So You Missed Buying TSLA, What can You do Now?
Calls for Unlimited Profit
Puts for Insurance
We’ve all been there. We desperately want to buy stock in the “NEXT BIG THING,” but we’re afraid that all we’ll do is “Buy the TOP in the Next Big Thing.” So what do we do? We don’t pull the trigger. We just watch, and watch, as this new sensation rallies to new highs day after day.
This has happened to me countless times. My list of near-buys includes Apple, Amazon, Priceline and most recently, Tesla Motors.
(Which stock are you currently watching, but not buying, as it continues to fly higher each day? Reply to this email and tell me what you think is the Next Big Thing.)
The first time I really heard someone talking up Tesla (TSLA) was when I started talking to Tim Lutts at Cabot about taking the reins of Cabot Options Trader. We were enjoying a nice lunch talking about markets and life; all I really wanted to talk about was sports, but Tim kept coming back to Tesla. At the time, the stock was trading at 35 and I hadn’t seen one of the cars on TV, let alone the road.
Fast forward a couple of months to mid-April, and I was seeing quite a few of these beautiful cars zipping around my town. It dawned on me that maybe Tim was onto something.
So what did I do?
The stock was trading at 45 and there was no way I was going to buy a stock already trading $10 higher in just a couple of months.
So now I sit here today, grinding my teeth because once again I missed out on the Next Big Thing. As of Friday, June 28, TSLA is trading at 108 and I missed out on a big score.
I don’t endorse buying TSLA today, but there are several options trades that I could put on that would give me long exposure to the stock so I don’t continue to miss out.
TSLA Call Purchase
The power of options trading is that for a fraction of the price, you can control several hundred shares of the underlying stock.
For instance, if I’m a bit nervous about buying 1,000 shares of TSLA today at 108 (for a total capital outlay of $108,000), I could instead simply buy 10 calls. One call option gives the owner of the call the right to buy 100 shares of the underlying stock at a set price.
If I want to have the right to buy 1,000 shares of TSLA at 110 a share, I could simply buy 10 TSLA July 110 calls for $4.50 each for a total capital outlay of $4,500. This way, if I’m wrong about TSLA, my total loss is capped at the $4,500 (10 calls multiplied by premium paid =$4,500).
If I’m right, and TSLA trades above 110 on July 20, I can exercise my right to buy the stock and my potential profit is unlimited.
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TSLA Put Sale
If I like TSLA, but would prefer to buy the stock a bit lower than its currently trading, I could sell a put.
By selling a put, I am obligated to buy the stock at the predetermined price if the stock were to go below that price. Because I am selling this protection to the put buyer, I receive a premium. I have essentially sold insurance.
So let’s say I am comfortable buying 1,000 shares of TSLA at 85. I could simply sell 10 TSLA September 85 Puts (expiring 9/21/2013) for $5.00
If TSLA stays above 85 on September 21, 2013, I will have collected $5.00 in premium 10 times, or $5,000.
If TSLA drops below 85 on September 21, 2013, the put buyer will sell his stock to me at 85 a share and I will be long 1,000 shares. So as long as I’m comfortable buying TSLA at 85, I will have achieved one of my objectives with this trade.
While I’m not recommending these trades to you today, you can see that there are many ways to get long exposure to the next big thing using options. If you do it well, you won’t be like me, pounding my fist on the steering wheel every time I see a Tesla flying by me on the highway.
Your guide to successful options trading,
Analyst and Editor, Cabot Options Trader
Editor's Note: Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on risk/reward and volatility expectations.