Tesla Motors Inc (NASDAQ:TSLA) : Covered Calls With Intelligence

Tesla Motors Inc (NASDAQ:TSLA) : Covered Calls With Intelligence

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While covered calls are one of the most commonly used option strategies, it turns out we need to be clever in how we treat earnings in order to maximize the strategy in Tesla Motors Inc (NASDAQ:TSLA) . Even further, if we don't do this analysis, we can easily dismiss some worthy covered call opportunities as losers. This is one of those cases.

There's a lot less 'luck' involved in successful option trading than many people realize and we're going to review that right now for TSLA. Let's first examine a two-year back-test of a covered call strategy with some simple rules:

* Trade monthly options (roll the trade every 30-days).
* Avoid earnings
* Test this strategy for two-years

Here's how this quick set up looks in the back-tester:

If we do this test, it turns out the best covered call to sell is out of the money with a delta of 20. Any delta below 50 is usually out of the money and certainly a 20 delta is out of the money.

If we do a covered call in Tesla Motors Inc (NASDAQ:TSLA) over the last two-years but always skip earnings we get these results:

Buy TSLA Stock, Sell 20 Delta Call
* Trade Frequency: 30 Days
* Always Avoid Earnings

Gross Gain: $29,812
Gross Loss: -$27,780
Covered Call Return:  8.4% 
Stock Return: 1.7%

Out-performance:  6.7% 

That tile tells us two critical pieces of information. First, we see a very nice covered call result with a 8.4% return. But, just as important, we also see that the 8.4% return in the covered call considerably out-performs Tesla Motors Inc stock over the last two-years, which hit 1.7%.

In total we're looking at a 6.7% out-performance while taking less risk than owning the stock outright and always avoiding earnings risk.

While out-performing the stock and avoiding the risk of earnings is a powerful implementation of a covered call, we actually did even better. Next we do the same back-test, but this time we only trade earnings. That is, we open our position two-days before earnings, let the event occur, and close the position two-days after earnings.

Here's the set-up -- very easy. Just click the appropriate buttons.:

Now we examine the results for that same 20 delta covered call.

Buy TSLA Stock, Sell 20 Delta Call
* Trade Frequency: 30 Days
* Only Trade Earnings

Gross Gain: $4,846
Gross Loss: -$6,539
Covered Call Return:  -6.4% 

Now we see why avoiding earnings was so powerful. Holding the covered call in Tesla Motors Inc (NASDAQ:TSLA) through earnings under-performed the stock and certainly under-performed a covered call that avoided this risk. In fact, our strategy to avoid earnings beat the strategy held only during earnings by a whopping 14.8%. It could have been so easy to miss this result without diving just a little deeper than the standard option analysis.

For some clarity we simply chart the returns of the stock, the covered call strategy with earnings and the one that avoids earnings, below.

Tesla Motors Inc Stock
and Covered Call Returns %

Note the out-performance we get in Tesla Motors Inc by being methodical in our approach and in this case avoiding the risk of earnings.

Going through this practice with Tesla Motors Inc (NASDAQ:TSLA) reveals that the entire concept of 'options expert' has been made made overly complicated. Below, we go the final step (with a video).