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Option Brief: Tesla Motors Inc (NASDAQ:TSLA) has surrendered 4.3% so far this week to trade at $235.53, due to continued fallout from a direct-sale ban in New Jersey. However, while Schaeffer's contributor Adam Warner recently highlighted the risks of "owning time" in TSLA right now, one options trader is wagering on long-term upside for the electric automaker.
Just before yesterday's close, simultaneous blocks totaling 1,100 contracts traded at the January 2016 230-strike call. The contracts crossed at $65.56 -- closer to the ask price at the time, suggesting they were bought. Meanwhile, symmetrical blocks traded at the January 2016 340-strike call -- this time near the bid price for $32.36, implying they were likely sold. Open interest increased by 1,100 contracts at each strike, indicating the trader constructed a bull call spread for a net debit of $33.20 per pair of options.
As alluded to in the name of the strategy, the investor has bullish prospects for TSLA. However, instead of simply buying the 230-strike calls outright for $65.56 a pop, the trader reduced both his maximum risk and his breakeven level by selling to open the higher-strike calls. Specifically, the "vanilla" calls wouldn't have generated a profit until TSLA toppled $295.56 (strike plus premium paid), and he'd be risking the entire $65.56, should the stock end south of the strike at January 2016 options expiration.
With the spread, the speculator will make money if TSLA topples $263.20 (bought strike plus net debit), and he's risking only $33.20 per contract -- about half that of the straightforward call purchase. However, the sold calls also limit his profit potential to $76.80 (difference between strikes, less the net debit) per pair of options, no matter how far Tesla Motors Inc (NASDAQ:TSLA) shares should soar past $340. With the simple call purchase, his maximum reward would be theoretically unlimited.