TSLA Max Pain Sitting Around 190

Tesla (TSLA) is currently sitting right between the 50 and 200-day moving averages, and there is a theory that the stock might stay around this level for the next week.

That theory is called Max Pain and is something I talked about in a recent video for Barchart.

The Max Pain Theory claims that as option expiration approaches, stock prices will get pushed toward the price at which the greatest number of options in terms of dollar value will expire worthless.

Large institutions are generally net sellers of options, so they will benefit the most from options expiring worthless, or with the lowest net value.

We can use Barchart Excel to quickly and easily find the Max Pain level for any stock and expiration.

Within our Max Pain Excel file, we simply need to input the stock ticker and the expiration date and Barchart Excel will do the rest.

The Excel file then calculates the notional value of all open puts and calls. What we are looking for is the stock price at which the puts and calls have the lowest notional value.

Barchart Excel displays this data in table format and also a graph.

Here we can see that the Max Pain level for TSLA on March 17th is right around 190.

What can we do with this information?

Well, if we think that the Max Pain theory might play out this month, we could look to trade a butterfly spread centred at the 190 strike.

Let’s take a look at how that trade idea might be structured.

TSLA MAX PAIN BUTTERFLY SPREAD

A butterfly spread is constructed by buying an in-the-money call, selling two at-the-money calls and buying an out-of-the-money call. The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.

The maximum profit is calculated as the difference between the short and long calls less the premium that you paid for the spread.

Using the March 17 expiry, the trade would involve buying the 180 strike call, selling two of the 190 strike calls and buying one of the 200 strike calls. 

The cost for the trade would be $210 which is the most the trade could lose. The maximum potential gain is $790. 

The lower breakeven price is 182.10 and the upper breakeven price is 197.90. The maximum profit is 376% with a probability of success of 31.1%.

TSLA COMPANY DETAILS

The Barchart Technical Opinion rating is a 24% Sell with a weakening short-term outlook on maintaining the current direction. 

TSLA rates as a Strong Buy according to 13 analysts with 2 Moderate Buy, 8 Hold and 3 Strong Sell ratings. Implied volatility is 61.65% which gives TSLA an IV Percentile of 38% and an IV Rank of 27.48%

Tesla is the market leader in battery-powered electric car sales in the United States, with roughly 70% market share. The company's flagship Model 3 is the best-selling EV model in the United States. 

Tesla, which has managed to garner the reputation of a gold standard over the years, is now a far bigger entity that what it started off since its IPO in 2010, with its market cap crossing $1 trillion for the first time in October 2021.' 

The EV king's market capitalization is more than the combined value of legacy automakers including Toyota, Volkswagen, Daimler, General Motors and Ford.Over the years, Tesla has shifted from developing niche products for affluent buyers to making more affordable EVs for the masses. 

The firm's three-pronged business model approach of direct sales, servicing, and charging its EVs sets it apart from other carmakers. 

Tesla, which is touted as the clean energy revolutionary automaker, is much more than just a car manufacturer.

Conclusion And Risk Management

Short-term trades such as this one are difficult to adjust. Either the trade works, or it doesn’t so position sizing is vital. 

Short-term trades also have assignment risk, so traders need to be aware of that possibility.

If you have any questions, feel free to reach out to me by email or on Twitter. 

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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