Tesla stock jumped 6% on Thursday, flashing a buy signal and marking a technical breakout. The electric-vehicle maker also was added to the IBD SwingTrader with a price entry of 358.38.
The stock is showing signs of accumulation and is above its 21-day exponential moving average in addition to the 50-day and 200-day moving averages. Investors interested in taking some bullish exposure can do so with much lower risk through a bull call spread.
Shares jumped another 6% in morning trades on Friday.
Implied volatility is low, which means favoring debit spreads over credit spreads is a good idea.
Traders create a bull call spread through buying a call and then selling a further out-of-the-money call. Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Making The Bull Call Spread Work
Here's how it would work. Thursday, the Dec. 19-expiration call option with a 370 strike price was trading around $42.35, and the Dec. 19 call at 380 at around $38.15. Buying the 370 call and selling the 380 call would create a bull call spread.
That trade cost $420, or the difference in the option prices, multiplied by the 100 shares in a contract. The maximum potential profit would be $580, or the difference in strike prices, multiplied by 100 less the premium paid.
The 370 strike was particularly attractive as a clear line of prior resistance, but Friday morning saw Tesla jump well beyond that level of resistance. With a 20-point move in Tesla, you could still create a similarly structured bull call spread by just moving both strike points up by 20.
That keeps the spread cost at $420 with the long call now at 390 and the short call at 400. If the original strikes are used, that spread is now trading around $500, which would be the maximum loss and the maximum profit.
Analyzing The Trade
A bull call spread is a risk-defined strategy. You always know the worst case scenario in advance. If using the higher strikes for the Tesla stock bull call spread, a close below 390 on Dec. 19 would produce the maximum loss of the roughly $420 premium paid.
Potential gains are also capped above 400, so no matter how high Tesla stock might go, the most the trade could profit is $580.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 394.20. In terms of trade management — if the stock dropped back into its base at around 360, or if the spread value dropped from $420 to $210 — I would consider closing early for a loss.
The 360 level represents a break below a resistance level that should become support and could suggest an invalidation of the bullish thesis. Cutting losses at 50% of the premium paid helps preserve capital for future opportunities while preventing small losses from becoming large ones.
What's New With Tesla Stock
Tesla has introduced its new Megablock energy storage system, featuring a next-gen Megapack that installs 23% faster and cuts construction costs by roughly 40%. Chief Executive Elon Musk also announced Tesla is producing its own transformers and continues to promote the Optimus humanoid robot.
With third-quarter vehicle deliveries expected to rise 13% to around 432,000 units from the second quarter, the expiration of the U.S. EV tax credit on Sept. 30 could lead to a sharp drop in domestic demand afterward.
Investor's Business Daily gives Tesla stock a Composite Rating of 65 out of a best-possible 99, an Earnings Per Share Rating of 53 and a Relative Strength Rating of 84. According to IBD Stock Checkup, Tesla also ranks seventh in its group.
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 also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
