Trade Highlight #1
In this new blog format I will be highlighting a trade and explaining my reasoning behind it. This week it will be about two Tesla option contracts. Thanks for joining me!
The trade of this week is an options trade and to be fair, I suppose a lot of times this series will be about option trades. Here are the contracts I sold this week:
-P TSLA 24 MAY 2019 $170 $1,37
-C TSLA 24 MAY 2019 $217,50 $1,41
I sold these contracts on Monday the 20th of May for a net income of $275,20. This combination is also known as a Short Strangle, the vision with this strategy is that the stock price stays flat. As we are talking about Tesla in a period that’s been hard on the company I figured I wanted a safety margin of around 15% on both sides of the trade. I generally only do option contracts with a safety margin of 10% anyway.
As these are volatile times in the markets, due to the trade war, Brexit and more, option premiums are generally way higher. This applies especially when you consider a volatile company like Tesla.
For people new to options; these option contracts meant that I had to buy 100 shares of Tesla if the stock price would have been under $170 at the closing bell on the 24th of May. It also meant that I had to sell 100 shares of Tesla if the stock price was higher than $217,50 at the closing bell on the 24th of May. For agreeing to this obligation I received the premium of $275,20.
Because I’m not interested in either buying or selling 100 shares of Tesla, I hope that the stock price doesn’t hit either of my strike prices. In that case I can keep the option premium I received, without having to sell or buy anything. You could compare it to an insurance company.
Why this trade?
I’ve never held any shares of Tesla, nor did I ever have any option contracts for the company. I didn’t even read most articles about Tesla. I’m a big fan of Elon Musk (whenever he stays away from social media anyway) but I never considered buying shares of the company. However in the last few weeks I saw more and more negative articles about Tesla on SeekingAlpha.com and I realised the stock price had been slashed in half. Increased attention and heavy stock price movement generally make for interesting option premiums and I decided take a look. After finding out that for a bet of five days, with quite a big margin of safety I would gain $275,20 I immediately decided to pull the trigger.
On Monday Tesla’s stock price went -6%, I sold my option combination and the price already recovered to -3%. This caused a lot of volatility to go out of the option premiums and it meant that my position was $100 in the green within hours. An unrealised profit of roughly 36%. As you can imagine with such a short trade, every day the option premium goes down as the stock price is less likely to hit your strike prices. So every day that passed I gained another 20% of the outstanding profit as the price of Tesla itself hovered between $190-$205.
Long story short
I sold two options contracts, a Short Strangle combination, for five days and gained $275,20. Even though I had a safety margin of 15% on both sides, the stock price of Tesla never moved much. This allowed me to gain a quick $55,04 per day.
To see all my option trades you can visit my options page.
For any questions regarding options, leave them down below in the comment section or simply hit me up on any of my social media channels!