
With the founder, Elon Musk, reaffirming the commitment to the improvement of artificial intelligence, the Tesla stock falls into the sweet spot for traders to continue the ride higher.
Understanding The Long Call Butterfly Spread
When risk and reward need to be firmly balanced in a stock, traders can use the butterfly to give up some reward in order to put a firm boundary on risk.
- Buy to open 1 TSLA July 21 monthly 210 strike call at 21.25
- Sell to open 2 TSLA July 21 monthly 230 strike call at 12.60
- Buy to open 1 TSLA July 21 monthly 250 strike call at 7.30
Total debit spent is 3.50 per spread or $350. That is also the total risk for the butterfly on Tesla stock. There are two break-even prices (before commissions). On the downside at 213.50 and once you get above 246.50 on the upside.
The maximum return is realized if TSLA stock finishes at 230 on expiration. The maximum return is calculated like this: The difference in the strikes (230 — 210 = 20) less the premium paid for the position (20 — 3.50= 16.50).
As a comparison, to buy the TSLA July 21 call at 210 would cost 21.25 and the break-even price would be 232.25, much higher than our butterfly position. Granted we are giving up some likelihood of outsized gains, but if TSLA stock performs at less than optimal levels, we are still able to profit from the exposure.
Trade Management
Identify the key chart levels.
The monthly retest of the 50-month simple moving average level near 165 is important. Since then, the chart has been grinding northward and is now retesting $200, with the next congestion of resistance near 230. This is a noted pattern of retracement in this stock looking at its monthly candles.
TSLA Stock Butterfly Spread Scenarios
What could happen:
- Tesla stock moves to $230 by expiration, and we collect the full profit.
- TSLA stock moves lower but holds higher lows and lifts above $210 but does not advance much beyond there. This will allow the butterfly to hold some value but when expiration gets closer, within two weeks, we must reassess. We’ll either cover the position with less than a 50% loss of the original premium or triage the trade by selling options below the 210 price point.
- If Tesla stock moves markedly lower under heavy volume for three days without lifting — this is a signal that we must leave the position.
Set an alert for the prices on the edges (near 200 and 230). If they trigger, give the trade a few days to wiggle through and then make your decisions based on your own risk profile.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of “The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology.” She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
YOU MIGHT ALSO LIKE:
Royal Caribbean Stock: How To Capture $1,250 In Income With Options Today
With Amazon Stock In Bullish Trend, Option Trade Can Return $310
Is LULU Stock’s Slide Over? If It Is, This Options Trade Can Return 26%
Watch Our Market Experts Spot Top Stocks Each Morning On IBD Live
LVS Stock: This Bear Call Spread Trade Earns $107 Immediately
[ad_2]
Source link
