Time decay can be frustrating, right? How to make options more "value-preserving"?

Many people have demonstrated remarkable opportunistic skills. I've seen someone make a cool million buying Tesla calls.

I reckon she had been gradually buying in over the past week or so, purchasing out-of-the-money calls expiring in about half a month (but not too far out, at 167.5, which became in-the-money after Tesla's Monday surge).

Many comments label this as pure gambling, based on the premise of large funds going long on calls expiring in half a month without a perfect bottoming-out formation. But let's face it, calling trading "gambling" is somewhat meaningless.

Back to trading.

As shown, this mooer clearly possesses strong technical analysis skills.

Now, as a newbie with average trading experience and moderate technical analysis skills, when Tesla closed at 162 on Thursday, here's what I thought: it would likely climb back above 170, but reaching 175 would be challenging. I didn't mention a timeframe because last week, I wasn't sure if it would stop falling in the short term (in half a month or a month). My estimate is that it will return to 170 within three months.

Here's a summary:
1. The decline seems a bit unwarranted. Bearish fundamental news: the magnitude of car price reductions exceeding expectations, intensified competition in electric vehicles, and delays in products like FSD and the third-generation platform. Negative news is negative, sure, but a sudden plunge of seven points starting from the 4th? I don't get it. Also, it feels like a lot of the Q4 earnings report anticipation has been factored in, and the outlook at that time was quite conservative.

2. On the technical side, despite the decent volume and RSI on last Thursday's decline, there wasn't a clear bottoming-out pattern. The stock price dipped to 160 during Thursday's session. Note this logic: 135-155 is a robust support range for Tesla. Reaching this level, even without a strong bottoming-out pattern, I believe many Tesla enthusiasts would buy in.

3. From a forward valuation perspective, based on a PE ratio of 30-50, the range for 2024 is $91-153, and for 2025, it's $122-204. Dropping below 160 isn't a bad price.

4. The logic behind Tesla's major decline at the end of 2022 is different from now. At the end of 2022, indices fell, and the overall market dropped. But now, the overall market has been relatively stable over the past two years.

So, how did I act? I went long on an in-the-money call expiring in three months. It was around 32 at the time, 40 on Monday, and now it's at 38.

Many might say I'm just coming out now that it's risen. But the characteristic of this option lies in the fact that even though it didn't skyrocket like the big players' calls, if Tesla reaches 170 within two months, I won't incur losses. If Tesla reaches 170 in a month, this call will earn a 10% profit. As it turned out, Tesla surged on Monday, and this call gained 30%.

Let me explain why I call this option more value-preserving: two key points.

Expiring in three months. As shown, an option's time decay accelerates over time. How to understand this? In the first 90 days, I'm consuming 1/90 of the option's value each day. In the last 5 days, I'm consuming 1/5 per day. No need for complicated mathematical analysis; just a feeling is enough.

Strike price at 140. Without delving into complex mathematical explanations, let me give you a sense. For out-of-the-money options, the intrinsic value is already low, so its time decay (Theta) is small. For in-the-money options, the deeper in the money you go, the more of your investment is allocated to intrinsic value (price differential), and although each contract is more expensive, the proportion of time value is relatively smaller, resulting in slower decay.

Buying a call option expiring in three months with a strike price of 140 is a simple logic: knowing that Tesla will rise but uncertain about the timing. This approach doesn't incur significant time decay for small traders like us, which is acceptable. Making a profit of more than ten points is considered a stroke of luck. When my trading instincts are honed, I might try buying far out-of-the-money options.

Finally, let me add a personal opinion on Tesla: by 2024, people will realize that its stock price is still strongly linked to car sales and gross profit margins. It's not that Tesla is bad, but within the big seven, its price isn't cheap.

Tesla went from over 400 to where it is now. When it was at its peak, everyone was piling non-car-related hopes onto it, but now it's all been wiped clean.

Mooers, feel free to comment and discuss.