Tesla is stuck in a range between 270 and 310. If traders think that rangebound trading may continue, it could mean it is a good time for an iron condor option trade on Tesla stock.
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
Tesla Stock Put, Then Call
First, we take the bull put spread. Using the Oct. 21 expiry, we could sell the 250 put and buy the 240 put. Investors could sell that spread Wednesday for around $1.40 a share.
Then we do the bear call spread on Tesla stock, which we can place by selling the 360 call and buying the 370 call. This spread sold yesterday for around $1.15.
In total, the iron condor will generate around $2.55 per contract, or $255 of premium.
The profit zone ranges between 247.45 and 362.55. We calculate this by taking the short strikes and adding or subtracting the premium received.
Because both spreads are $10 wide, the maximum risk in the trade is 10-2.55 x 100 = $745.
Therefore, if we take the premium ($255) divided by the maximum risk ($745), this iron condor trade has the potential to return 34.3%.
If Tesla Stable, Iron Condo Succeeds
If price action stabilizes, then iron condors will work well.
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $255, so we could set a stop loss equal to the premium or a loss of around $255.
Another way to manage the trade is to set a point on the Tesla stock chart where the trade will be adjusted or closed. That could be around 280 on the downside and 340 on the upside.
According to the IBD Stock Checkup, TSLA stock is ranked No. 1 in its group and has a Composite Rating of 95, an EPS Rating of 77 and a Relative Strength Rating of 92.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
