Tesla Bear Put Spread Could Return 185% in One Month

Tesla (TSLA) stock was a bearish candidate that came up on one of my screeners for being rated a Strong Sell with an 88% Sell rating.

Today, we’re going to look at a Bear Put spread trade that assumes Tesla will continue to drop over the next month. 

A Bear Put spread is a bearish trade that also benefits from a rise in implied volatility.

The maximum risk for a Bear Put spread is limited to the premium paid while the maximum potential profit is also capped. 

The maximum profit is equal to the width between the strikes less the premium paid.

Tesla Bear Call Spread

To create a Bear Put spread, we buy an out-of-the-money put and then sell another put further out-of-the-money.

Buying the August 21st put with a strike price of $295 and selling the $290 put would create a Bear Put spread.

This spread was trading for around $1.75 on Monday. That means a trader buying this spread would pay $175 in option premium and would have a maximum profit of $325.

That represents a 185.71% return on risk between now and August 21st if TSLA stock falls below $290.

If Tesla stock closes above $295 on the expiration date the trade loses the full $175.

The breakeven point for the Bear Put spread is $293.25 which is calculated as $295 minus the $1.75 option premium per contract.

Company Details

The Barchart Technical Opinion rating is a 88% Sell with a Strongest short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Relative Strength is below 30%. The market is in oversold territory. Watch for a potential trend reversal.

Tesla designs, develops, manufactures, sells and leases high-performance fully electric vehicles and energy generation and storage systems, and offer services related to their products.

They generally sell their products directly to customers and continue to grow their customer-facing infrastructure through a global network of vehicle showrooms and service centers, Mobile Service, body shops, Supercharger stations and Destination Chargers.

Conclusion And Risk Management

One way to set a stop loss for a Bear Put spread is based on the premium paid. In this case, we paid $175, so we could set a stop loss equal to the 50% of the premium paid, or a loss of around $87.

Another stop loss level could be if the stock broke above $340.

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.