Options Theory: Tesla and the Volatility Cycle | Tackle Trading: The #1 rated trading education platform

Options Theory: Tesla and the Volatility Cycle

bicycle 1

Stocks move in price cycles. Bull markets eventually give way to bear markets and vice versa. But price isn’t the only variable that exhibits cyclical qualities. Volatility does too.

Wall Street measures volatility as a stock’s standard deviation. But you don’t have to dive into statistics to understand what we’re talking about. Just think about volatility as “how much a stock moves.”

Here’s where the cycle part comes in. There are two regimes of volatility: expansion and compression. I’ve also heard the second regime called “contraction.” Periods of expansion eventually give way to compression and vice versa. When a stock is compressing it’s like someone coiling a spring. You’ll see the price consolidating in a range. In its purest form, you’ll see the range narrowing as it persists, kind of like a symmetrical triangle.

Eventually, however, the spring releases its pent up energy. Volatility expands and we get a breakout.

To someone who focus on chart patterns, the cycle looks like this: consolidation, breakout, consolidation, breakout.

If we’re using volatility terms, then we’d articulate it as follows: compression, expansion, compression, expansion.

Enter Tesla

tesla 1

Tesla provides an enlightening case study. Shares in Elon Musk’s flagship have a reputation for raucous volatility. It is not for the faint of heart. But lately, things have gotten unnaturally quiet. We have a real life volatility compression on our hands. Perhaps a cabal of traders seeking for calm slipped TSLA some Ambien. Or maybe we’ve just found an equilibrium between supply and demand. Bulls and bears have made peace at $810 and neither party wants to upset the balance.

TSLA vol
The Coiled Spring

No matter how you spin it, the sideways slithering isn’t likely to last. Not if the volatility cycle has anything to say about it. Sooner than later, something will happen to disrupt the peace. I can feel it in the air. An expansion is coming.

Volatility trades like long strangles and debit condors are ideal for situations like this. They profit from disorder. Think of them as a bet on volatility’s return. The optimal entry is right before a big breakout. If TSLA finally pops/drops tomorrow, then today will be the ideal time to pull the trigger on one of these long volatility strategies. But if it continues sleeping for another week before the awakening, then you’re better off waiting.

Both of these strategies are negative theta. That means time decay is the enemy. Profiting with them is a matter of getting enough movement to offset the time decay. Here’s how I think of it:

If Delta Gains > Theta Losses = You Win

If Delta Gains < Theta Losses = You Lose

It’s impossible to know ahead of time when the expansion will happen, but you would certainly think TSLA is getting close. That’s my hope, at least. As one who’s been watching closely, it’s putting me to sleep. For heaven’s sake, I’m finding more movement in the utilities sector. Someone tell Elon to Tweet something crazy so we can get the party started.

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.

One Reply to “Options Theory: Tesla and the Volatility Cycle”

  1. JacobAgbor says:

    Odd indeed for the master of big moves.

Comments are closed.

Share this

X
Facebook
LinkedIn
Reddit
Pinterest
Telegram
WhatsApp

More Insights

Join the #1 Rated Trading Education Platform

Learn to generate monthly cash flow from the financial markets and how to grow long-term lasting wealth. Tackle Trading is an amazing online community for active traders that is led by seasoned market professionals. Tap into the power of Tackle Trading’s proven trading system and learn how easy it is to make money with the proper coaching and education.

8,800+

Members

100+

Reviews

Ready to take your trading to the next level?

Get in touch today and receive a FREE complimentary consultation.

Let us help you start trading!

Our Pro Membership gives you the tools to tackle all your trading obstacles.

Register for the Master Trader Live Workshop and get the First 15 Days on Us

Book a FREE Consultation

Sign up for a free consultation to build your Educational Plan.