A cautious way to bet on a bounce in one of the broken ‘Magnificent Seven’ stocks
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The so-called Magnificent Seven group of stocks, which rose together for most of 2023, are starting to break-up this earnings season. The Magnificent Seven constituents (Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia, and Tesla) have been the main performance drivers in the S & P 500 index all year. As of mid-October, these seven stocks represent nearly 29% of the benchmark. The super-duper seven have added almost $4 trillion in market cap in 2023 alone while collectively as a group contributed roughly 90% of the S & P 500’s 2023 gain. However, the group is seeing bifurcation during this third-quarter earnings season. Investors have welcomed Microsoft’s’ and Amazon’s impressive reports. On the contrary, Alphabet disappointed investors with their cloud growth numbers and by itself dropped nearly $200 billion in market cap. Apple’s earnings are ahead next week. Since August, not one of these Magnificent Seven names have been immune from the bears’ selling pressure. Options traders consistently hunt and seek ways to turn recent turmoil into profits. I want to focus on one of the high-flying Magnificent Seven names: Tesla . Elon Musk’s EV company has been a stock that I have owned on and off for years and currently own. This high-beta name offers significant opportunity to options traders with its consistent volatile underlying price movement. Tesla just reported its first earnings and revenue miss since the second quarter of 2019, and the stock fell 9% the day of that earnings report. Options trade on Tesla To capture elevated options premium while still feeling comfortable in potentially owning the stock, selling a put spread is the prudent approach. Selling this put spread allows an investor to collect premium, better known as a credit spread. Furthermore, I want to lean on the technicals and recent year price history to assist in selecting strike prices as TSLA has violated both its 50 & 200-day moving averages. To construct the put spread that I will be selling, here is what I need to do: The option chain on Tesla shows that I can sell the December regular expiration ATM (at-the money) $205 put for $14.50 I will also buy the same December expiration $170 put option for $3.00 This put spread will allow an investor to collect $11.50 per one put spread This put spread risks $2,350, and the investor has to be prepared to be assigned the option and own TSLA shares if the price of TSLA is under $205, yet above $170. In the event the price of Tesla plummets under $170, the investor will realize a loss of $2,350. However, if the technicals are correct and Tesla bounces into year end, an investor will collect $1,150 per one put spread sold and not own the stock if it settles above $205 in December. In times of emotion, I believe it is imperative to acknowledge the chart technicals. TSLA YTD mountain Tesla in 2023 Let’s switch from the Tesla perspective and look at the broad benchmark S & P 500 index that recently closed at its lowest level in five months, cracking the imperative 200-day moving average. Using the SPDR S & P 500 ETF (SPY) , traders saw the 200-day violated at $422 and Relative Strength Indicator levels have now been slammed into oversold territory. I am cautiously optimistic that we will see interest rate yields continue to come off their recent high, which will allow the S & P 500 as well as Tesla to resume its 2023 respective climbs. DISCLOSURES: (Owns TSLA) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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