In this article, we want to talk about recent developments in Tesla (TSLA) and the resulting trading opportunities. We have opened a Covered Call in Tesla.
Tesla is to be privatized
The basic idea of our Covered Call is based on this tweet by Elon Musk (CEO of Tesla):
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
With Tesla currently under the target, one can speculate that the price will move towards $420. Of course, there is no guarantee, because as you surely know: There is no such thing as a free lunch! Still, we think the current position is good enough to buy Tesla shares and sell call options as a kind of hedge. If Tesla stagnates or falls, we earn some money with the premium income.
What our Covered Call consists of
We have set up our Covered Call in Tesla as follows:
- Purchase of 50 shares at $371.88
- Sale of a call with the strike $410 and the term 21.09.2018
- Premium income for the call is $682 ($6.82 * 100)
Wondering why we only bought 50 shares? That’s a very good question! The answer lies in our risk and money management rules. We already have a large number of shares in the portfolio and do not want to let the portfolio go too far. In addition, the Tesla share is very expensive and 100 shares would make up more than 30% of the account.
This is how the chart looks with the major price tags:
Call option does not cover the stock portfolio
Due to the lower number of shares, the problem arises that the call sold is not fully covered. In this case, we have planned to buy another 50 shares should Tesla trade above $410 shortly before the end of the term.
Stop Loss, Take Profit and Break Even in this Tesla Trade
You wonder what maximum profit we can make? This can be calculated relatively simply:
- If the call expires worthless, we earn $682
- If Tesla rises to $410 or above, we’ll earn $1,906
- Thus, the maximum win is $2,588
Scenario 1: Tesla rises to $400
If Tesla rises to $400, we’ll earn the full premium on the call and $1,406 on the stock, making $2,088 in total.
Scenario 2: Tesla rises to $380
If Tesla rises to $380, we’ll earn the full premium on the call and $406 on the stock, for a total of $1,088.
Scenario 3: Tesla drops to $360
If Tesla drops to $360, we’ll earn the full premium on the call and lose $594 on the stock, which still adds $88 to the total.
Scenario 4: Tesla drops to $330
If Tesla drops to $330, we’ll earn the full premium on the call and lose $2,094 on the stock, giving a total loss of $1,412.
Stop loss at Tesla
Of course, we want to limit the loss and, in accordance with our money management rules, risk no more than 1% of the account. For this reason, we have a combined order in the market that closes the trade when the total loss from both positions (option and stocks) reaches $1,000.
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