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Tesla Inc (NASDAQ:TSLA) shares closed 7.82% higher on Wednesday after Citi analyst Itay Michaeli upgraded the stock to ‘Neutral’ from ‘Sell’ with a price target of $176, up from $141.33. However, prior to the news, the stock was languishing below the $170 mark.
What Happened: As a result of the surge in price, Tesla’s call options exploded in value and made more than 100% returns in just a day.
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If you had bought the 170-strike Tesla call option, belonging to the Dec. 2nd expiry, on Tuesday, which was available in the price range of $5.9-8.15, and which closed at $7.1 according to Barchart data, you would have more than doubled your money as on Wednesday’s close with the call option ending the session at $15.43.
Benzinga’s Take: Some of you might be thinking paper trades are easy, especially in hindsight. And who would have predicted the Citi analyst report release? Agreed! However, if you look at the daily chart of Tesla, it is apparent that the stock had long-term support at levels close to $166 and a near-term bounce-back was imminent if the support was not breached on the downside, which didn’t happen.
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Screenshot of daily chart for Tesla stock via Benzinga Pro
So, buying the call option was good, if risky, trade for the extreme short-term. Even for those who are risk-averse, the Tesla option trade made sense given the fact that the stock was lingering near a pivot point.
Such traders could have considered a Long Strangle – a strategy where you buy slightly out-of-the-money call and put options simultaneously, expecting a significant movement that could come on either side.
Call options rise when the stock price rises, while put options gain when the stock declines.
In the Tesla option case, you could have bought an equal amount of $165 put option as a hedge. The put option had closed at $4.8 on Tuesday and post the surge in the stock price, ended Wednesday’s session at $1.33 —losing $3.47. As a result, compared to the $8.33 surge in the call option price, the put option lost only $3.47, making you a decent profit of $4.86 per unit.
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Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.