Tesla Iron Condor Could Profit 39% In 5 Weeks

Tesla (TSLA) has had a mammoth run since the election but could be due for a pause here. That could mean it’s a good time for an iron condor trade.

Tesla is also showing elevated implied volatility with an IV Percentile of 88%.

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.

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.

TSLA IRON CONDOR

Traders that think TSLA stock might stay in the current range over the next five weeks could look at an iron condor.

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.

First, we take the bull put spread. Using the January 17 expiry, we could sell the $355 put and buy the $350 put. That spread could be sold yesterday for around $0.90.

Then the bear call spread, which could be placed by selling the $550 call and buying the $555 call. This spread could also be sold yesterday for around $0.50.

In total, the iron condor will generate around $1.40 per contract or $140 of premium.

The profit zone ranges between $353.60 and $551.40. This can be calculated by taking the short strikes and adding or subtracting the premium received.

As both spreads are $5 wide, the maximum risk in the trade is 5 – 1.40 x 100 = $360.

Therefore, if we take the premium ($140) divided by the maximum risk ($360), this iron condor trade has the potential to return 38.9%.

If price action stabilizes, then iron condors will work well. However, if TSLA stock makes a bigger than expected move, the trade will suffer losses.

COMPANY DETAILS

The Barchart Technical Opinion rating is a 100% Buy and ranks in the Top 1% of all short term signal directions.

Long term indicators fully support a continuation of the trend.

The market is in highly overbought territory. Beware of a trend reversal.

TSLA rates as a Strong Buy according to 11 analysts with 2 Moderate Buy ratings, 16 Hold ratings and 9 Strong Sell ratings.

Tesla is the market leader in battery-powered electric car sales in the United States, with roughly 70% market share. The company's flagship Model 3 is the best-selling EV model in the United States.

Tesla, which has managed to garner the reputation of a gold standard over the years, is now a far bigger entity that what it started off since its IPO in 2010, with its market cap crossing $1 trillion for the first time in October 2021.'

The EV king's market capitalization is more than the combined value of legacy automakers including Toyota, Volkswagen, Daimler, General Motors and Ford.

Over the years, Tesla has shifted from developing niche products for affluent buyers to making more affordable EVs for the masses.

The firm's three-pronged business model approach of direct sales, servicing, and charging its EVs sets it apart from other carmakers.

Tesla, which is touted as the clean energy revolutionary automaker, is much more than just a car manufacturer.

Conclusion And Risk Management

One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $140, so we could set a stop loss equal to the premium received, or a loss of around $140.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $380 on the downside and $490 on the upside.

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.