Options Action
Friday 5:30 PM ET, Saturday & Sunday 6:00 AM ET
Options Action

The big bet that Tesla’s upside is capped

Heavy action in Tesla options

Tesla shares have enjoyed a winning week, rising over 6 percent to record levels. But one options trader is betting that the stock's further upside is limited.

As the stock was hitting a new record high Thursday, one trader sold 556 June 240-strike calls for $12.60. This represents a wager that Tesla shares will remain below $252.60 through June expiration.

(Read more: Another fire reported as Tesla hits new high)

What's notable is that this seller was taking advantage of strength in the stock as well as strong call activity. On Thursday, 1.5 calls traded for every put, which is higher than the stock's average call-to-put ratio.

"Basically, that option trader is saying they don't expect Tesla to get above $250, $260 by June— but certainly with all the call activity out there, I would expect Tesla to trade higher," said Brian Stutland of the Stutland Volatility Group.

A row of new Tesla superchargers outside the company's factory in Fremont, Calif.
Getty Images

Over the past year, Tesla shares have risen in value by an incredible 418 percent. For the trader to lose money on this trade, the stock would have to increase another 27 percent from current levels. If the stock is not above $240 at June expiration, the trader will get to keep the entire $12.60 taken in per share—or about $700,500 in total.

The problem with selling an upside call, however, is that the downside is not capped. That's because a call seller is obligated to sell the shares at the strike price, no matter how high it rises, and any stock can technically rise forever.

Calls are often sold by investors who are already long the underlying shares. This solves the problem of the potentially infinite losses and allows shareholders to take in some cash. It is possible that the seller of these Tesla calls is long the stock and wanted to see some quick gains as Tesla made record highs.

Tesla is slated to release fourth-quarter earnings after the bell Wednesday.

—By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex.

Follow the show on Twitter: @CNBCOptions.

Related Tags