Tesla stock has experienced a significant rally since hitting an early April low, but perhaps now it is time for some sideways price action — and an iron condor might do the trick.
Iron condors can produce a return on stocks that stay within a specified range over the trade period. This can be a welcome change for buy-and-hold investors who are reliant on markets always going up.
Setting Up An Iron Condor
Let's look at how we might set up an iron condor on Tesla stock. An iron condor can be set up via a combination of a bull put spread and a bear call spread.
First, we take the bull put spread. Using a June 20 expiration, we could sell the 270 put and buy the 265 put. That spread could be sold for around 90 cents a share this morning.
Then the bear call spread which could sell the 390 call and buy the 395 call. This spread could be sold for around 55 cents a share.
In total, the iron condor will generate around $145 in premium, with a profit zone ranging between a share price of 268.55 and 391.45. This is calculated by taking the short strikes and adding or subtracting the premium received.
This is quite a wide range for a stock like Tesla. As both spreads are $5 wide, the maximum risk in the trade is $5 – $1.45 x 100 = $355.
Therefore, if we take the premium $145 divided by the maximum risk $355, this iron condor trade has the potential to return 40.8%. If price action stabilizes then iron condors will work well. However, if Tesla stock makes a big move the trade will suffer losses.
Crafting A Stop Loss
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $1.45 per spread, so we could set a stop equal to that. That means covering the spread if its value rises to $2.90.
Note that Tesla reported earnings in mid-April, so this trade should have no earnings risk.
According to the IBD Stock Checkup, TSLA stock is ranked number 7 in its group and has a Composite Rating of 74, an EPS Rating of 59 and a Relative Strength Rating of 92.
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.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
