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Moves in Tesla options are making the stock's wild swings look tame

Tesla's options skyrocketing even faster than the stock

Despite a downgrade from Canaccord taking a double-digit chunk out of the stock Wednesday, Tesla is still in the middle of an eye-popping run.

The stock is up more than 30% in a week, over 70% in a month and about 235% in the last six months. If you think those numbers are too big to believe, wait until you hear about the electric-auto maker's options contracts.

"It's quite extraordinary what we're seeing in Tesla. I mean, almost unprecedented, I would have to say," Optimize Advisors President Michael Khouw said Tuesday on "Fast Money."

Tesla was the most actively traded stock in the options market on Tuesday, trading more than 1.3 million contracts representative of over $105 billion in notional value. That is a head-turning number, made possible by the stock's seemingly unstoppable march higher leading to skyrocketing inflation in the value of certain options contracts.

"Last week, we highlighted a trade. Somebody went out and bought 900 of the June 800-strike calls," Khouw said. "Those were way out of the money at the time that we highlighted them. [The trader] spent $19 per contract for those. Those traded over $250 [per contract] today. The buyer of those calls made over $20 million in one week."

That trader made out like a bandit, but if they had instead bought the 900-strike calls last week, they might have become even more fabulously wealthy in the blink of an eye.

"Those were trading for 5 cents last Friday. They traded for over $100 [Tuesday]," said Khouw.

Now, however, just buying calls or puts to make a directional bet probably makes a lot less sense than it did a few days ago. For example, since each options contract is worth 100 shares of stock, a bet on the 900-strike calls that cost $5 to put on last week cost $10,000 on Monday.

Plus, as Khouw pointed out, 90-day implied volatility in Tesla is 100%, meaning that a trader could be caught on the wrong side of this trade with a huge deficit to cover just as easily as they could make a fortune. Therefore, limiting your risk exposure becomes a top priority, in addition to cutting down the front-end cost of the trade.

"If you're thinking about using options yourself to make directional bets, it's probably going to be very expensive to do that unless you use spreads," said Khouw. "I was looking at a 1,000/1,200-call spread. That would cost about $40 to make that bet [per contract]."

That trade breaks even if the stock cracks the $1,040 level. After Wednesday's sell-off in the shares, that would represent a move of about 38% higher from the current level. However, instead of the maximum risk of about $110 per contract this hypothetical trader would have incurred if they had just bought the 1,000 calls, they're only risking $40.

On the other hand, this stock could theoretically swing higher again just as easily as it could sell off another 15%. So, limiting your risk on a bearish bet against the stock is important, too.

"If you're making a similar bet that the stock could decline by a like amount, that would be the 800/600-put spread," said Khouw. "That would actually cost you $55, so the options market right now seems to be betting that there's a bigger chance that the stock could decline from these really elevated prices that we're seeing here.

"But I will tell you this; if you're thinking about making your bets in Tesla, it's probably smarter to use options. That way, you can manage your risk."