Date Published: 2017-03-12
Tesla Inc (TSLA) Inc has been on an historic run of late much to the dismay of the doubters on Wall Street, and there is an exceptional way to use trading options to profit from the run.
Tesla Inc Stock Tendencies
Buying an at-the-money call (also known as a 50 delta call) is a bullish stance on a stock, but the real secret behind successful option strategies is found in the nooks and crannies of the trade. Let’s take a look.
First, here is how buying a 50 delta call every week for the last 6-months has done.
Even though Tesla Inc has seen an historic run, it turns out that blindly buying an at the money call was actually not a very good approach — returning 15.3%. But this is not the end of the analysis — it’s the beginning. The strategy we just looked at must be improved upon, and we start by addressing the risk.
First, we can see what happens if we avoid earnings — that is, while we buy a weekly at the money call every week — when earnings comes around, we simply skip that week. Here are the results.
By avoiding earnings, we can see nearly a quadrupling of returns while taking less risk.
We need to go further. Understanding the reality of Tesla’s stock dynamics leads to a strategy that lets the winners run, but cuts the losing calls off early. We can do this by putting in a stop loss. While a long call can lose 100% of its value, what we can do is put in a rule:
In any week, if the call loses 70% of its value, let’s cut it off, and trade the next week. We are effectively removing fully 30% of the downside risk.
For example, if we bought a $5 call option, if during the week it starts to fade and falls to $1.50 (down 70%), we simply sell it, and don’t wait for it to fade to nothing. We then continue with the same approach the next week.
We can do this with the tap of the mouse:
And here are the results using a stop loss and avoiding earnings.
We have gone from a 15.3% return by buying weekly calls, then taken less risk by avoiding earnings and returned 56.9%, and further yet, by cutting off 30% of the downside risk again, we now see 82.5% returns.
We see more than a quintupling of returns but there was no magic bullet, just a systematic approach based exactly on the dynamics of Tesla’s stock.
Is This Really Analysis, or Just Luck
Skepticism is natural — trading isn’t a game. We can prove to ourselves that this isn’t luck or happen stance. If our trading analysis is correct, this approach should work consistently for all time periods. That is, 6-months, 1-year and 2-years, across the board.
It turns out that this is exactly what we find. Here are the results, side-by-side, for one-year for Tesla Inc (TSLA):
No magic bullet — just objective data. A 36.9% loser, when shedding a bundle of risk by avoiding earnings and then using a stop loss, has turned into a 61.3% winner. We can even look at how this approach worked over the last two-years for Tesla:
There it is again — knowing when to trade, knowing when not to trade, and knowing when to close the trade, has nearly tripled the results over the last two-years.
What Just Happened
This is how people profit from the option market — it’s preparation, not luck. Every stock has its own dynamics, we just need to identify them. This could have been Apple, Google, Bank of America, Coca-Cola or literally any stock, and even any ETF. We could have looked at covered calls, or short puts, or anything that fits our comfort zone — and it’s remarkably easy.
To see how to do this for any stock, beyond Tesla Inc, for any strategy, with just the click of a few buttons, we welcome you to watch this 4-minute demonstration video:
Thanks for reading, friends.
The author has no position in Tesla Inc (TSLA) at the time of this writing.
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.
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