Every now and then, I like to cover a trade idea we talked about in MTM’s Daily Group Coaching class. Today, Tesla Inc. (TSLA) takes center stage. TSLA is one of my favorite stocks to trade options on and usually offers several opportunities a week. Let’s look at a trade from the last week of February.
Bearish Market
The trend is your friend. You have probably heard this a few times, right? At the time of this trade, the S&P 500 was acting bearish to non-bullish, meaning that when tested several resistance levels were keeping the index from moving higher. Check out the hourly chart below.
Edge in TSLA
TSLA, which is a stock I look at every day, had been moving predominantly lower over the past several days. I was looking for an entry that would give me an edge. As you can see in the hourly chart below, the stock dropped below some support around the $301 level. Then it triggered a sell setup as a bearish engulfing candle took out the previous candle’s low after a 2-bar rally up to resistance. The arrow indicates the trigger candle and where to enter.
Since we were expecting a move lower sooner than later because of the sell setup that triggered, we chose an expiration with 2 more days until expiration. At the time, we modeled out a Feb-28-25 290/297.5 bear put spread for a cost of 2.80. That same day, as seen in the chart above, the stock moved lower, and it continued to move lower the following day. Below is the screenshot of the trade idea we looked at the next day.
The spread could now be sold for 5.85 (16.05 – 10.20) or a profit of 3.05 (5.85 – 2.80) or $305 in real terms. And check out the positive theta on the position at the time of the screenshot. A whopping 1.39 (2.46 – 1.07)! Not too bad when you can have an option position generate that much positive theta from a debit spread.
Find Your Edge
Looking for an edge and creating a position to take advantage of it is a key element to successful option trading. Our edge in this case was a bearish trigger and taking a spread with a short expiration that produced positive theta. Your edge is out there. You just need to learn how to find it!
John Kmiecik
Senior Options Instructor
Market Taker Mentoring
