Tesla's stock has piqued the interest of professional and retail traders alike as they try to capitalize on the electric car maker's wild swings.
Shares of the Elon Musk-led company have posted moves of at least 1% in 23 of the 31 trading days this year through Friday's close. By comparison, the S&P 500 has recorded just five moves of that magnitude in 2020.
These moves — including a 19.9% surge on Feb. 3 — propelled Tesla to record highs. But it hasn't been all good news for the stock. Tesla has had five declines of at least 1% this year, including a 17.2% plunge on Feb. 5. The stock also fell 0.4% in volatile trading on Friday after Tesla priced its $2 billion secondary stock offering at $767 per share.
CNBC talked to professionals trading Tesla's swings. Here's how they're doing it.
Jon Najarian, co-founder of Market Rebellion and a CNBC contributor, said professional options traders are "fading" Tesla's big swings by betting on out-of-the-money puts when the underlying stock surges and on out-of-the-money calls when it drops sharply.
Out-of-the-money options have no intrinsic value, but they can still be used to make a profit. For example, a call option is out of the money when the underlying stock is lower than the call's strike price. If the stock price breaks above or trades at the call's strike, the option is considered to be "at the money," meaning it will be profitable to exercise it.
However, such trades are not for the faint of heart and can be expensive, especially when talking about Tesla. Najarian pointed out Tesla's implied volatility has surged to about 70% from 45% in mid-November. Tesla's 10-day volatility also soared to about 130% from 60%.
"In layman's terms, whether you want to bet on a collapse or a rally, it costs you twice to three times as much as it did 30 days ago," Najarian said, who is long Tesla call option spreads.
Mike Katz, partner at New York-based proprietary trading shop Seven Points Capital, said they are trading Tesla on a short-term basis using the previous day's highs and lows as exit and entry points for their trades.
"If you have a strategy where you're buying strength then you're stopping out if it takes out a previous day's low, then that's worked out really well," he said. "I would think that if this thing is going to continue to have strength and legs, it shouldn't really take off the previous day's low with too much authority."
He noted this trend has been in place since Tesla's stock rally began in late October, when the stock traded around $300 per share. Since then, Tesla shares are up about 144%, leaving high-flying stocks such as Facebook, Amazon, and Google-parent Alphabet in the dust.
However, Tesla's surge may also be attracting inexperienced traders. On Feb. 3, about 12,000 Robinhood brokerage accounts bought Tesla for the first time.
"That's what happens when people think it's quick, easy money," said Mike Mangieri, managing partner at Seven Points Capital. "Those guys usually will just get run over when it collapses because they're not looking to sell because they're still convinced it's going higher because everybody told them."
"That just creates a panic to the upside and everybody has to follow it," Mangieri added. "Same thing happened with bitcoin."