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