On Monday April 11th, Tesla (TSLA) announced a recall pertaining to one of its models. TSLA has had a monster move rallying more than 100 points from its 52 week low.

Even with this rally, TSLA has a short interest of over 31 percent. That made me think that any sell-off would be relatively shallow. When the news came out I was looking at multiple ways to play that slight sell-off.

This is the actual movement of TSLA when the recall news came out, using the “on demand” function on ThinkorSwim (TOS).

Intraday-TSLA0

As seen, the daily chart still looks great, with no negative divergence. I knew that any trade would have to have a very short term time frame. The news caused a rapid sell-off in TSLA, as seen on a 5 minute chart. The key was to wait for TSLA to work off its oversold condition. Now, the ideal area to initiate a short position is the red arrow at the ATR trailing stop.

Why would I want to short the stock? Recall news on automakers that are depending on cash flow could hurt sales. I am not saying the stock is going to crash, but will probably not test its daily high until some analysts weigh in the next day.

What are the 3 strategies?

An aggressive trader could buy deep in the money puts. Here is where the April 260 puts were trading.

Intraday-tsla1

The problem with this strategy is that a trader has to be right about timing AND direction. If the stock just sits here for a few days, a lot of time premium would come out of these puts.

A more conservative approach is to sell an out-of-the-money call spread, with a trader assuming any bounce back would be mild. The 260-265 Weekly Call Spread could be sold for 1.39. This means TSLA would have to rally 7 points in the next 3 days just to start losing money. That is using Theta to your advantage!

Intraday-TSLA2

The problem with this strategy is the limited amount of profit potential in the trade.

My actual trade, and another conservative strategy, which I posted in the Simpler Options live chat, was to buy an in-the-money put butterfly. I bought the 260-250-240 put butterfly for 2.06. The spread was so cheap, even though it was 5 points in the money, because the negative news pumped up the out the money puts. This spread actually had only 2.06 of risk, but a potential reward of almost 8 dollars! We stayed in overnight, and sold it the next day for around 2.70, or a gain of over 30 percent !

Intraday-TSLA4

Get more of Chris Brecher's trade recommendations, strategies, & actionable market analysis at Simpler Stocks.