Hello Trader,

I’ve been trading TSLA a lot recently. 

The reason? It’s in play, and I have high conviction trading it at these levels. I made an interesting trade on it a few weeks back. You can read about that here

But last week, I took a few papercuts being on the wrong side of the trade. And I’m really glad I stuck to my plan because TSLA is gapping up 2.6% this morning as I write this. 

By cutting off the trade as it went against me early, I saved my ammo and am ready to reload again today or later this week when the trade sets up. 

I still think we’ll see this retest of $1000 at least sometime soon, but I will not fight a stock as it moves against me and add to a loser. I cut off the trade Friday afternoon as it made new highs, and it is now around $70 higher. I got my timing on the trade wrong and was on the wrong side of it, but I am really proud of my execution. I’ve preserved my mental capacity and am ready to have another shot at much better prices this week.

Here’s How I traded it:

Now Here’s a breakdown of the trade:

Lead Up

TSLA was one of the strongest large-cap stocks in the market, running up over 40% in less than a month. That was until Elon Musk decided that it was time for him to sell some stock. This announcement and on-market selling caused TSLA to fall over 18% in 3 days from over 1200 to under 1000. I was able to trade this action, and you can read about that here (insert link). 

Now last week TSLA found support at the 1000 level and started to bounce. I anticipated a move back below 1000, given the overall market weakness I was seeing and didn’t believe that TSLA would hold over $1100 for long when I entered the trade.

Big Picture

One thing I noticed is the crypto market seems to be a leading indicator on the Nasdaq. When things fall, it usually leads to Nasdaq pulling back risk too. I know we touched an all-time high (ATH), but things just didn’t feel healthy out there. So many stocks were having big red days and the Advance/Decline (A/D) line was very weak. These aren’t the things we see on sustained breakouts usually. 

The relative weakness in ARKK vs QQQ did not make sense to me, and I thought that was a leading indicator that the market would go lower. However, it appears the leaked information that AAPL was working on an electric car sent investors into risk-on mode, and the market marched higher.

The Trade

I started into a short position on Thursday morning, then added to it as TSLA made new lows for the day. I took this short position by buying 1150 puts that expired the next day on Nov 19. However, TSLA did not continue to trend lower and pulled back towards its opening price. Given that these options expired the next day and I wanted to stay in this position and give it time to work, I sold the puts at around break-even and rolled over by buying the 1150 puts 2 weeks out expiring on December 2.

Initial trade scratched

2nd trade put on

On Friday, TSLA refused to go red. It tried to sell off below $1100 in the morning, but the buyers refused to let it go lower. Once the stock held green and held above vwap, I decided to reduce some size on my position. I could always add back if we broke below $1100. Then in the afternoon, TSLA made new highs for the day. As TSLA held higher, I covered the rest of my position after 2 pm, as TSLA continued higher.

I’ve watched TSLA for a long time. Given that it is a momentum stock, it’s not a good idea to step in front of a freight train. I cut the trade, licked my wounds, and it’s a good thing I did as, on Monday, TSLA was $60 higher. I saved myself a huge headache by getting out of the trade early, and now I am ready to reload at much better prices if a good opportunity on the short side presents itself.

Bottom Line

Controlling risk is one of the most important parts of being a trader. Whilst it can be uncomfortable for beginners, cutting trades that are not working quickly helps me maintain clarity of thought and control my emotions. 

Even more importantly, it saves my ammo to make my next trade. After all, after exiting a trade, I can always get back in. 

By cutting my trade on TSLA last week as planned, I can now get back in at much better prices if I wish to do so. I will continue stalking TSLA for the next short trade opportunity, as I believe it could be setting up soon. To me, the most important part of trading is planning your trade and trading your plan. The outcome is not something I can control!