Options Trades for Tesla Earnings This Wednesday

Tesla (TSLA) is due to report earnings this Wednesday after the closing bell. The Barchart Technical Opinion rating is a 56% Buy with a Strengthening short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.

Tesla rates as a Strong Buy according to 7 analysts with 1 Moderate Buy, 8 Hold ratings and 2 Strong Sell ratings. Implied volatility is 54.70% which gives TSLA and IV Percentile of 42% and an IV Rank of 39%

Today, we will analyze three different ideas:

• A Short Iron Condor
• A Bull Put Spread
• A Butterfly Spread

Short Iron Condor

The first strategy is a short iron condor. An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes. Tesla’s IV Rank is slightly lower than 50%, but an Iron Condor could still work if the stock doesn’t move much after earnings.

The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

Using the April 22 expiration, traders could sell the 960-strike put and buy the 955-strike put. Then on the calls, sell the 1110 call and buy the 1115 call.

Earlier today, that condor was trading around $1.60 which means the trader would receive $160 into their account. The maximum risk is $340 for a total profit potential of 47.06%.

The profit zone ranges between 958.40 and 1111.60. This can be calculated by taking the short strikes and adding or subtracting the premium received.

Let’s take a look at another potential option strategy.

Bull Put Spread

Traders thinking that TSLA might continue with its bullish bias could just trade the bull put spread side of the iron condor.

Trading just the bull put spread side would involve selling the April 22nd 960 put and buying the 955 put. This spread could be sold earlier today for around $0.92 or $92 in total premium. 

The maximum gain is $92 with total risk of $408 for a potential return of 22.55% with a breakeven price of 959.08.

The final idea we will look at is a short strangle.

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 April 22 expiry, traders could buy the 960 strike call, sell two of the 1020 strike calls and buy one of the 1080 strike calls. The cost for the trade would be $1,750 which is the most the trade could lose. The maximum potential gain is $4,000. The lower breakeven price is 977.50 and the upper breakeven price is 1062.50. 

Conclusion And Risk Management

There you have three different trade ideas for Tesla’s earnings. All three are risk defined trades, so you always know the worst-case scenario even if TSLA makes a bigger than expected move.

Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital. Short strangles involve naked options and should be avoided by beginner traders.

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

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.

*Disclaimer: On the date of publication, Steven Baster did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, April 19, 2022.