TSLA Analysis

Update 8/1/2015: TSLA options expired out of the money for maximum profit.

Shares rose by 2.0% over five days, or a +145% annual rate. The options position produced a 100.00% yield on debit, for a +25,240% annual rate.

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The electric vehicle and energy storage company Tesla Motors Inc. (TSLA), headquartered in Palo Alto, California, publishes earnings on Wednesday after the closing bell.

[TSLA in Wikipedia]

TSLA

I shall use the AUG1 weekly series of options, which trades for the last time nine days hence, on Aug. 7.

Ranges

Click on chart to enlarge.

TSLA at 12:05 p.m. New York time, 30 days hourly bars

Implied volatility stands at 50.4%, which is 3.3 times the VIX, a measure of volatility of the S&P 500 index. TSLA’s volatility stands in the 94th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	284.84	307.77	286.65	272.16
Lower	238.98	216.05	254.33	251.66
Gain/loss	8.8%	17.5%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

The one standard deviation range covers a lot of ground on the grid and provides insufficient premium. I've built a proposed trade based on the maximum range of post-earnings movement.

Proposed Trade #1:
Iron condor, short the $275 calls and long the $280 calls,
short the $250 puts and long the $245 puts,
sold for a credit and expiring Aug. 8.
Probability of expiring out-of-the-money

AUG1	Strike	OTM
Upper	275	86.5%
Lower	250	82.2%

That structure produces a 4.2:1 risk/reward ratio, which is higher than I'm willing to accept.

The stock price is downtrending, so if I trim the zone of profit, it will be at the top, while covering as much of the earnings range as possible.

Proposed Trade #2:

Iron condor, short the $270 calls and long the $275 calls,
short the $250 puts and long the $245 puts,
sold for a credit and expiring Aug. 8.
Probability of expiring out-of-the-money

AUG1	Strike	OTM
Upper	270	70.1%
Lower	250	82.2%

The premium is $1.29, which is about a quarter of the width of the position’s wings.The stock at the time of purchase was priced at $260.98.

The risk/reward ratio is 2.9:1, which is high but acceptable.

The zone of profit in the proposed trade covers a $10 move either way. The biggest immediate move after each of the past four earnings announcements was $10.25, and the average was $6.64.

Decision for My Account

I've opened a position on TSLA as described in Proposed Trade #2.

The risk is a bit higher because I shrunk the profit zone, but I judge it to be acceptable. I've mitigated that risk by opening a smaller than usual position.

-- Tim Bovee, Portland, Oregon, July 27, 2015

References

My volatility trading rules can be read here.


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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.