Tesla just dropped sharply - How to trade unexpected falls
Tesla just dropped 4% in a matter of seconds after a report was released saying China sales fell by half in May.
The stock dropped quickly and puts started getting bids like crazy. Nearly all the trades coming through on the tape right now are puts.
How do you trade a sharp decline?
The short answer is that you don’t.
Small flash crashes (or sharp advances on good news) are impossible to predict, unless you have inside information.
If you randomly bet on sharp advances or declines, you might hit the lottery every so often, but most of your trades won’t go anywhere and your capital will wither away as you buy out of the money calls that decay when no events happen to cause the stock to move.
The only other way to profit from these types of moves is watching the tape all day and being ready to pounce. If you saw that news come across and immediately put weekly puts, you likely could have sold for a 10 or 20% profit a minute later.
Strategies like that require a quick trigger and a quick sell - set a stop loss and a limit sell with a 20% profit target.