Broken Wing Butterfly in TSLA | Option Trades Today

Tesla (TSLA) Options Strategy – January 16th Expiration Analysis

Key Concepts:

• Call Skew: The phenomenon where out-of-the-money call options are priced higher than out-of-the-money put options at the same distance from the at-the-money strike.
• Implied Volatility (IV): A measure of the market's expectation of future price fluctuations of an underlying asset.
• Delta: A measure of an option's sensitivity to changes in the price of the underlying asset. (25-30 delta = ~50% probability of touch)
• Broken Wing Butterfly: An options strategy involving buying a call spread and selling a call spread, creating a defined risk and reward profile.
• Omnidirectional Delta: A strategy that profits from sideways movement, with limited profit potential in either direction.
• Buying Power Effect: The amount of margin required to enter a particular options trade.
• At-the-Money (ATM): An option with a strike price that is equal to or very close to the current market price of the underlying asset.

Market Overview & Tesla’s Recent Performance

The market experienced a significant reversal from the previous day, with the S&P 500 recovering 6070 handles after a 6070 handle decline. Tesla (TSLA) was a notable mover, experiencing a substantial increase, up $22 and change, representing almost a 5% gain. Despite a relatively low Ivy rank, the stock’s momentum has been increasing. The presenter notes low volatility coupled with significant call skew as key factors influencing trading strategy.

Understanding Call Skew & Its Impact on Option Pricing

The presenter explains call skew using TSLA as an example. Assuming a stock price of approximately $490, the 460 put option trades around $13, while the 520 call option trades at $16. This difference demonstrates call skew – calls are more expensive than puts at equal distances from the at-the-money strike.

This skew impacts option pricing: naked options become more expensive, while spread trades become cheaper. The presenter highlights that the high implied volatility of TSLA (59% in February vs. 54% in January) makes diagonal or calendar spreads less attractive due to the cost of February premium.

Proposed Options Strategy: Two Call Spreads

Given the call skew and volatility differences, the presenter proposes a strategy involving two call spreads. The goal is to capitalize on the expanding implied volatility in February while managing risk.

Step-by-Step Trade Construction:

1. First Spread (Bullish): Buy one 530 call option.
2. Second Spread (Bearish/Neutral): Sell two 545 call options.
3. Third Spread (Bullish): Buy one 565 call option.

Initially, the trade was executed at a $1 debit. The presenter later refined the strikes, aiming for a $1 credit, and suggests viewers may be able to achieve this price if the stock increases by $1-$1.50.

Risk/Reward Analysis & Probability of Profit

The trade requires approximately $1,400 in buying power. The maximum potential profit is around $1,600 (based on the initial $1 credit). The break-even point is at $560.

The presenter emphasizes the trade has a slightly bearish delta, meaning it benefits most from sideways or slightly upward movement. There's a 33% chance of the stock reaching $560. The strategy is designed to profit from the expected $50 move in the next 29 days, positioning the trade within the "tent" or optimal profit zone. The risk is limited to $1,500.

Trade Adjustments & Real-Time Example

The presenter initially encountered a calculation error while constructing the trade. He demonstrated the importance of using TastyTrade’s “follow page” to verify and correct strike prices. He highlights that the follow page allows traders to duplicate and adjust trades efficiently.

TastyTrade Promotion & Account Information

The presenter concludes with a promotion for TastyTrade, emphasizing its position as a leading brokerage firm. He encourages viewers to consider moving their accounts to TastyTrade, highlighting the availability of trading in various account types (IRA, margin, portfolio margin).

Data & Statistics:

• TSLA Price Increase: Up $22 and change (approximately 5%)
• February Implied Volatility: 59%
• January Implied Volatility: 54%
• Maximum Profit: $1,600 (based on $1 credit)
• Maximum Risk: $1,500
• Break-Even Point: $560
• Probability of Touching $560: 33%
• Expected Move (Next 29 Days): $50

Synthesis/Conclusion:

The presenter outlines a specific options strategy designed to profit from the current market conditions in Tesla, characterized by low volatility, significant call skew, and expanding implied volatility. The two-call-spread strategy aims to capitalize on a potential $50 move in the stock price over the next 29 days, with defined risk and reward parameters. The emphasis on using tools like TastyTrade’s follow page and understanding concepts like call skew and delta are crucial for successful implementation. The strategy is presented as a relatively low-risk, high-probability play, suitable for traders comfortable with managing options spreads.