A smart way to play Tesla's big stock-market swings using options

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OPINION: Tesla options are fairly priced, so any speculative strategy can be undertaken without fear of having overpaid for the options, Lawrence G. McMillan writes.

Tesla has recently been one of the most active and volatile stocks. However, what appears to the naked eye is not always the same when placed under the microscope of analytical mathematics.We can see that the stock was in a steady uptrend from May through October of 2021. Then, it experienced a strong rise into November. Since then, it has been volatile – swinging back and forth in wide ranges and generally moving lower. Note that the stock bottomed in the 550-570 area back in May 2021.

There is one more piece of information that we need to have to build an option strategy: a comparison of today’s implied volatility with past daily readings of CIV. That is shown in the next chart. As one can see from the accompanying stock charts, the stock could be above 870 very quickly if things turn bullish.

The problem with a put sale is that if the stock drops below 550, one might not be so willing to own the stock. But the put sale can always be closed out for a loss if Tesla is falling. When there is a reverse skew, any option strategy that takes advantage of the skew buy puts with “higher” strikes , and sell puts with lower strikes. That is why it was noted above that a put bear spread might make some sense .

 

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