Date Published: 2017-04-11
Written by Ophir Gottlieb
There has been a way to profit from Tesla Inc (NASDAQ:TSLA) irrespective of stock direction, but it takes a deft hand and a clever investor that makes two adjustments to turn in out-sized returns.
Likely the single most important decision when trading options is whether to buy or sell the premium. Even with Tesla Inc (NASDAQ:TSLA) stock's realized volatility, owning options has been a losing trade -- unless we make a smart adjustment.
Owning Option Premium
Here are the results of owning naked options in Tesla Inc over the last three-years -- we're looking at out-of-the-money strangles.
Tesla Inc's large stock moves -- this strategy has been a disaster.
Our first step in improving the results is to eliminate the risk of earnings. Options are much more expensive during earnings periods, for good reason, and it's well worth our time to the see impact on the original strategy of removing earnings trading:
The returns went from a 49.4% loss to a 13.3% gain. But now we make the really important move:
Instead of the naked buying of options in Tesla Inc, we will sell options that are further out of the money to offset the expense of the purchases but still invest in a strategy that profits from stock volatility. The strategy we are going to look at is called a condor (or an iron condor). Here are the results of both avoiding earnings and selling out of the money options against the long options:
It's remarkable, but these are the realities of option trading. The results went from a 49.4% loss, to a 13% gain by avoiding earnings, and now to a 99.5% gain by selling options to offset the long options. During this time period, Tesla Inc stock was up 57%.
We can do this over the last six-months as well:
Now we see a 88.8% gain while the stock is up 55% in that same time. And again, the appeal to owning options in this way is the removal of stock direction bias -- up or down, the stock direction doesn't matter, it's the volatility that we're after.
WHAT JUST HAPPENED
This is how people profit from the option market - it's preparation, not luck.
To see how to do this for any stock, index or ETF and for any strategy, with just the click of a few buttons, we welcome you to watch this 4-minute demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
The author has no stock position in Tesla Inc (NASDAQ:TSLA).