Tesla

The Tesla logo is intended to represent the cross-section of an electric motor, Elon Musk explained to a querying Twitter follower.
Tesla is of course the electric car company, owned by Elon Musk, and its having a spectacular year.

TSLA Feb 5 900 calls

I was perusing options with high volume to see what the largest number of Options Traders are buying. One of these was Tesla.

The option

TSLA FEB 5: 900$ Calls 3 days left until expiration, last price 5.38, the volume is 37,000 contracts and probability of being out of the money is 75%.

So what does this mean...

If you sell these calls, each contract has a per share premium of 5.38$ or 538.00 per contract.
If you sell 10 contracts, you net 538$.

Your strategy depends on whether you own TSLA or not. While there are many strategies, I will discus these two: covered call and uncovered or naked calls.

Own Tesla

If you own Tesla, then your sale of options is considered covered, as in you own the shares you are required to deliver. This option is a great covered call play. The premium is very high and the amount of time left is very low. It’s no wonder the volume is high. For every 100 shares you own, you collect 538$. You are hoping Tesla closes below 900$, the calls expire and you keep the money.

If Tesla closes 1 cent above 900$ you have to sell your Tesla at 900$. Tesla is 839 at the time of this post. So in addition to a nice 61$ per share profit 6100$, you keep the 538$ premium.

Don’t own Tesla

Sell Calls
This is an uncovered or naked position, as you don’t own the stock you are selling options on, so you must have enough cash to go into the market to buy the stock. You will normally have to have a large line of credit or buy a higher priced call option to be allowed this play.

Strategy
You can hold and let them expire if Tesla closes under 900$ and you keep the premium. Or if Tesla starts rising you buy back the calls before close, preferably at a lower price then you paid, and the difference is profit. This option value will decay or decrease each day, so most traders would buy back at 33% or 50% of price. This strategy is risky, and requires you have enough cash to go into the market and buy Tesla should it close above 900$.

In either scenario it is unlikely that Tesla will close above 900$ as the probability is 25% or 1:4, but not impossible. This is a large premium for the set-up and is really a gift. As @rollandthomas likes to say, follow the Smart Money or volume, it will lead you to great deals frequently.