To The Moon

On Wednesday, the Federal Reserve lowered the federal funds rate target range by 25 basis points to 4.25%-4.50%. This marks the third consecutive rate cut following the initiation of an easing cycle in September. After a cumulative hike of 525 basis points from March 2022 to July last year, the Fed has now cut rates by a total of 100 basis points over these three instances.

Since U.S. President Donald Trump secured his second term, Tesla has been riding a wave of positive sentiment, with its stock price surging over 90%. On Tuesday, Tesla closed at an all-time high for the fifth consecutive trading day, gaining 3.64% to finish at $479.86.

However, on Wednesday, Tesla’s stock price dropped over 8% at market open, wiping out $131.5 billion in market value (approximately ¥962.5 billion). By the end of the trading day, Tesla became the most actively traded stock on the U.S. market, closing down 8.28% with a trading volume of $65.998 billion.

For investors looking to short Tesla, the Bear Call Spread strategy might be worth considering.

What Is a Bear Call Spread?

The Bear Call Spread is an options strategy used by traders expecting a stock’s price to decline within a specific timeframe. This strategy is designed to short the underlying asset while limiting risk exposure.

It can be constructed using either call or put options:

• Bear Call Spread: Selling and buying call options with different strike prices.

• Bear Put Spread: Buying and selling put options with different strike prices.

Bear Call Spread:

• Sell a call option with a lower strike price.

• Buy a call option with a higher strike price.

Bear Put Spread:

• Buy a put option with a higher strike price.

• Sell a put option with a lower strike price.

The primary advantage of a bear spread is its ability to limit the risk of shorting. For example, directly shorting a stock can lead to unlimited losses if the stock price rises sharply. In contrast, a Bear Call Spread caps the potential loss. Variations, such as using options with different expiration dates, can further enhance flexibility (e.g., calendar spreads).

Example: Tesla Bear Call Spread

Let’s assume Tesla is trading at around $439 pre-market. If an investor anticipates Tesla’s price will drop to around $300 in the next month, they can establish a Bear Call Spread in two steps:

1. Sell a Call Option:

   • Strike Price: $300

   • Expiration: January 17

   • Premium Received: $14,515

     

2. Buy a Call Option:

   • Strike Price: $440

   • Expiration: January 17

   • Premium Paid: $3,708

Net Premium Received:
$14,515 - $3,708 = $10,807

Profit and Loss Analysis

1. Maximum Profit

• Condition: Tesla’s stock price ≤ $300 at expiration.

• Amount: Net premium received.

  • Max Profit = $10,807

2. Maximum Loss

• Condition: Tesla’s stock price ≥ $440 at expiration.

• Amount: Strike price difference - net premium received.

  • Strike Price Difference = $440 - $300 = $140

  • Max Loss = (140 × 100) - $10,807 = $3,193

3. Breakeven Point

• Breakeven Price:

  • Upper Breakeven = $440 - ($10,807 ÷ 100) = $331.93

Key Characteristics

1. Maximum Profit: $10,807 if Tesla’s price falls below $300.

2. Maximum Loss: Limited to $3,193 if Tesla’s price rises above $440.

3. Breakeven Point: Tesla’s price at $331.93 results in neither profit nor loss.

Risk-Reward Analysis

• Max Profit: $10,807

• Max Loss: $3,193

• Risk-Reward Ratio: $10,807 ÷ $3,193 ≈ 3.38

Strategy Insights

• Market View: Ideal for scenarios where Tesla’s price is expected to drop moderately (below $300) or remain range-bound (not exceeding $440).

• Risk Control: Limited potential loss by buying the $440 call option.

• Return Potential: High net premium from selling deep in-the-money options.