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The Less Risky Way To Trade TSLA


Tesla reported earnings this week, and the stock took a hit due to weak guidance. The bears will tell you that this is the beginning of the end. The bulls will see it as a buying opportunity. No matter how you see it, there is no doubt that this is a very risky stock, both for the bulls and the bears. As a non-directional traders, we don't really care. I would like to present a less risky way to trade TSLA, with a good chance to make money no matter what the stock does.

TSLA also became very emotional stock. Many people cannot separate their love/hate for the company from the stock. No doubt that standard valuation methods are not applicable to TSLA. Fortunately, with our strategy, we don't have to do it, and we couldn't care less if the stock is undervalued or overvalued.

 

So here we go.

 

tesla.jpg

 

About a month before earnings, we entered a double calendar spread on TSLA at $2.80. The thesis is to take advantage of volatility skew between different options expirations.

 

Two days before earnings, we closed the trade at $3.94. That's 40.7% gain. The trade actually reached 4.70+ on the last day and could be closed for 60%+ gain. Some of our members entered earlier at lower prices and booked even higher gains.

 

This is a strategy we have been using very successfully for the last two years, and TSLA is one of the best candidates for that strategy. Here are the results of the last 8 trades:

  • Aug. 2015 - 40.7% gain
  • May. 2015 - 33.5% gain
  • Feb. 2015 - 28.1% gain
  • Nov. 2014 - 30.8% gain
  • Aug. 2014 - 36.8% gain
  • May. 2014 - 26.1% gain
  • Feb. 2014 - 26.2% gain
  • Nov. 2013 - 23.2% gain


That's cumulative return of 245.4%. During the same period of time, the stock gained around 60%. Our strategy beats the stock holders by 4:1, without taking any directional risk!

 


Of course no strategy is without risks. The main risk is a pre-announcement, which would result a big stock move. If the stock moves too much before earnings, the trade will suffer as well. However, due to the unique setup, those calendars are more resilient to a big move than "standard" calendars. In fact, couple of times the stock moved more than 10% before earnings, and the trade still was a winner.

 

Pre-earnings calendars are among our most successful strategies. We implement it mostly on high volatility stocks like GOOG, PCLN, LNKD, FFIV, NFLX, FB etc.

 

Related articles:

 

We invite you to join us and learn how we trade our options strategies in a less risky way.

 

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Hi 

Can you please tell about the setup of the 4 legs of the double calendar, the Strikes and expirations etc.. What was the IV when your entered and exited the trades ?

 

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The short legs expired a week of earnings, the long legs two weeks after. 250/280 strikes. I don't have the IV data.

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Will not the short legs rise in vol and the skew increase due to earning week and this could hamper the trade? Yes the back legs will also increase but not as much as the week of earnings. You seem to have had success always picking the short legs on the week of earnings - does this work in all cases? or is it a better strategy to have the short legs expire the week before.

thanks for your input

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No it won't work in all cases. This is why we do extensive backtesting to find the best stocks suitable for this strategy and the optimal entry prices.

Short leg exiting before earnings can work as well, but it will be much less resilient to the stock move. I would consider it higher risk trade. Our trades are much more resilient and in some cases the trade can make money even if the stock moved 10% or more.

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