Let’s face facts: with EV manufacturer Tesla (TSLA) rising almost 60% on a year-to-date basis, it might seem to be too late to bank on this opportunity. It appears that the hype train left weeks ago. Nevertheless, the dynamism of the options market allows traders to define what success means, thereby artificially creating a high-probability wager.
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It’s true that skepticism is starting to grow regarding the EV maker’s lofty goals. Still, management insists that lower vehicle costs and the rising incorporation of autonomous solutions should generate 20% to 30% unit sales growth for 2025. Frankly, it’s difficult to doubt Tesla CEO Elon Musk. While eccentric and perhaps to some insufferable, he didn’t become the world’s richest man by being wrong.
Plus, TipRanks reporter Joel Baglole issued an alarming statistic. Over the course of the last few months preceding the 2024 election, short sellers of TSLA stock lost around $7 billion. Unless these bears cut their losses, the red ink has gotten worse. Currently, I’m in no mood to fight the tape any longer, so I hold a Buy assessment on shares. However, there’s a smart way to go about this, which I’ll discuss below.
Establishing a Statistical Baseline for TSLA Stock
One simple but contributing factor to why pessimists of TSLA stock lost so much money comes down to probabilities. Like other industry leaders, Tesla’s equity features an upward bias. Based on weekly performance (defined as the difference between Monday’s open and Friday’s close), TSLA over the past five years saw a success ratio of 54.8%.
Stated differently, if you acquire TSLA stock on any given Monday morning, there’s a chance that by the end of the week, your position will be profitable (not assuming the outlay of administrative fees). Over the long run — combined with strict money management and stop losses — you should win out.
Still, this framework also means that the failure rate is 45.2%. Without careful management, your position can easily get blown up. Further, there’s a very real possibility that an unusual losing streak could lead to ruin. Nevertheless, the beauty of options trading is that the speculator can define what winning means, allowing for lucrative opportunities that most retail investors fail to recognize.
Leveraging the Advantages of the Bull Call Spread
Thanks to its triple-digit price tag, TSLA stock comes off as “expensive” to many retail investors. Subsequently, those who are interested in buying TSLA call options tend to purchase the cheapest ones available. However, these “cheap” options are deceptively costly because they’re so far out of the money. It’s unlikely that they’ll be profitable.
To address this dilemma, a trader may consider the bull call spread. Here, you buy a call option and simultaneously sell a call at a higher strike price. Subsequently, the credit received from the short call helps offset the debit paid for the long call. Not only are you receiving a discount on your net long position, but you can also lower the threshold of profitability — many times to below that of the current market price!
Now, it must be said that the maximum reward of the bull call spread comes when the stock hits the short call strike. Therefore, if the security rises materially higher from that point, these gains actually represent an opportunity cost. That’s why traders generally deploy option spreads for short-term strategies, meaning in frameworks involving weeks, if not days or hours.
Building Out the Best Tesla Call Spread
As stated earlier, a nearly 55% success ratio is decent but still involves plenty of risk. However, a bull call spread allows for the threshold of profitability to be positioned in a variety of places, including below the present market price. Notably, if we define success as anything above 1% down for the week, the probability of profit for TSLA stock rises to 59%.
Even better, if success is defined as a return better than a 1.9% loss for the week, the success ratio marches higher to 63.2%. Over the long run, a probability of 63% — again, assuming tight money management — definitely tilts the odds in your favor. Therefore, it’s prudent to consider call spreads that feature a net debit (premium) that, when added to the long call strike, comes out to a breakeven price 1.9% below the current market price.
It’s worth mentioning that you can play around with the probabilities. For example, if success is defined as anything above 3% down, the success ratio for TSLA stock jumps to 67.4%. However, the payout for a call spread with a breakeven point 3% below the market value will likely be very small. Therefore, the best call spread is the one that fits with your risk-reward profile.
Taking What the Market Gives You
In this article, I have refused to list out specific call spread ideas because it’s a pointless exercise. By the time you read this, the options market will almost certainly have changed the bid-ask pricing. What may have seemed like a good deal may have already evaporated by the time the proposed idea gets to your hands.
Instead, what I’d like to stress is that TSLA stock, on a weekly basis, features an upward bias. Further, the options trader — with the deployment of the bull call spread — can artificially lower the threshold of profitability. By doing this, the probability of success naturally rises. However, as you reduce your probabilistic risk, there is a tendency for positional risk (the net debit paid or maximum loss) to rise.
Still, this inverse correlation between probabilistic and positional risk is not linear. Without driving too far into the weeds, this framework means that there are certain trades that offer the biggest bang for the buck. This is why it’s important to understand the statistical baseline of the target stock to gauge how much probability you can take from the market while still extracting a satisfactory payout.
Is TSLA Stock a Buy?
Turning to Wall Street, TSLA stock has a Hold consensus rating based on 12 Buys, 13 Holds, and nine Sell ratings. The average TSLA price target is $267.79, implying 33.2% downside risk.
The Takeaway: Take the Smart Approach with TSLA Stock Call Spreads
Despite Tesla defying gravity and thus raising skepticism of sustained positivity, the statistical reality is that TSLA stock features an upward bias. In the absence of a truly compelling reason to short the EV maker, it’s probably better to stay on the optimistic side of the ledger. Nevertheless, there’s a smarter way to approach the company with options.
Using a strategy called the bull call spread, the speculator can artificially lower the threshold of profitability. By doing so, the chance of success rises but at the cost of a lower payout. Fundamentally, then, the name of the game is to take as much reward as possible while minimizing both positional and probabilistic risk.
