SA contributors have done a nice job of explaining the absurdly sharp drop in Tesla's (NASDAQ:TSLA) price on Friday, due to the departure of two executives, as well as the stock's 35% drop from its November highs. Everyone seems to agree that the stock is oversold and the current price is an attractive entry point. I'd like to recommend a relatively conservative buy-write strategy that can still deliver double-digit returns.
Tesla closed at $22.79 on Friday and bounced back by about $4.00 by mid-day Monday. At the then-current price of $26.79 you could have sold a March 30 call for $1.30. The buy-write transaction would reduce your cost basis to $25.49 and deliver a maximum profit of 17.6% ($30 minus $25.49) if the option were exercised.
Alternatively, for more hedging and increased upside, you could have sold a June $32 call for $1.85. This buy-write trade would reduce your cost basis to $24.94 and deliver a maximum profit of 28% ($32 minus $24.94) if the option were exercised.
A couple of key points to keep in mind. The huge spikes up and down indicate just how volatile the stock is. I view that kind of volatility as a plus because it allows me to collect hefty option premiums (i.e., 4.8% on the March trade and 6.9% on the June trade). Less aggressive investors, however, might want to look elsewhere.
Disclosure: I am long TSLA.
Additional disclosure: In addition to my current position, I traded several TSLA buy-writes in 2011.