Tesla Option Trading | Earnings Today!! | Expiry 3 Days From Now !! |
Note:
Tesla Options Strategy (Expiry April 25th, 2025):
1 Contract = 100 Shares.
Long Put: Buy 200 contracts @ $225 Strike
Cost: 200 * 100 * $11.15 = $223,000
Long Call: Buy 200 contracts @ $230 Strike
Cost: 200 * 100 * $11.25 = $225,000
Short Call: Sell 1000 contracts @ $262.25 Strike
Premium Received: 1000 * 100 * $2.05 = $205,000
Position Overview:This is a long strangle; using the $225 put and $230 call, combined with 1,000 uncovered short calls at the $262.25 strike.
Cost Breakdown:
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Total Cost (Long Options): $223,000 + $225,000 = $448,000
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Premium Collected (Short Calls): $205,000
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Net Capital Outlay: $448,000 - $205,000 = $243,000
Risk/Reward Profile:
This strategy anticipates a significant price move. While potential gains are capped due to the structure, there is substantial upside risk stemming from the uncovered calls if the underlying rallies sharply.
Scenario Analysis (at Expiration - April 25th, 2025):
Primary Consideration, Volatility Contraction:
As seen in previous cases, a sharp decline in implied volatility following an earnings announcement can significantly diminish the value of both long calls and puts. Even if the stock moves in a favorable direction, the impact of this volatility drop may offset potential gains, unless the price shift is substantial.
Best Case Scenario:
Scenario A: Significant Downside Movement in Tesla Stock
In this scenario, Tesla's stock price experiences a substantial decline, falling well below the $225 strike level. For instance, TSLA closes at $190.
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Long Put Position: Substantial gains are realized due to the increase in intrinsic value.
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Intrinsic value = ($225 – $190) × 200 contracts × 100 shares = +$700,000
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Long Call Position: These options expire worthless, resulting in a realized loss of $225,000 (initial premium paid).
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Short Call Position: These also expire worthless, allowing the retention of the $205,000 premium originally collected.
Estimated Net P&L:
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+$700,000 (gain from long puts)
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–$223,000 (initial cost of long puts)
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–$225,000 (cost of long calls)
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+$205,000 (retained premium from short calls)
= Net Profit: +$457,000
Note: Should Tesla’s price decline further below $190, profits from the long put position would continue to increase accordingly.
Scenario B: Moderate Upside Move (Price Rises but Remains Below $262.25)
In this scenario, TSLA closes at $260 at expiration.
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Long Call Position: The calls gain intrinsic value, calculated as:
= $600,000 -
Long Put Position: These expire worthless, resulting in a realized loss of $223,000.
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Short Call Position: These options also expire worthless, allowing the entire premium of $205,000 to be retained as profit.
Net Profit/Loss Calculation:
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+$600,000 (gain from long calls)
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–$225,000 (initial cost of long calls)
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–$223,000 (cost of long puts)
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+$205,000 (premium collected from short calls)
= Net P/L: +$357,000
Strategic Insight:
Maximum profit is achieved when the stock settles just below the $262.25 short call strike at expiration. Interestingly, while a moderate rise in price results in a solid profit, a sharp decline in TSLA's price can potentially yield even greater returns due to the long put exposure
Worst Case Scenario:Scenario A:
Limited Price Movement / Neutral Outcome
In this case, TSLA closes within a narrow range, specifically between $225 and $230, or exhibits minimal movement overall. However, a significant reduction in implied volatility adversely impacts the long strangle position, leading to a substantial decline in its value.
Estimated Outcome: The anticipated loss would approximately equal the initial premium paid, resulting in a projected drawdown of around -$243,000. This figure represents the maximum potential loss, assuming TSLA remains below the breakeven threshold of $262.25.
Scenario B: Significant Price Surge, Substantial Downside Risk; Worst Of The Worst Case.
In this scenario, TSLA’s stock price experiences a sharp increase, closing substantially above the $262.25 mark, assume a crazy, hypothetical closing price of $350.
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Long Call Position:
The $230 strike long calls appreciate significantly in value:
($350 - $230) × 200 contracts × 100 shares
Realized Gain: $2,400,000 -
Short Call Position:
The short calls, with a $262.25 strike, incur heavy losses:
($350 - $262.25) × 1,000 contracts × 100 shares
Realized Loss: $8,775,000 -
Long Puts:
Out-of-the-money at expiration and expire worthless.
No Value -
Initial Net Debit:
Total upfront cost of the position: $243,000 -
Net Result (P/L):
$2,400,000 (gain) - $8,775,000 (loss) - $243,000 (initial cost)
Net Outcome: -$6,618,000
Summary:
While the long call exposure captures significant upside, the uncovered short calls result in an extreme downside, leading to a catastrophic net loss of approximately $6.62 million. This illustrates the asymmetric risk inherent in strategies involving naked short call positions during sharp upward price movements.
Typical Market Movement Scenario (Moderate Price Action with Implied Volatility Decline)
Overview:
In this scenario, Tesla experiences a moderate price move that fails to significantly increase the intrinsic value of the long option positions. The decline in implied volatility (IV crush) further diminishes the overall value of these options, making it difficult to offset the initial net debit.
Example, Moderate Downward Move:
Tesla (TSLA) closes at $215. Following the move and associated volatility compression:
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The long put positions retain an estimated value of approximately $10 each, post-IV adjustment.
Estimated Value: $200,000
Resulting P/L: Approximately –$23,000 (after accounting for the original cost) -
The long call positions decline significantly in value, resulting in an approximate loss of $225,000
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The short call positions gain due to the move and IV drop, with an estimated profit of $205,000
Net Outcome:
The combined position yields an overall loss of approximately $43,000
Note:
Given the increased net debit of $243,000, the strategy requires a more substantial price movement to achieve profitability, which I do anticipate since it's Tesla's earnings, and they have a history of major price movements during earning releases.
If, however, the underlying stock remains relatively stable and fails to move decisively beyond the $225 or $230 strike levels, the position is likely to result in a loss near the amount of the net debit.
This Question addresses the " Worst Case Scenario " As of the market close on April 21, Tesla's stock was priced at $227.50. The company is scheduled to report its earnings after the market closes on April 22. Given this upcoming announcement, what are the odds that Tesla's share price could reach or exceed $262.25 within the next three trading days?
Disclaimer:
Forecasting exact stock price movements, particularly during high-volatility events such as earnings reports, is inherently uncertain. The insights presented here are derived from an interpretation of market indicators, including options pricing, to assess implied expectations and probabilistic outcomes. However, actual market behavior may diverge significantly from these projections. This content is intended for informational purposes only and should not be construed as financial advice.
Required Move:
- To reach $262.25 from $227.50, the stock needs to increase by $34.75.
- This represents a move of +15.3% ($34.75 / $227.50).
Options Market Outlook on Post-Earnings Movement
Options set to expire shortly after earnings often provide insight into the market’s expectations for volatility surrounding the event. By examining the pricing of options near the current stock price, we can gauge the implied move.
Using the provided data , a $225 Put priced at $11.15 and a $230 Call at $11.25 ,we can estimate the cost of a straddle centered around $227.50. The combined premium of these contracts totals $22.40, which serves as a proxy for the anticipated price swing in either direction.
Estimated Trading Range:
Adding and subtracting this implied move from the $227.50 midpoint suggests a market-expected range of approximately $205.10 to $249.90 by the April 25th expiration.
Strategic Implications:
With a projected move of ±$22.40, the market does not currently price in a scenario where TSLA reaches your target of $262.25 within the specified timeframe. This level sits notably above the implied upper boundary, indicating that such a significant upside move is not widely anticipated by options traders at this moment.
Note:
Based on recent analysis leading up to today's earnings release, projections suggested Tesla (TSLA) could experience a price movement ranging between approximately 9.3% and 11.4%. The option pricing referenced, implying a shift of roughly $22.40 on a $227.50 stock price, or about 9.9%, aligns well within that anticipated range. Even at the higher end of the spectrum, an 11.4% move would place the stock near $253.44, which remains notably below the $262.25 level.
Implied Probability via Option Delta (Estimation):An option’s delta can serve as a general indicator of the market’s perceived likelihood that the option will expire in the money, specifically, for a call option, that the underlying asset's price will exceed the strike price at expiration. In this case, the $262.25 strike call is approximately $35 above the current trading level of $227.50, with just three days remaining until expiration. Options this far out-of-the-money with limited time left typically exhibit very low delta values, often below 0.15, and potentially under 0.10.
Market Implication:
A delta in this range implies that the market views the probability of TSLA reaching or surpassing $262.25 before expiration as quite low.
Contextual Background:
Tesla has historically exhibited significant price volatility following earnings announcements. A review of past performance reveals that price fluctuations exceeding 10% are not uncommon, with several instances of more pronounced movement, such as gains of 21.9% and 12.1%, as well as declines of 12.3% and 12.1%.
A post-earnings shift of approximately 15.3% has occurred in the past, indicating that such a move, while on the higher end, remains within the bounds of historical precedent. Although this magnitude surpasses both the implied move currently anticipated by the market and the average fluctuation cited in some analyses (approximately 12%), it aligns with Tesla’s established pattern of elevated earnings-driven volatility.
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