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TSLA Stock Bullish Diagonal Trade Targets a Price of $265 by December 15
November 29, 2023 — 07:03 am EST
Written by Gavin McMaster for Barchart ->
A bullish diagonal spread is an advanced option trade and generally not suitable for beginners, but it can have its place within an option portfolio.
It is a bullish strategy that benefits from time decay and is best placed when volatility is low, such as the current conditions.
The strategy involves buying a long term, in-the-money call and selling a monthly out-of-the-money call against it.
The trade is best placed when the trader has a bullish outlook and thinks the stock could get to the short call strike by the first expiration date.
A rise in implied volatility will benefit the trade as it has positive Vega overall.
The big risk with the trade is a sharp move lower early in the trade.
Let’s look at an example using Tesla (TSLA).
TSLA Stock Bullish Diagonal Example
Tesla put in a solid day yesterday closing up 4.51% and closing above the 50-day moving average.
TSLA stock is also showing impressive accumulation.
Let’s look at how we can use options to find a favorable risk to reward trade on the assumption that TSLA stock might rally to $265 in the next few weeks.
We will look at a bullish diagonal spread which allows traders to get long TSLA without risking too much capital.
A bullish diagonal spread is a trade that involves buying a long-term call option and selling a shorter-term, further out-of-the-money call option.
Structuring the trade at $265 gives the trade around 38 delta, which is roughly equivalent to being long 38 shares of the stock.
Selling the December $265-strike call option will generate around $340 in premium and buying the June 2024, $240-strike call will cost around $4,230.
That results in a net cost for the trade of $3,890 per spread, which is the most the trade can lose.
The estimated maximum profit is around $1,380, but that can vary depending on changes in implied volatility. The maximum profit would occur if TSLA closes right at $265 on December 15.
The trade benefits from time decay as the short-term option will decay at a faster rate than the longer-term option.
The ideal scenario for this TSLA trade is for the stock to stay above $245 for the next few weeks.
