Using Tesla as an Example: Company Outlook is Positive, but How to Trade in a Highly Volatile Stock? | Moomoo Research

The recent stock market has been highly volatile, filled with both opportunities and risks. Historically, Tesla's stock price has been highly erratic, exhibiting significant fluctuations. Using Tesla as an example, how can we trade in a market with such high volatility?

It's crucial to ensure that the company or asset in question is fundamentally strong and has a positive long-term outlook. If you believe the company’s operations or long-term profitability (including dividends) cannot sustain, then it lacks long-term value.

Note: The following analysis does not take transaction fees into account.

If we believe Tesla's stock price is currently oscillating within a range and will not experience significant fluctuations before the disclosure of financial reports or operational data, we can use the covered call strategy to earn the time value and volatility value of options.

For example, on August 14, 2024, Tesla's stock price was $201.38. If we believe a price of $220 is worth selling (this target price may vary for different individuals), we could choose to sell a call option with a strike price of $220, expiring on August 30, 2024, with an option premium of $2.32.

This is essentially an options strategy where you sell call options while holding the stock to collect the option premium. For instance, if you hold 100 shares of Tesla, you can sell one call option based on your predetermined target price.If the option expires with the stock price below the strike price, the option becomes worthless, and you keep the premium as profit。

Option Premium: By selling the call option, you earn the option premium of $2.32 per share, which is the time value and volatility value of the option—the money the option buyer ultimately loses.

StockPrice Increase:If the stock price rises but does not reach the strike price, you retain the stock and profit from the stock’s appreciation.

Assuming you hold 100 shares of Tesla and sell a call option, you immediately receive $232 (2.32 dollars/share * 100 shares) as the option premium.

If, by August 30, 2024, Tesla’s stock price is below $220, the option will not be exercised, and you retain the $232 premium as profit, along with any appreciation in the stock.

If the stock price rises to $220 or higher, the option may be exercised, and you will be obligated to sell the stock at $220 per share.

In this case, your profit will be the stock price appreciation plus the option premium, which is (220 - 201.38) * 100 shares + 232 = $2,094. Compared to just holding the stock, you earn an additional $232. If the stock price never reaches the target price and you don’t intend to sell, you can continuously earn the option premium.

Risk Analysis:
If the stock price significantly exceeds the strike price, you will miss out on higher gains since you must sell the stock at the strike price once the option is exercised.If you sell more call options than the number of shares you hold, and the stock price exceeds the target price ($220/share), you face the risk of a net short position, leading to substantial losses.
Fund Utilization:

The received option premium can be invested elsewhere, such as in cash plus , to earn additional interest income.

If you are optimistic about Tesla’s long-term value but the stock hasn't reached your target buy price, you can sell put options at your expected buy price to earn the option premium while providing a potential low-cost entry point.

For example, on August 14, 2024, Tesla's stock price was $201.38. By selling a put option with a strike price of $170, expiring on August 30, 2024, with an option premium of $0.84, the following outcomes are possible:

Stock Price Above Strike Price:If Tesla's stock price is above $170 at the option's expiration, the put option will become worthless because no one would sell the stock at a price higher than the market price. In this case, you keep the received option premium as profit, which is $0.84 per share, totaling $84 (0.84 dollars/share * 100 shares).

Stock Price Equals or Below Strike Price: If Tesla's stock price is at or below $170 at expiration, the put option will have intrinsic value, and the option holder may choose to exercise the option, selling the stock at $170. This means you will purchase the stock at $170 per share. Your total cost will be the net expenditure after subtracting the option premium, which is (170 dollars/share * 100 shares - 84 dollars) = $16,916, or $169.16 per share.

StockPrice Drops Significantly: If Tesla's stock price drops significantly below $170, you face the risk of purchasing the stock at a price higher than the market price. For example, if the stock price drops to $150, you will buy the stock at $170 per share, incurring a loss of $20 per share. After accounting for the option premium, the overall net loss would be $1,916.

StockPrice Drops Significantly:If the stock price falls significantly, you may face the risk of purchasing the stock at a price higher than the market price. In such a scenario, you have to take delivery of the stock or close the short put option position.

Maximum Gain is Fixed:The maximum gain is limited to the received option premium. However, the maximum loss is theoretically unlimited, as the stock price can continue to fall, potentially to zero, in the event of a delisting.

Fund Utilization：The received option premium can be used for other investments, such as depositing into cash plus to earn additional interest income.

If you do not hold 100 shares of Tesla and do not have enough funds to purchase 100 shares (the basic options threshold), you can use the psychological price levels formed by the stock's erratic price movements to trade.

For a stock like Tesla, which exhibits significant volatility, you can identify strong psychological support and resistance levels formed by trend lines or technical indicators to execute trades.

Important Consideration:It is crucial to remember that technical analysis relies heavily on psychology. In technical analysis, short-term trends generally have the best trade outcomes on the first touch of the trend line; the second touch is typically weaker. This is because short-term trading is essentially a zero-sum game, aimed at profiting from others' panic. Therefore, executing trades near strong target prices during the first touch has the highest success rate.

However, in the long term, if a certain price level is repeatedly tested, it can form a strong support level.