Interested in TSLA Stock Calls at a 41% Discount? Follow This Strategy!

When it comes to betting on Tesla ($TSLA), the electric vehicle giant, investors often turn to call options for potentially outsized gains. Buying a call gives you the right, but not the obligation, to purchase the stock at a certain price (the strike price) within a set period.

If TSLA stock surges past the strike price, a call buyer stands to make significant profits, as the value of the option appreciates along with the stock price. However, buying a call outright is a double-edged sword. While it offers a shot at unlimited profit potential (minus the premium paid), it’s also inherently risky.

If the stock price stays below the strike price, the call option could expire worthless, and the buyer would lose the entire premium. In Tesla’s case, if you were to buy the $222.50 call for $11.50 per contract and the stock doesn’t rise past $222.50 by the expiration date, you’d lose $1,150 ($11.50 x 100 shares). For a trader expecting modest gains, this risk might outweigh the potential reward.

The Benefits of a Bull Call Spread

For investors who believe in a moderate upside for TSLA stock but want to mitigate risk, a bull call spread is an effective strategy. With this approach, you purchase one call option while simultaneously selling another call option at a higher strike price within the same expiration date. This strategy reduces the overall cost of entering the trade while capping both your potential gains and losses.

For example, instead of purchasing the $222.50 call outright for $11.50, you could execute the following bull call spread:

• Buy the $222.50 call (expiring on 9/20/2024) at $11.50 per contract.

• Sell the $235 call (same expiration) at $4.70 per contract.

By selling the $235 call, you offset some of the cost of the $222.50 call. Instead of paying $11.50, the total net cost is reduced to $6.80 (the difference between the $11.50 purchase and $4.70 sale). This reduction in cost is a 41% discount compared to buying the call outright. However, the tradeoff is that your potential profit is capped once TSLA stock hits the $235 strike price.

The Details of the Bull Call Spread

Here’s a breakdown of this specific bull call spread trade on TSLA stock:

• Expiration date: 9/20/2024

• Buy the $222.50 call at an ask price of $11.50.

• Sell the $235 call at a bid price of $4.70.

• Breakeven price: $229.30. This means TSLA stock needs to trade above $229.30 by expiration for you to start making a profit.

• Max profit: $5.70 per contract. This is the difference between the two strike prices ($235 - $222.50 = $12.50) minus the net premium paid ($6.80).

• Max loss: $6.80 per contract, which is the total net premium paid for entering the trade.

• Breakeven probability: 51.2%, suggesting a slightly better-than-even chance that TSLA stock will reach the breakeven price of $229.30 by expiration.

Why This Strategy is Effective

The bull call spread offers a more balanced approach compared to buying a straight-up call. Here’s why:

1. Lower Cost, Lower Risk: As mentioned earlier, buying the $222.50 call outright costs $11.50 per contract. But with the bull call spread, the net cost is $6.80—a significant 41% discount. This lowers your maximum potential loss to $6.80 if TSLA stock stays below $222.50, compared to losing the full $11.50 if you were to buy just the call.

2. Capped Reward but Manageable Risk: The bull call spread caps your maximum profit at $5.70 per contract, which occurs if TSLA stock rises to $235 or higher. While you miss out on potential gains above $235, this strategy protects you from larger losses that could occur if the stock doesn’t move as much as expected. If TSLA stock falls or doesn’t rise above $229.30 by expiration, the most you can lose is $6.80—still much less than the $11.50 loss if you’d bought just the call.

3. Moderately Bullish Outlook: This trade is ideal for investors who are moderately bullish on TSLA stock. If you believe that Tesla has the potential to rally, but not necessarily to skyrocket, the bull call spread provides a more cost-efficient way to take advantage of that expectation.

4. Probability of Success: With a breakeven probability of 51.2%, this trade has a slightly better chance of success than simply buying the call. You only need TSLA stock to reach $229.30 by the expiration date, making this a safer play than betting on a massive price increase.

The Tradeoff: Opportunity Cost

Of course, there is an opportunity cost involved with a bull call spread. If TSLA stock skyrockets well past $235, your gains will be limited to the $5.70 max profit, whereas an outright call purchase would allow for unlimited gains beyond your strike price. However, for those concerned about risk management, this tradeoff might be worth it.

With a straight-up call, you risk losing the entire premium if TSLA stock doesn’t rise enough, which in this case is $11.50 per contract. But with a bull call spread, you’re reducing that risk while still allowing for decent upside if TSLA stock rises moderately.

Conclusion: A Smarter Way to Play TSLA Stock

For investors who are moderately bullish on TSLA stock, a bull call spread is a smart way to play the potential upside. You reduce your cost basis and protect yourself from large losses while still allowing for solid gains if the stock rises. While this strategy caps your upside potential, it also significantly lowers your risk, making it a more balanced approach in a volatile market environment.

If you believe in the future of Tesla but want to manage your risk, a bull call spread offers a compelling option.