Last month, we looked at a Tesla iron condor that worked well, and I think conditions are still favorable for another trade.
Implied volatility is reasonably high at 60%, which means that short strikes of the condor can be placed quite far away from the stock price. This gives the trade a high margin for error.
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
Tesla Stock Trade Targets April Expiry
First, we take the bull put spread. Using the April 21 expiry, we could sell the 140 put and buy the 135 put. That spread could be sold yesterday for around $0.60.
Then the bear call spread, which could be placed by selling the 235 call and buying the 240 call. This spread could be sold yesterday for around $0.40.
That's quite a wide iron condor and should have a good chance of success.
In total, the iron condor will generate around $1 per contract, or $100 of premium.
The profit zone ranges between 139 and 236. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Because both spreads are $5 wide, the maximum risk in the trade is 5-1.00 x 100 = $400.
Potential Return Of 25%
Therefore, if we take the premium ($100) divided by the maximum risk ($400), this iron condor trade has the potential to return 25%.
If price action stabilizes, then iron condors will work well.
One way to set a stop loss for an iron condor is based on the premium received. In this case, we received $100, so we could set a stop loss equal to the premium, or a loss of around $100.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around 160 on the downside and 210 on the upside.
According to the IBD Stock Checkup, Tesla stock is ranked No. 5 in its group and has a Composite Rating of 79, an EPS Rating of 99 and a Relative Strength Rating of 17.
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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
