To The Moon

Hello everyone! Today I want to share some option strategies with you. Hope it can help u!

1.

Had an interaction with someone regarding this trade, and thought it would be helpful to post our reasoning for all optionselling traders to see and learn from. We're playing $Tesla Motors(TSLA)$ 's earnings call this week. So, why did we sell a 165/155 put credit spread that expires in March? What was our strategy and line-of-thinking on taking this trade? Read our thought process in the thread below ...

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2.

We don't know which way $Tesla Motors(TSLA)$ will move for earnings. So, we wanted to capture premium on this trade before the earnings call. That said, we don't care which way it moves and don't have to worry about predicting its movement in order to make money ... unlike option buyers that have to predict the move correctly in order to make money. We want to capture higher premium by selling a further-out expiration versus this week or next week's expiration. If TSLA pumps up big after earnings, then IV crush will kill the premium on the contracts we sold regardless if its a weekly or monthly.

3.

We picked the 165 short strike because there is volume support at that level, and the 155-175 range was an accumulation zone when TSLA was down there previously, so we're assuming there would be strong buying activity around that level if TSLA were to breach it. Also, we purposely identified and picked a low delta strike (less than 0.10). In addition, we have the 155 long strike as a hedge, so that helps to limit downside risk.

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4.

If, for whatever reason, TSLA drops to 165 pre-earnings or post-earnings, we can mitigate the risk by rolling the 165p to a lower strike (for a net credit) and get ourselves a better entry price for assignment. And, we can cash out our 155p for a lot of profit. That said, its a very low probability that TSLA drops to 165 pre-earnings. In addition, theoretically, IV crush could still happen on our 165p if TSLA drops but doesn't drop enough to where MMs think the 165 strike is probable to hit by expiration. So, we could theoretically exit the trade with profit if TSLA drops.

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5.

We win on this trade if TSLA pumps up big or stays flat after earnings ... and (as mentioned in the previous post) maybe even if it drops but does not drop enough to increase the probability (thus increasing the premium buyback) of the 165 strike hitting by expiration. Key thing here ... we win and profit in multiple scenarios. And even if TSLA does drop to 165, we still "win" because our 155p hedge will make money and we can roll our 165p position to a lower strike for net credit and a better entry price for buy-and-hold shares.

6.

TSLA is too strong a stock to drop to $0 and we bet with high confidence it will find strong buying volume/support if it drops to 150 or lower. We will be buyers at that level (or lower if we can get a better entry price). If TSLA pumps up big after earnings, then we'll simply close out the trade for profit (no need to hold until March). If TSLA dumps, then we'll decide what we want to do based on how the buyback premium looks and how TSLA's price action looks like it might move post-earnings into the March expiration.

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