Tesla stock rallied 12.6% Monday with investor anticipation of its Battery Day event on Sept. 22. And on Tuesday, shares rallied as much as 10% in heavy turnover amid a fifth straight advance.
Tesla (TSLA) bounced beautifully off the 50-day moving average earlier this month. Ditto for its rebound off the 10-week line on a weekly chart. So, with investors continuing to make bullish bets on Tesla stock in advance of Battery Day, it seems like the stock could be drawn back up to the all-time high around 500.
How could you create a low-risk way to play that opinion with options? Try a bull call spread.
Tesla Stock Options Trade: The Bull Call Spread
Selling the further out-of-the-money call reduces the cost of the trade. But keep in mind that this also limits the upside.
Going out to the Oct. 16-expiration options, a 490 strike call option was trading recently around $29.85 and a 500 call was around $27.65.
Buying the 490 call and selling the 500 call would create a bull call spread. The cost of the trade would be roughly $220 and the maximum profit potential would be $780 (difference in strike prices less the premium paid).
A bull call spread is a risk-defined strategy, so if TSLA stock closes below 490 on Oct. 16, the most the trade could lose is the roughly $220 premium paid.
Potential gains get capped above 500, so no matter how high TSLA stock might go, the most the trade could profit is $780.
Trading a bull call spread can be an easier way for smaller traders to gain bullish exposure to the upcoming Tesla event using options.
When To Cut Losses And Control Trading Risk
In terms of trade management, if the spread in these two Tesla stock call options dropped from $2.20 to $1.10, then I would consider closing early for a loss.
It’s important to 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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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