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Sam, how does TSLA look to you? Is it reaching an oversold level that would make sense to buy?
Getting very close to where we want it to be. Will discuss it soon.
Sam – Tesla oversold a lot today? Any trade ideas?
Any thoughts on Tesla? Looks deeply oversold now, I know you talked about it yesterday and didn’t love how it was moving. Wanted to see if today’s drop made it more attractive to you?
Yeah, a lot of hate on TSLA right now, it’s beaten. My guess is if we go in now it’s going to have to be gradual, or wait a few hours for it to stabilize.
So earnings is coming up soon and that does complicate the timing issue. But the cycles we’re talking about here are very very near-term in nature. Nvidia could sell-off, reach oversold, bottom and rally back to where we are right now or higher and still have a week or longer to go until earnings.
We’re talking hourly time-frames here.
A lot of Tesla related questions. We’ll discuss it in a moment.
One 350 or 360 April call look okay, in general, or sit it out?
So it’s really not that simple. Here’s a more detailed post on this issue. Here’s why Baratheon would NOT buy the $360 calls. Why we would only really trade this with the spread, through shares or through the purchase of DITM call like the Jan $250’s which trade at a 10% premium and provide a lot of leverage over common stock. The problem with the $250’s is the high risk of spending $100+ on an option. Here’s the problem as we see it.
Right now the $360/$380 call-spread for the March expiration trades at $5.03 at the mid-price with Tesla sitting here at $334. If Tesla went nowhere for an entire month, that’s about where our spread would trade. We’d be down about $0.70 or 13%. Hell let’s say it drops even $1.00 down to $4.75. That’s still like 17%. So let’s say 13-17% in the red with Tesla having gone nowhere for an entire month.
The March $360 calls are trading at $14.60.
The April $360 calls are trading at $22.40.
-The April $360 calls would drop 35% in that same scenario.
-The April $360-$380 call-spread would take half the loss at -17%
And that’s with the current sky high volatility. Volatility has a more marginal impact on spreads than on open ended calls.
If Tesla went nowhere for a month and stabilized, vol would tank and the options would lose a lot more value than the $14.60 indicated by the march expiration price.
This right here its the problem with open ended calls on a high volatility stock like Tesla. The margin for error is paper thin.
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Now let’s consider the profits. The only situation where the calls would perform better is if (1) Tesla were to skyrocket to $420 a share and one managed to hold the position the entire time as it rallied to $420; or (2) the stock immediately began rebounding toward $360 a share over the next week. Immediate rally or big rally.
But let’s say Tsla were to rally to $360 in a month. So it takes a month for Tsla to get there.
Right now the march $335 calls are trading at $23.80. That’s about what the April $360’s would be trading at under the same precise conditions (same volatility etc) with Tesla at $360 come 1 month from now. That’s a minor profit at best. 5% or something liek that.
Apply that same scenario to the spread. It trades at $8.00 with Tsla just outside the money. The spread gains 40% if Tesla rallies to $360 over the next month.
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With calls, it’s a different trade entirely. It doesn’t quite work. The actual goals on the trade are very different. With calls, you need immediate performance with a small margin of error. Tesla needs to rally immediately. It can’t sit around here for a month and can’t take a month to get there.
And even then, the calls would just barely outperform the spread anyway. If Tesla made an immediate push to $360, the spread would also perform almost as well or maybe even better under certain situations.
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Hedging and risk management is critically important. The spread is an internally hedged asset that reduces the impact of volatility. It allows for a larger margin of error in terms of timing.
Let’s say Tesla rallies to $370 exactly at expiration. Our spread rises to $10.00 producing 85% returns. The $360 calls fall 50%. See the difference?
Yes, thank you. I will have to read it again a few times. 🙂 I hate making you type. I think I would really benefit from having a call spread on my screen that I could follow everyday, as I have with buying and selling calls. Obviously identifying premium is still alluding me. I thought overbought was always anticipating some sort near term rebound, but interesting to see how the spread allows for sideways action and a larger window if I understand correctly.
Chris, it helped me a lot to play with an options calculator such as the one below.
For calls https://www.optionsprofitcalculator.com/calculator/long-call.html
For spreads https://www.optionsprofitcalculator.com/calculator/call-spread.html
You can compare scenarios side by side.
I’ve also gotten into the habit of taking a screen capture of the calculator result whenever I enter a new trade so that I can refer back to it throughout the lifetime of the trade.
For example, here’s Sam’s TSLA trade that we entered today.
Don’t answer that.
Don’t worry about the typing. Other people are seeing this and it’s essentially a small post within a post addressing an issue.
That’s accurate. When we buy, we’re buying in anticipation of the stock rebounding fairly quickly. But the problem is that it does’t always play out that way. And when it doesn’t, we want to be in a position that will allow us a margin of error.
We’ve seen Tesla push down into very deeply oversold conditions. It’s pretty oversold right now on the hourly and just barely oversold on teh daily.
Our timing is hourly based. We’re buying when we’re buying because it’s sitting at a sub-20 RSI on the hourly.
If it rebounds right away, we profit immediately. If takes a little more time to get there, we’re still in position to profit as long as Tesla eventually rebounds up to $350-$360 a share in the coming weeks.
Whereas with calls, if it doesn’t’ start the process right away, then it’s a loss.
it’s not like this with all stocks. Another stock might have the $360’s only costing $6.00 due to the lower volatility profile. And with a stock like that, you have a much better chance of producing a profit with a lower margin of error.
Don’t know if you saw this: weeks before Stargate was announced, EU announced 7 AI centers: https://ec.europa.eu/commission/presscorner/detail/en/ip_24_6302
Today they plused another 200B for InvestAI initiative: https://ec.europa.eu/commission/presscorner/detail/en/ip_25_467
Take a look at our 2pm update. Putting on trades soon.
Okay I am closing my AAPL 220’s
Are you still looking to take action on Nvda? It moved back up a bit
Hi Sam
I missed the selling of Nvda covered calls earlier. Is this still something that makes sense?
Obviously, it’s always going to be better at higher levels. We sold the covered calls against Nvidia when it was trading at $130. they’re better priced at $134
In terms of NVDA, how can we know whether scenario A or B is more likely? Or is there no way to know and it’s just a toss up
There’s no way to know. There are too many factors involved in making that determination. For one, we have inflation tomorrow and the market’s reaction. There’s no way to know whether it will put in a second instance or overbought or not. All we can do is trade the high probability scenarios that play out as a result.
For example, while we can’t know whether a second instance of overbought will happen or not, we do know that if it does happen, we can put on a short trade and reduces exposure to some of our short-term long positions in Nvidia.
if instead, Nvidia pulls back as it has every time it reached overbought in the first instance, then we simply just wait for oversold and go further long. We close out the covered calls we sold ($135’s in Baratheon) and simply buy more $125’s ahead of the next rebound.
So we have moves to make regardless of whatever Nvidia does.
For us it would be significantly better if Nvidia makes a second push higher. We’ll make substantially more money as a result.
But we’ll still do fine either way.