Below is a description of how I traded Tesla this week. This post, as well as all of my other posts on this blog, are for educational purposes. They aren’t trading advice. You should never risk your capital based on how someone else trades. Learn from others then develop your own trading style which suits your risk tolerance and personality!
Below are all of the Tesla trades that I made in the past 30 days. I post these so that you can see that I’m only trading what I see on the charts. There’s no selective editing here! The bullish trades were based on the chart setup that was indicating higher prices were likely and then just 2 days later I flipped to a bearish bias. You’ll see why when we examine the charts below.
The first setup that I traded last week was a bullish breakout on the daily chart. Wait a minute…aren’t I the guy who always says ‘don’t chase (breakouts), wait for the retrace’? Well yes, that’s me, and that’s still the best rule for consistently profitable entry points with tight stops but when you get to the point where you’re familiar with very nuanced setups you’ll see more entry locations than strictly retracements. Below is one of those setups. The green candle preceding the candle marked #1 on the daily chart (left side) closed above the declining 8 SMA upper band. That was the day after price moved above the declining upper band but couldn’t close above it and instead closed much lower in what appeared to be a bearish reversal. The sellers were in control that day but on the next day they couldn’t take price lower and instead allowed price to close above the upper band. So, while I prefer a second close above the declining upper band to confirm a failure I was willing to favor the buyers due to that weak response from the sellers. However, there was another, even more compelling, reason to favor the buyers at that time.
Below I’m showing just the daily chart. The candle labeled #3 is that day I was just discussing above. That close above the declining 8 SMA upper band was one indication of motivated buyers but that day also closed above the Fib retracement resistance zone of the prior decline range (from candle #1 high to candle #2 low). That resistance zone was 215-41-218.43 and the daily close of candle #3 was 219.41. So not only did price close above the declining upper band but it also closed above the prior range’s Fib resistance zone. Highly unlikely that happens if sellers are strong! So, under those circumstances, I don’t mind buying a breakout. IF, the next day, price had retraced back to the Fib support zone of #3 I would have added to the position’s size with a hard stop below the low of candle #3 and a soft stop IF price lingered below the the 61.8% Fib retracement of #3. The following day (#4) price advanced again and the bullish trade was profitable. The long upper wick caused some concern and is the reason why I believe in Delta Hedging risk on most trades when there’s an opportunity to do so. No reason to short that just because of the long upper wick but it factors into the next day’s analysis.
Same daily chart but I’ve changed the labels to reflect the important candles for purposes of this analysis. #1 was the prior pivot high from 8/20/2024. Prior pivots (highs and lows) are always important since they represent structural support or resistance. And, as you should know already, what was support, once broken, should become resistance and what was resistance should become support. In this case, the pivot high at 228.22 should have been resistance during candle #2 but once price moved above that level, spent time trading above it (acceptance) and closed above it, then it should have been strong support for future price action! I also added the Fib retracement support range (227.16-228.67) of #2 because if that was a strong bullish continuation candle then price should find support at or above that zone the next day. Now, putting the Fib support zone together with the 228.22 prior pivot high, I can reasonably assume that if buyers are motivated then they will step-up and buy IF price makes it’s way back to that zone on day #3. Clearly that didn’t happen. Day #3 opened below the high of #2 and almost immediately sold-off back below that very important support area! It’s an easy decision to short that weakness with a hard stop above the #2 high and a soft stop on price acceptance back above the 228-29 zone.
That’s a simple example of how I read, or interpret, price action. I look for levels or zones, based on price structure, Fibs, and the 8 SMA upper and lower bands, to determine where price should find support or resistance. If price does as it should then that offers a trade entry. If it fails to do as it should then that also offers a trade entry. Either way I can have a trade entry based on these identifiable levels or zones on a chart. I don’t just take a trade because a chart looks bullish or bearish. I need a well defined entry point where I can also set a well defined stop based on a specific level.
Once I have a specific level and a directional bias to trade then I have to decide what trade structure to use. I often start a trade with simple long Call(s) or Put(s). A Vertical debit spread or a Diagonal spread can also work well. I like to have a trade structure that I can roll up or down to DH (Delta Hedge) the position. You’ll see numerous posts on this blog showing DH’ing trades that reduce the initial cost of the position and I highly recommend that strategy for many traders, especially less experienced traders! However, there is another way to reduce Delta exposure that involves adding to the initial cost. That is what my current position will demonstrate (below). The initial bearish trade that I made was a standard Put Vertical debit spread. I then bought back the short Put of the Vertical spread to add more short (negative) Deltas and then as price moved lower bought a Call Vertical debit spread and also sold even further OTM (Out of the Money) Puts to reduce the position’s net cost. By overall adding net cost to the position I reduced the Delta exposure and can make a profit if price moves dramatically higher or lower. The weak spot of the position, an area I refer to as ‘Death Valley‘ is right in the middle. Not a great position to hold into expiry especially if TSLA ends up being near the current price then but you can be assured that I won’t be holding this position that long! In fact, I’ll typically exit or adjust this position again within the next 30-60 days! I will not let the purple line (current profit level) dip back below the $0 profit line. Worst case scenario is likely a breakeven trade, best case is a $26,890 profit. At this point I’d like to take the opportunity to say that the length of time establishing a position has nothing to do with the duration of that position. I was in the bearish trade for approximately 20 hours before DH’ing it and that resulted in a position with 132 DTE (Days to Expiration). I spread my portfolio’s positions around so that they don’t all expire at the same time. In my portfolio I’m holding positions with anywhere from 7 DTE to almost 300 DTE. That strategy allows me to capture short and long term trends. I know lots of traders who focus on 0 DTE trades but those traders never get to benefit from the longer term price trends which can offer the opportunity of potentially large profits. But, to each his own, and I’m not here to judge other traders, only to demonstrate how I trade.
To summarize the above position, I entered a bearish trade based on a specific price level and, as price moved in the expected direction, I added more cost to the position while reducing the Delta (directional) risk. It is an alternative to the DH strategy that reduces the initial cost of a position in order to reduce Delta risk however I utilize both strategies in my portfolio.
Finally, I posted my portfolio’s P&L on X (Twitter) during Friday’s strong selloff. The point wasn’t to brag about how I was having a profitable day but rather to demonstrate the power of the DH method. Look at the SPX Beta weighted Deltas of my portfolio. It was long (positive) 31 Deltas and at that time the SPX was down about 1.5% on the day. The reason the day was profitable was due to the fact that I had DH’d my positions as price moved lower taking my Deltas from very short (negative) before the RTH open to basically flat or slightly long later in the day. The very short Delta trades took place at good location for a short trade as demonstrated above in this post. Then, as price moved lower (in my favor) I reduced that Delta risk so that I didn’t give back all of those gains if/when price rallies again.
Let’s wrap this post up with a simple summary: I find a good trade location on a chart and enter a trade of appropriate size, not too big because no single trade should ever do serious damage to my risk capital! If it goes against me I stop out using a specific level! If it goes in my favor I reduce Delta risk by either adding or reducing initial cost. I vary my trades by expiry so that I mitigate time risk. That’s how I trade.
Comments or questions? Leave them down below or you can find me on X (Twitter) @VegaOptions.