As per the latest reports, Tesla Inc. (TSLA) will be the biggest company to join the S&P 500 index in decades, adding a layer of complexity to a fairly routine index re-balancing. So please continue your read to know will the price of TSLA get affected on the first day of inclusion; will it rally or go down. How to play the stock options and move forward in trading TSLA! How will Tesla vs Apple play out in the battle of EVs. As the latest news came out today regarding Apple and its goal of producing an Apple EV by 2024, how will this affect Tesla moving forward? And will TSLA stock drop after the Apple EV news and after the S&P 500 inclusion?
Tesla Stock and S&P500 Inclusion
The S&P500, or as we all know the S&P is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices, especially in NASDAQ.
When a stock like TSLA is added to an index like S&P500, it’s often done based on a sustained increase in earnings, appreciation in market value, and positive price momentum. Because of these factors, a stock may exhibit better performance following its addition to the index.
TSLA has been doing exceptionally well for a long time now. So let’s look at the possible strategies to trade the TSLA stock.
Strategy 1: Before inclusion in S&P500 is a Credit call spread
A bear call spread, or a bear call credit spread, is a type of options strategy used when an options trader expects a decline in the price of the underlying asset. The maximum profit to be gained using this strategy is equal to the credit received when initiating the trade.
As we had predicted earlier that Tesla would likely see a price ceiling fall from there, the same happened today the stock is down 7.5%.
Strategy 2: Rise in price in the midterm
Today is the first day after S&P inclusion, so the stock price will likely go down, but it will be beneficial in long-term investment. If you are purchasing today on the day of inclusion, hold the dip for the long term. S&P500 inclusion day is a binary event. On every binary event, especially with these high momentum stocks, is when new buyers think they’re going to get rich buying on the date of the event and those who bought well before are happy to drop their shares for profit. This is why Tesla actually hit 6.95% on Friday.
As per the history of the US stock market, the stocks that have entered the index will eventually see a rally in price. So Tesla can see UP of almost 700s and 800s in the midterm.
Based on Tesla’s chart analysis these are the following observations:
1. There is a bearish divergence between the price and the stochastic RSI. A bearish divergence when the price is making a higher high and the oscillators are making lower highs
2. The accumulation distribution line shows a potential trend change, it is pointing downwards suggesting that Tesla can go back to the 21 EMA, which currently is around 600.
Tesla vs Apple EV
Tesla saw further drawdown today. It was down initially five percent and later dropped a couple percent more because of the news that came out today about Apple. “Apple is said to be pushing ahead on self-driving car and challenge Tesla.” If there is any company in the world that can do this or they can at least pool the resources to do this, it’s companies like Apple or Amazon that are valued in the trillions of dollars.
In the post Steve Jobs era Apple has really shown to be a vertical integration beast. It kicked out Intel and started manufacturing its own chips. No one ever thought of Apple as a chip maker or a silicone maker, but they literally did this. Apple alone call breakthrough battery technology also. But they are targeting launch in 2024. There were earlier some speculations whether Apple would be building a car or just the self-driving technology itself; Whether they would work with other car manufacturers! But no, they’re actually building an electric vehicle. They also have a former Tesla employee managing this project and targeting their production in 2024.
One might think that the future of car driving is Apple but don’t forget, Tesla is not going to just remain stagnant ,they are also going to be improving their battery technology as well. By 2024 their self-driving will likely be already at level five autonomy which is the highest level.
How to trade Tesla stock - S&P 500 inclusion
Strategy 3: Iron condor for small capital/range bound investment
An iron condor is an options strategy created with four options consisting of two PUTs (one long and one short) and two CALLs (one long and one short), and four strike prices, all with the same expiration date. The goal is to profit from low volatility in the underlying asset. In other words, the iron condor earns the maximum profit when the underlying asset closes between the middle strike prices at expiration.
The iron condor has a similar payoff as a regular condor spread, but uses both CALLs and PUTs instead of only CALLs or only PUTs. Both the condor and the iron condor are extensions of the butterfly spread and iron butterfly, respectively.
Understanding the Iron Condor
The strategy has limited upside and downside risk because the high and low strike options, the wings, protect against significant moves in either direction. Because of this limited risk, its profit potential is also limited. The commission can be a notable factor here, as there are four options involved.
For this strategy, the trader ideally would like all of the options to expire worthlessly, which is only possible if the underlying asset closes between the middle two strike prices at expiration. There will likely be a fee to close the trade if it is successful. If it is not successful, the loss is still limited.
One way to think of an iron condor is having a long strangle inside of a larger, short strangle (or vice-versa).
The construction of the strategy is as follows:
– Buy one out-of-the-money (OTM) PUT with a strike price below the current price of the underlying asset. The out-of-the-money PUT option will protect against a significant downside move to the underlying asset.
– Sell one OTM or at-the-money (ATM) PUT with a strike price closer to the current price of the underlying asset.
– Sell one OTM or ATM CALL with a strike price above the current price of the underlying asset.
– Buy one OTM CALL with a strike price further above the current price of the underlying asset. The out-of-the-money CALL option will protect against a substantial upside move.
The options that are further out of the money, called the wings, are both long positions. Because both of these options are further out of the money, their premiums are lower than the two written options, so there is a net credit to the account when placing the trade.
By selecting different strike prices, it is possible to make the strategy lean bullish or bearish. For example, if both the middle strike prices are above the current price of the underlying asset, the trader hopes for a small rise in its price by expiration. It still has limited reward and limited risk.
Iron Condor Profits and Losses
The maximum profit for an iron condor is the amount of premium, or credit, received for creating the four-leg options position.
The maximum loss is also capped. The maximum loss is the difference between the long call and short call strikes, or the long put and short put strikes. Reduce the loss by the net credits received, but then add commissions to get the total loss for the trade.
The maximum loss occurs if the price moves above the long CALL strike (which is higher than the sold CALL strike) or below the long PUT strike (which is lower than the sold PUT strike).
Strategy 4: Buy the stock in every two weeks as per the budget- Dollar Cost Averaging
Tesla is at 650 today, you would buy it here. In two weeks, if it’s at 600 you would buy some more. In four weeks, it’s at 670 you’d buy some more. In six weeks, it drops to 550 you would buy some more. This way you are averaging the buying cost giving yourself the best average possible.
For google searchers, Exponential Moving Average EMA is a moving average that places a greater weight and significance on the most recent data points. Like all moving averages, this technical indicator is used to produce buy and sell signals based on crossovers and divergences from the historical average. Traders often use several different EMA lengths, such as 10-day, 50-day, and 200-day moving averages.
For long term investors, if the understanding of EMA goes well, you would basically be buying at support levels like the 21 exponential moving average or the 50 exponential moving average.
For Example: Tesla was chilling at the 50-day moving average for a month and nobody wanted to buy it at that price of 420. Now Tesla is at all-time high and everybody is talking about it and buying the highs. Giving a loss of 6.5. But we should do the opposite.
Stategy 5: PUT-CALL spread (big investment required)
This strategy is for people willing to trade with larger sums. Let’s just say that you want to sell to the 400 PUT with March-19, 2021 expiry. You can sell the 400 PUT for USD 1130. Now if Tesla does not hit USD 400 price by the contract expiry, you get to keep USD 1130. But if it does hit USD 400 or below, you are obligated to still buy Tesla at 400 (minus what you got paid for the PUT), thus making a loss. For this strategy, you’d require high capital investment like USD 40k.
If we pick our top range as USD 700-71, on the CALL side we’re going to be selling the 700 CALL and buying the 710 CALL. On PUT side sell 605 PUT and buy the 600 PUT, thus making the CALL-PUT spread.