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Trade Idea: Create a Call Debit Spread on TSLA with a $165 strike price.
Explanation:
In this trade idea, we are suggesting creating a Call Debit Spread on TSLA, which is the stock symbol for Tesla, a well-known electric vehicle company. A Call Debit Spread is an options strategy that involves buying and selling call options on the same underlying stock but with different strike prices.
By creating a Call Debit Spread on TSLA with a $165 strike price, we are expressing the belief that the stock price of TSLA will increase above $165 by a specific date. With this options strategy, we have the opportunity to potentially profit from the rise in TSLA's stock price.
To manage risk in this trade, it is recommended to set a predetermined level called a stop loss, at which you would exit the trade to limit potential losses. The suggested stop loss for this trade is 25%, meaning that if the value of the Call Debit Spread decreases by 25% from its initial purchase price, it is advised to exit the trade.
Creating a Call Debit Spread helps reduce risk because it involves both buying and selling call options. By simultaneously buying a call option with a lower strike price and selling a call option with a higher strike price, we can limit our potential losses. The difference between the strike prices represents the maximum potential loss.
If the stock price of TSLA rises above the $165 strike price before the options contract expires, the call option we bought will increase in value. Meanwhile, the call option we sold may decrease in value, but to a lesser extent. The difference between the two represents our potential income.
In summary, creating a Call Debit Spread on TSLA with a $165 strike price allows us to potentially profit from an increase in the stock price. Implementing a 25% stop loss helps manage risk by defining a level at which we exit the trade to limit potential losses. This options strategy reduces risk by involving both buying and selling call options, and the potential income comes from the difference in value between the two options as the stock price rises.