written by reader Ok, you asked for it, here goes, I was advised to do some options on TSLA

By backoffice, May 18, 2018

the trade was was given to me about 2 weeks ago, buy 1 put on TSLA June 1st at 312.50 and sell a put on TSLA at 260.00.
Because I don’t have a level 2 account with Schwab I couldn’t do it. (it’s pending). My question is how would this look at this time and also how much money would I need in the Account to cover this trade? Thanks Travis!

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Travis Johnson, Stock Gumshoe
May 22, 2018 3:49 pm

That’s a really precise short-term options trade. Not sure I’ll get the details perfect because I just have a moment to run through it on the fly, but her’s how I see it:

If you buy a put, you buy the right to sell 100 shares of stock — in this case, 100 shares of TSLA. That’s a bet that Tesla will fall below $312.50 over the next week or two (if you’re talking June 1 expiration), and if you sell a put you’re trying to reduce the cost a little bit buy also promising to buy 100 shares of TSLA at $260 if it falls that far.

Right now, that would cost you about $3,700 per contract to ($37 per share) buy the put, and you’d get cash back of about $300 for selling the lower -priced put — so if TSLA is at $275 in ten days, like it is now, you come close to break-even (you can sell at $312.50, which is $37.50 above $275, and the $260 put expires valueless unless the price falls that far at expiration so you pocket the $300)

If TSLA is back to $320 in ten days, you’re out that $3,300 net cost and everything expires worthless, or if it’s at $290 your $3,300 turns into $2,200, roughly. If it’s at $260, you’re pretty much at max profitability, the option you bought is worth $5,250 and the option you sold is still worthless. So as I see it, you’re risking $3,300 for a possible range of 100% loss to about 65% gain. Don’t know what the odds are or how it will turn out, that all depends on how volatile Tesla is, but this seems like a “I’m positive Tesla will fall, just not sure how much” bet.

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