I promised you I would come back and make a follow up if something changed on the Babe Ruth trade. So here I am. This is not financial advice, but it is a real important lesson on how to handle short term options that win quickly.
Let me take you back to the chart. This was a Tesla setup I had been watching closely. We broke out of a consolidation zone, fell back to the 200 moving average, and then pulled back to retest that level in what I call a kiss back. You see this coupled with a neutral mean reversion reading on my four hour IADSS chart. I love these setups.
This pattern happens when the market has been consolidating, whether in a downward channel, an upward channel, or moving sideways. The stock finally breaks out, then comes back to retest old resistance, which becomes new support. It is like a slingshot. If you watched MM33 on TSLA short term trading, this is the same type of thinking. You stalk the setup, you wait for the chart to tell you when to go, and then you execute.
I said if this level held, Tesla was going to run to its next natural major resistance. We broke through $405 and my target was $450 by June. I had a time target and a price target. We got there much quicker than expected. So now the question becomes, what do you do when a short term trade hits your target early and you are wildly profitable?
My first choice in this scenario is the vertical roll. If you remember from MM8 and MM11 where I covered rolling mechanics, the concept is the same. You are closing your current position and opening a new one at a higher strike to let the trade keep running while locking in profits along the way.
The Vertical Roll
Here is how it works on this trade. I bought the June $400 call for a $13 debit. Letā€™s say I bought 12 contracts, knowing I might want to exit in fourths. To roll, I sell the June $400 call and buy the June $410 call. That roll was trading for about a $7.60 credit.
What am I leaving on the table? The difference between the two strikes is $10. I receive $7.60, so I am giving up $2.40 per $10 spread roll. I like to do these for more than $0.80 on the dollar. This one was close, but not quite good enough, and I am showing you how it works so you can apply the concept to your own trades.
Now let me take it a step further. If you rolled every $10 increment at $0.80 on the dollar all the way from the $400 strike to the $500 strike, you would make $80 on your original $13 debit. That is over a 6x trade. This is the kind of math I teach in multiple courses. You put numbers behind the trade, you understand your upside, and then you decide if the reward justifies staying in.
Taking Profit
But here is my problem with the rolling approach on this particular trade. For the June $400 call to capture the full $80 via rolls, Tesla needs to get to $500. I do not have a crystal ball. What I do know is these are short term options. They are almost all intrinsic value at this point. There is not much time value left in this trade. If we get any pullback in Tesla, the value evaporates.
If this were a LEAP two or three years out, I would not be making this video. I would be holding it and letting it run, just like all of my other long term Tesla trades. This is different. This was a short term trade with a specific target in mind, and we hit it.
So here is what I did. I sold 75% of my contracts at +3x. I bought these for $13 and they went to anywhere from $48 to $52, with some hitting as high as $60. That is a 3x to nearly 5x return. Phenomenal. Do not look a gift horse in the mouth.
Why Not Sell a Call Against It?
Somebody asked a great question about selling a call against the position instead. I do not like that idea here, and let me tell you why. This is not a long term trade. This is not stock. This is not a LEAP. If I sell a June $450 call against my June $400 call, yes, it brings in a credit and locks the upside. But if I really want to be selling June calls, I am better off just selling the call I own. That one is trading at $62. The premium from a covered call against a short term option is not worth the added complexity. Now, if this were a LEAP two years out, I would be saying maybe Iā€™ll sell some calls against it. Maybe we go out to the $500 strike and bring in some premium. That is what I teach in Course 202. But that is for long term positions with time on their side.
Time Decay Is the Enemy Here
This is critical. Let me walk you through how time decay works in the last 30 days. Early in an option's life, three years out, two years out, one year out, theta barely touches you. At 90 days you start to notice it. At 60 days it is picking up. At 30 days, theta falls off a cliff.
We are inside that 30 day window right now. If Tesla reverses for any reason, these options lose value fast because there is no extrinsic value left to cushion the fall. Every dollar of movement matters in a way it simply does not with long term positions.
Confluence Sell Signals
Here is what I am watching. We have a +2 mean reversion reading on the four hour IADSS chart. That is a confluence sell signal. We are sitting right at resistance at $450. Could we break out and run to $500? Sure. But I do not know that, and I am not willing to bet my huge gain on a maybe.
If we close above $450, it is probably a clear run back to all time highs. But right now, the signals are telling me to be cautious. This is the same concept I covered in MM38 on reducing risk after a huge rally. When the trade has done what it was supposed to do and the chart is flashing caution, you respect the signals.
My Personal Approach
I let my long term trades run. I lock in home runs like this when I get them. I have sold three quarters of this position. I still have some contracts running. I might implement a roll on the rest, or I might sell them by end of day. I have not decided yet.
That is my personal style. I am risk averse. I am not willing to give back $55 or $60 in credit on a $13 trade and remember, for me to hold this trade with the hope of getting to $500 means that I am now risking $62 to try to make another $38 should we get to $500. That math doesnā€™t work for me. You might be different, and that is perfectly fine. You choose the strategy that fits your personality and your risk tolerance. Both approaches, taking profit and rolling, are valid.
I just want to make sure I share this with you because I promised I would. I hope you made some money on this trade. Congratulations.
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