Tesla (TSLA) is due to report earnings next Wednesday after the closing bell. The Barchart Technical Opinion rating is a 24% Sell with an Average short term outlook on maintaining the current direction. 

Tesla rates as a Strong Buy according to 8 analysts with 2 Moderate Buy, 14 Hold ratings and 3 Strong Sell ratings. Implied volatility is 49.85% which gives TSLA and IV Percentile of 39% and an IV Rank of 38%

Today, we will analyze three different ideas:

• A Short Iron Condor
• A Bull Put Spread
• A Butterfly Spread

Short Iron Condor

The first strategy is a short iron condor. An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes. Tesla’s IV Rank is slightly lower than 50%, but an Iron Condor could still work if the stock doesn’t move much after earnings.

The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

Using the January 26 expiration, traders could sell the $195-strike put and buy the $190-strike put. Then on the calls, sell the $240 call and buy the $245 call.

Yesterday, that condor was trading around $1.05 which means the trader would receive $105 into their account. The maximum risk is $395 for a total profit potential of 26.6%.

The profit zone ranges between $193.95 and $241.05. This can be calculated by taking the short strikes and adding or subtracting the premium received.

Let’s take a look at another potential option strategy.

Bull Put Spread

Traders thinking that TSLA might continue with its bullish bias could just trade the bull put spread side of the iron condor.

Trading just the bull put spread side would involve selling the January 26th $195 put and buying the $190 put. This spread could be sold yesterday today for around $0.60 or $60 in total premium. 

The maximum gain is $60 with total risk of $440 for a potential return of 13.6% with a breakeven price of $194.40.

The final idea we will look at is a short strangle.

Butterfly Spread

A butterfly spread is constructed by buying an in-the-money call, selling two at-the-money calls and buying an out-of-the-money call. The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.

The maximum profit is calculated as the difference between the short and long calls less the premium that you paid for the spread.

Using the January 26 expiry, traders could buy the $200 strike call, sell two of the $215 strike calls and buy one of the $230 strike calls. The cost for the trade would be $430 which is the most the trade could lose. The maximum potential gain is $1,070. The lower breakeven price is $204 and the upper breakeven price is $226. 

Conclusion And Risk Management

There you have three different trade ideas for Tesla’s earnings. All three are risk defined trades, so you always know the worst-case scenario even if TSLA makes a bigger than expected move.

Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital.

Short-term trades also have assignment risk, so traders need to be aware of that possibility.

Please 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.

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