Tesla stock has been under pressure lately, having plunged more than 40% over the last three months. Shares currently sit below their 200-day, 50-day and 21-day moving averages, and there is a clear resistance zone between 290 and 300.
Let's look at a bear call spread that assumes Tesla will struggle to get back above the 310 level between now and mid-June.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call. The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
A June 20 expiry bear call spread on Tesla stock using the 310-315 strike prices can be sold for around 70 cents each. Traders selling the spread would receive $70 in option premium which is also the maximum possible gain. The maximum loss would be $430.
The Return On A Bear Call Spread
That represents a potential return of 16.28% between now and June 20. The spread will achieve the maximum profit if Tesla stock closes below 310 on June 20, in which case the entire spread would expire worthless, allowing the trader to keep the $70 option premium.
The maximum loss will occur if Tesla closes above 315 on June 20. Further, that would see the premium seller lose $390 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. You always know the worst-case scenario in advance. Also, a stop loss could be set if Tesla trades above 290, or if the spread value rises from $0.70 to $1.40.
Bear call spreads can be a good way to potentially generate some income while the market remains under pressure. But there's a chance the market could continue to rebound, so it's best to keep the position size small.
Rankings For Tesla Stock
According to the IBD Stock Checkup, Tesla stock is ranked No. 4 in its group and has a Composite Rating of 67, an EPS Rating of 84 and a Relative Strength Rating of 77.
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, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
