So…Tesla (TSLA) was down 4.26% today on disappointing earnings…and we made money on the long side. Here’s how. (April 25, 2019)
TSLA
We made money on Tesla ( NASDAQ: TSLA ) today, going long. Seriously, the stock is down 4.26 percent and it pierced 250.00, which conventional wisdom, I don’t really keep track of this stuff, but conventional wisdom is that if the stock trades below 350.00 it is kind of the level that “Elron” Musk’s phone is going to start ringing and he is going to start getting margin calls. I don’t know whether that’s true, I have no idea, but I have read that for many months, sourced by many people.
However, with that said, you know what happened with all this wonderful stuff that Washington, D.C. has been going through over the last few years. It’s like one guy starts a story, leaks it to one person who prints a story. And then the guy that leaked it to him goes to somebody else and says, “Hey, did you see what story was just written over there?” And then it kind of gets picked up, gets legs and all that stuff. Don’t think that the same thing doesn’t happen in finance, I think that is where that stuff has been invented. Actually, I think, from the video that I saw Cramer do a while ago, he is kind of one of the guys that invented it trying to knock a stock down, but I am speaking out of school.
Here’s the thing though; I want to talk about this. The stock closed at 247.63 and then after hours it is actually still kind of going down. And so how did we make money on this on the long side? I covered this just yesterday, I’m pretty sure it was in the Free Chart of the Day, and then I sent out a video this morning saying, “I don’t really think there is going to be much of a trade on Tesla ( NASDAQ: TSLA ) because it is not really volatile pre-market, it is just kind of trading right around the same level.” But I kept an eye on it, decided to watch it. And sure enough, there turned out to be a pretty good trade.
So let’s get to it, I want to show you how this thing works. This is how the stock opened up this morning: The opening print was around 255.00. So one of the methods I would use on this type of thing is, wait for the stock to get back above the morning print and then go long. Well, I know that 250.00 is an area that a lot of the scumbags on the street are going to defend, that’s just what they do; they are trying to keep it up so that retail buyers will buy it from the institutional clients. I hate to burst your bubble, but that’s what is happening. If you doubt me, just look at the chart, that’s all the proof I need.
I figured I can’t wait for that but I do know that this 250.00 is a pretty solid line here. You can see, first minute, second, third, forth minute in, fifth minute in, this line still has not been tested. And then the sixth minute in, higher lows here, this matters, it’s kind of a big deal. And then I am looking at this orange line here; this is the volume weighted average price.
Once the stock starts trading above the volume weighted average price that tells me that the selling pressure, the supply that has pushed this stock way down here, has been lifting and now buyers are not patient and buying down here way below the average price, they are actually chasing it higher above the average price. So you are buying here, by the way, keeping your eye on the gap here on about 258.00, that’s essentially where the stock was trading yesterday at the close so this would kind of be the high. And so you are looking at this; you are taking your entry here around 253.00, getting a confirmation here, boom. Now this is back up, you will notice the high here, 255.00, right where it opened up, add, boom, 255.05, whatever.
Now at this point, seriously, this is how I trade Tesla ( NASDAQ: TSLA ) because at this point it is just a stock. It doesn’t even have to be Tesla ( NASDAQ: TSLA ) it is just any chart, but you know what’s happening with key support here, key resistance right here at 258.00. Now the stock is up above 256.00. Even though you add to your position right around here if you are in a day trade you are immediately starting to think about leaving. And so you watch the natural reaction here, a little pause in the trend and then boom, the stock moves higher. And then finally, right about here, I am thinking about hitting the exit.
By the way, I sold puts on this. I did not buy the stock. I thought about buying the stock but I sold puts. I also bought calls on it and I posted this in our forum today. The interesting thing was, although not unpredictable but I am just stating it, that even though the stock kept moving higher, the calls were not keeping up at all. The puts were doing really well. I sold puts and so as the stock moves higher the puts started really, really bleeding price and they really started eroding and I am making a lot of money on that sale. At the same time, even though the stock is moving in the direction that I would be making money on the calls they are not really making much money, not like the puts were.
And why is that? It is because calls and puts trade according to market demand, supply and demand. Right at the open there is a lot of demand for calls and for puts, they’re really, really expensive. They are very expensive because nobody really knows which way the stock is going. Once the stock starts to move up then the calls are actually going to start to normalize and you are going to actually be paying less the “implied volatility”, the extrinsic value of these options are going to start coming down to a normal level and that is also the same thing with puts. So the puts that I sold, as that implied volatility comes down, I’m making money. As the implied volatility comes down on the calls I’m losing money if the stock is not doing anything. If the stock is moving higher, which it was, then the delta on those calls, that is the amount that an option price will move for each dollar that the stock moves, the delta starts to bail me out.
Ultimately, I wind up selling my calls for a small profit. I did make some because the stock kept up but I wound up buying my puts back for a really, really nice profit so it was a really good trade. And then I didn’t close this out right at the top. I didn’t close it out here, I think it might have been down here, but I didn’t top tick it at all, I wasn’t trying to; then the stock continues to move here. And then finally it does fall below 250.00 and now it is a stock that is back on my, do not touch this under circumstances trade. It is just not a stock that I would be interested in trading for various reasons that are beyond the scope of this video. But for this trade today, it is interesting how the stocks are down 4.62 percent and we made some really nice money on it to the long side just because of this little move here.
Free Chart