Opinion: A smart way to play Tesla’s big stock swings using options

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 had a consistent upward trend from May to October 2021. Then it had a strong rise in November. Since then, it has been volatile – swinging back and forth in wide ranges and generally moving lower. Note that the stock bottomed out in the 550-570 area in May 2021.

This action increased both the realized volatility of Tesla stock and the price of its options. In reality, however, Tesla options aren’t terribly expensive on a historical basis. However, there is a Tesla option pricing model that presents itself as a highly viable strategy.

A Look at Tesla’s Volatility

Let’s start with an analysis of Tesla’s volatility and its options. Currently, the stock’s 20-day (historical) realized volatility (HV) is 82%. I wouldn’t be too concerned about what 82% means statistically, but rather use it for comparison with other volatility measures. The 50-day HV is 70% and the 100-day HV is 71%. So these are in the same headquarters.

This chart shows the 20-day HV superimposed above the stock chart.

Laurent McMillan

The 20-day HV (top chart) was decreasing as Tesla was increasing, from May to October 2021. This is typical. Since then, however, with Tesla hovering in a wide range, the 20-day HV has risen, although it has remained roughly within a 55% to 90% range since last November.

These historical volatilities become clearer when we examine the implied volatilities of Tesla options. On a volume-weighted calculation, the composite implied volatility (CIV) of TSLA options is 71.4%. Given that the historical volatilities were 82%, 70%, and 71%, this shows that the implied volatility for Tesla options is “about right.” They aren’t too expensive, but neither are they cheap considering how fast the underlying stock has moved.

There is another piece of information we need to build an options strategy: a comparison of today’s implied volatility (CIV) with past daily CIV readings. This is shown in the following graph.

Laurent McMillan

You can see that the current VIC (71.3%) is towards the upper end of the VIC range over the past year. Last September, Tesla options were trading with an implied volatility of 31% – that’s the low point on the implied volatility chart. In fact, over the past 600 trading days, the current reading of 71.3% is within the 67and percentile. The percentile is just an easy way to indicate the cost of options, on a scale of 0 to 100. So they are a bit “overpriced”, but not hugely.

Options Strategies to Consider

Call purchase: So which options strategies make sense? If you’re bullish on the stock, you’re not really paying too much for an outright buy; pure and simple purchase of the currency at parity, June (17and) The 770 call costs 70 points, or $7,000 for a contract. This is a large amount for a call, but statistically it is not a very high price, as its implied volatility is around 75% – generally in line with the volatilities discussed above.

One could counter this dollar outlay a bit by creating a bullish call spread – perhaps by selling the June (17and) Call 870 against the call you buy. This would return around $3,000, but would cap your profit potential at 870.

As can be seen from the attached stock charts, the stock could be above 870 very quickly if things turn higher.

Personally, with the CIV in 67and percentile, if I was downright bullish on the stock, I wouldn’t bother with a call bull spread because it limits your profit potential. Bullish call spreads only make statistical sense if the CIV is much higher – maybe near 90and percentile or more.

Put the purchase: Essentially the same argument applies if you are bearish on the stock: buy the put at the money and don’t spread. There is a small argument for a bearish spread (eg buying the June 770 put and selling the June 670 put) versus the call bull spread, which we will get to in a minute.

To put up for sale : If you didn’t mind owning the stock at 550, the June (17and) 550 put options could be sold for about 8 points. This is where the support was on the stock charts above, and that’s an implied volatility of 90% – meaning you’d be selling an expensive option (since 90% is higher than the others). volatilities discussed above).

The problem with a sell sell is that if the stock falls below 550, one might not be as willing to own the stock. But the sell sale can still be closed for a loss if Tesla drops.

Neutral strategy: A neutral strategy is generally one in which the strategist does not necessarily have a firm opinion on the future movements of the underlying stock, but can instead build an options strategy that makes money in a large number of results. Neutral strategies, however, carry risks and they cannot be established willy-nilly without understanding the specifics of the strategy.

One strategy that appears to be viable here involves what is called a “bias” in the implied volatility of options – specifically put options. It is often the case with index options and with equity options where the underlying stock is in a downtrend, that out-of-the-money put options are much more expensive than at-the-money put options. .

Consider the following current information:

TSLA (June 17) Implied Option Volatility
Option Implicit volume

500 bit


550 bit


600 bit


650 bit


700 bit


750 bit


770 bit


Tesla’s put option model of implied volatility is called a “negative” or “reverse” bias, which means out-of-the-money puts are expensive, relative to at-the-money puts.

Incidentally, the pattern does not extend to TSLA calls unless one is looking at extremely far-out-of-the-money calls.

When there is a reverse bias, any options strategy that takes advantage of the bias buys put options with “higher” strike prices (e.g., at par) and sells put options with lower exercise rates. This is why it was noted above that a bearish spread might make some sense (even if it would cap your profit potential on the downside, which you probably wouldn’t want if you were bearish on Tesla).

However, in this case, we are looking for a more neutral strategy. One of my favorite strategies in this case is to:

  1. Buy high exercise put

  2. Sell ​​lower exercise put

  3. sell one same lower strike bet

  4. Buy a deep out-of-the-money product to limit risk

Suppose we establish this strategy:

TSLA Sell Spread
Option Implicit volume

Buy Jun (17th) 700 put

43 debit


Sale June (17) 680 put options

37 credits


Sell ​​570 put options on June 17

15 credits


Buy Jun (17) 400 put

3 flow



6 credits

Note that we are buying lower volatilities (80%) and selling two higher volatilities (82% and 88%) on the three highest strike prices in the spread. The fourth leg is there primarily to limit risk and reduce the money needed to establish the spread.

If you want to give this strategy a name, it is often called a “broken-wing” butterfly spread.

If the stock is above 700 at expiration, you will profit from the initial credit amount ($600 in this case) as all put options would expire worthless in this case.

If the stock is between 570 and 680 at expiry, you earn $2,600 on the spread.

But if the stock falls below 544 at expiration, you have a risk down to the lowest strike price, in this case 400. That would usually be too much risk to take (144 points), so in practice , we would stop this gap if Tesla broke below the lowest short strike, 570. Remember this was the March 2021 low for the stock, so in theory there could be some support at this level. In case of failure, it would be time to abandon this propagation.

This is another interesting aspect of spreads trying to take advantage of the bias. The position can often be removed before expiration for reasonable credit (not the maximum credit, of course). This is due to the way options degrade when there is a bias. For example, if Tesla is between 680 and 700 at the start of June, one could probably remove the spread for a credit of 5 to 10 points.

The following chart shows the profit and risk potential of this spread if held to expiration. As noted above, stop the position if Tesla falls below 570, rather than risk it falling to 400.

Laurent McMillan

This type of spread can only be established in a margin account. Even though there is no margin debit, options spread trading requirements require what is called “collateral margin” to fund the spread. In essence, the risk of spread must be advanced when it is established. Options-focused brokerage firms might lower this requirement, but the ultimate risk is the 144 points between the two lower strikes, minus the initial credit of 6 points, or $13,800.

Typically, an account with a larger stock portfolio might view a spread like this as an “overlay,” where the borrowing power of the stock could be used to fund the spread without having to advance money. money for the collateral requirement.


Tesla options are reasonably priced. Thus, any speculative strategy can be undertaken without fear of having overpaid the options. Since the options are fairly priced, do not use vertical spreads (up spreads to buy or down spreads to sell are not optimal at this time). The presence of the reverse bias in put options means that traders with a more theoretical or neutral bias may consider spreads where put options with higher strike prices are bought and put options with lower strike prices. lower years are sold. The “broken-winged” butterfly is just one example of this type of spread.

Finally, investors with a longer-term view might consider selling deep out-of-the-money (expensive) Tesla put options, if they don’t mind buying the stock at the strike price if the price of the stock drops.

Lawrence G. McMillan is a columnist for CNET and editor of the CNET Options Trader Newsletter. He is president of McMillan Analysis, an investment and commodity trading advisor.

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