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Tesla Motors Inc (TSLA) Targeted for Skeptical Options Spread

Dissecting a short call spread on Tesla Motors Inc

by 4/22/2014 9:51 AM
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Option Brief: Tesla Motors Inc (NASDAQ:TSLA) has added 1.4% to trade at $207.25 out of the gate, as Wall Street digests comments from CEO Elon Musk. Speaking at the Geekpark conference in Beijing, Musk said Tesla will begin assembling cars in China within the next three or four years, and said Japan's Panasonic Corp. will likely be the firm's U.S. Gigafactory partner. However, at least one options trader is hoping TSLA shares remain relatively muted through the end of the week.

During Monday's session, the speculator sold to open a block of 2,258 weekly 4/25 225-strike calls for $0.15 apiece, and simultaneously bought to open an equal amount of weekly 4/25 227.50-strike calls for $0.10 each. In other words, the trader initiated a short call spread for a net credit of $0.05 per pair of calls, or $11,290 total (credit x number of contracts x 100 shares per contract).

The strategist will retain the entire net credit as long as TSLA remains beneath $225 through Friday's close, when the options expire. In this best-case scenario, both calls will expire out of the money. However, the purchase of the 227.50-strike calls limits the investor's risk to $2.45 per pair of contracts (difference between strikes minus net debit), should TSLA surmount the upper strike by the end of the week.

Tesla Motors Inc (NASDAQ:TSLA) sports a Schaeffer's Volatility Scorecard (SVS) of 97, implying that the stock has tended to make outsized moves on the charts, relative to what the options market has priced in. Furthermore, the shares closed north of $225 as recently as April 3, and have explored a 51-point range just this month -- and with today's early jolt higher, the strategist could be on pins and needles through Friday's close.


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