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Why Todd Gordon is bracing for Tesla to tumble on earnings

With Tesla reporting earnings after the bell on Wednesday, trader Todd Gordon of TradingAnalysis.com is hedging his position in the automaker.

While Gordon has called Tesla one of his favorite picks, he acknowledges that the stock is “underperforming” on a technical basis going into earnings, based on the stock’s gradual drop toward a “support” line near $318.

“As we go into earnings, I don’t mind taking a directional bet here to hedge my longer-term position in Tesla,” said Gordon Tuesday on CNBC’s “Trading Nation.”

According to Gordon, the options market is implying a $22 move in either direction for this stock, which would be more than 6 percent, based on Tuesday’s levels.

To take advantage of the increased price of options ahead of earnings, Gordon wants to sell the Aug. 4 weekly 335-strike call and buy the Aug. 4 weekly 340-strike call for a credit of about $1.25, or $125 per options spread. Gordon will get to keep that entire credit if Tesla closes below $335 on Aug. 4 expiration.

If Tesla sees a nice rally and closes above $340 on Aug. 4, Gordon will lose the maximum of $375. Yet Gordon explains that since Tesla is currently below $320 and Gordon’s strike prices account for the possible $22 move up, there is actually a high probability of this trade succeeding.

“We’re selling a call credit spread above the expected move,” he explained. “So by way of options math, you could say that the market has approximately an 80 percent chance of being below $340 post-earnings.”

Susquehanna head of derivative strategy Stacey Gilbert agrees that for those looking to trade Tesla earnings, using options spreads — or trades that combine multiple options position — is the way to go.

While options prices have fallen across the board as traders price in lower and lower amounts of volatility, Tesla “is one of the few names in the marketplace where volatility continues to be high,” Gilbert said Monday on CNBC’s “Trading Nation.”

“If you’re thinking about using options to get a position in here, you’re better off using spreads — or maybe just recognizing that on a historical basis, these options are expensive,” Gilbert said.

Tesla has soared 49 percent year to date, though the stock is down almost 17 percent from its June all-time highs.

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