Can Tesla's rally continue? How to profit using options seller strategies?

Although the stock price suddenly dropped after an 11-day rally, it slightly rebounded last Friday.

After the failed assassination attempt on Trump, the market accelerated the "Trump trade", pushing Tesla back above $250.

Additionally, Tesla is going to release its Q2 financial report next week (7/23). Differing expectations for its performance may cause continued volatility in the stock price this week.

Many investors are eager to identify investment opportunities but are uncertain whether the stock price will surge as it did previously. They are concerned about buying at a high point. What should they do?

This week, I will introduce several options seller strategies that are suitable for situations with high implied volatility.

Moomoo has launched the “Option Seller Report” feature. By filtering through various indicators, you can explore more opportunities for profits from seller options.

From Options > Analysis > Volatility Analysis, we can know that the implied volatility (IV) of Tesla's overall options chain is at its peak, and the IV percentile is as high as 98%, which is at a high level in its historical range.

Options are made up of two components: intrinsic value and time value. When a stock's implied volatility is high, it indicates a higher potential for significant price movements.

This increased perceived potential means the option is more likely to move into the money (ITM). As a result, the time value of the option increases. Therefore, options carry a higher time value premium when implied volatility is high.

Once the news buzz fades and the market no longer expects significant events in the short term, implied volatility will drop sharply. This is what we commonly refer to as IV Crush (Implied Volatility Crush).

This phenomenon is common around financial report releases. Before the financial report, the uncertainty of the stock is very high, and people expect the stock price to either surge or plummet, which leads to a high demand for options, thereby increasing the premium.

However, after the financial report, the uncertainty around stock prices diminishes, and the enthusiasm for buying options wanes. The IV can drop overnight from its peak, leading to a sharp decrease in option prices.

Given the current high IV, if you expect the IV to decrease after the earnings report, you can employ a seller strategy to sell options.

After the IV Crush, if the stock price remains unchanged, you can still buy back the options at a lower price to close your position, thereby profiting from the time value of the options.

Being an options seller involves risks. In this situation, what strategies are appropriate?

A Cash-secured Put is essentially selling a put option while holding enough cash as collateral to cover the obligation if the option is exercised. If you are optimistic about Tesla's long-term development and believe that the stock price might pull back in the short term, then Cash-secured Put is a proactive strategy that lets you wait for the right moment while potentially profiting from the market's movements.

Suppose TSLA's current stock price is $248, and you anticipate a slight pullback in the coming months.

Consequently, you set up a Cash-secured Put strategy. By doing this, you earn the option premium when the stock price rises; when the stock price falls, you can purchase TSLA shares at your desired price level.

Let's say you have a target buy price of $220. You decide to sell a put option with a $220 strike price, expiring in three months.

By doing this, you receive an option premium of $14.20 per share, totaling $1420 in net premium income.

Scenario 1: If, by the expiration date, TSLA's stock price is more than $220, the buyer will not exercise the option.

Scenario 2: If, by the expiration date, TSLA's stock price is lower than $220, the buyer exercises the option.

Note that as an options seller, your theoretical risk is unlimited while your profit is limited. Since each option contract requires the delivery of 100 shares of TSLA, you would need at least $22,000 to meet the exercise and delivery requirements. Therefore, if you are not prepared to take delivery of the stock, be cautious about selling Put options.

Similar to a Short Put, a Covered Call involves collecting premium by selling Call options.

Unlike a Short Put, which requires sufficient cash as collateral for potential exercise, a Covered Call requires you to already own enough underlying shares to cover the exercise of the Call options.

Suppose you hold TSLA shares and are optimistic about TSLA's long-term prospects.

However, you believe that the short-term bullish expectations are already priced in and the financial report is unlikely to cause Tesla's stock price to rise significantly further.

For this situation, you set up a covered call strategy, which involves selling a Call option while holding Tesla shares.

Assume you think TSLA won't rise above $270 in the next two weeks.

If you happen to hold 100 shares of TSLA at this time, you can directly sell a Call option with a $270 strike price expiring on July 26, and the system will automatically recognize this as a Covered Call.

Alternatively, you can go to Strategy at the bottom of the options chain interface and select Covered Stock. The system will simultaneously execute the purchase of the stock and the sale of the Call option, thereby creating a Covered Call.

You receive an option premium of $7.8 per share, totaling a net premium of $780.

Scenario 1: If, by the expiration date, TSLA's stock price is lower than $270, the option becomes out-of-the-money.

Scenario 2: If, by the expiration date, TSLA's stock price is above $270, the option becomes in-the-money.

We can see the commonality between the two strategies: by holding sufficient assets (stocks/cash) to cover potential exercise, you sell Call/Put options to earn extra income.

As long as the stock price does not reach the strike price of the sold option, you can rollover the position after it expires, continuing to sell options and collect "rental" income.

If the strike price is reached, you can buy the stock at a lower price (Short Put) or exit your position at the target price (Covered Call). For investors who are bullish on a particular stock in the long term and aim to profit from it, this approach is perfectly acceptable.

Moomoo's Option Seller Report feature supports the two basic selling strategies mentioned above. You can access this feature from Markets > Options and then scrolling down to the Seller Report.

In addition to Tesla, you can explore opportunities as an option seller for other stocks or index ETFs in this section. By filtering options contracts based on various metrics such as Return on Investment (ROI) and Out-of-the-Money (OTM) Probability, you can find the contracts that best suit your trading strategy.

Alright, that wraps up today's sharing.

The strategies discussed are best suited for scenarios where you expect TSLA's implied volatility is high.

A word of caution: options trading involves risks, particularly for sellers. If you're not prepared to buy the underlying stock at a lower price, be cautious about selling Puts. Similarly, if you don't hold the underlying shares, be cautious about selling Calls.

If you have a more accurate understanding of the subsequent IV Crush and the range of stock price movements, you can use Short Straddle and Short Strangle strategies.

If you have other ideas about options seller strategies, feel free to share and discuss them in the comments section.