Let’s be clear, Elon Musk is brilliant. He has accomplished many amazing things that are revolutionizing the way we pay for items, drive (or sit back while the car drives) our cars and even created a completely new way to power your home through the roofing shingles.

But, he may have inadvertently caused many more headaches for himself when he tweeted on Aug. 7 about a potential buyout of TSLA at $420 a share.

Could this be some sort of publicity stunt, as the man is known to pull on occasion, or a way to manipulate the stock price?

I’m not sure, and neither is the SEC which could potentially investigate Musk and Tesla to determine the validity of his public announcements via Twitter.

Man how business has changed!

But if he is telling the truth, here is a way to capitalize on the $420 target he touted with minimal risk if it all comes crashing down — as all of the record level of short sellers are hoping.

If TSLA is bought out at $420, that means the stock price will go there almost immediately and never move after that point, like LinkedIn when Microsoft purchased the business social network.

It moved to $196 per share, a 50 percent premium over the price at announcement in one day, and it stayed there until the acquisition was completed.

The implied volatility rank of the TSLA options is currently at 74, meaning that 74 percent of the time, options are priced less than they are today. This is an opportune time to sell options.

By selling the 325 put and buying the 320 put, you’re taking in a credit of $136 and have a max risk of $364. With TSLA trading at $352 you’re essentially risking 1 share of TSLA to make a 37 percent return as long as TSLA closes above the breakeven price of $323.64 by the Sept. 21 expiration.

The delta at the $325 put is 31, which means it has a 31 percent probability of being in the money at expiration, but that also means a 69 percent probability of being out of the money and keeping the full profit.

Here’s the amazing part about trading this with options: You would risk approximately one share to enter the trade and potentially get a 37 percent return if it stays above the breakeven price of $323.64.

To get a 37 percent return on purchasing one share of stock, the price would have to go to $482.24, which seems like an impossibility with these takeover talks.

Oh and your breakeven is the current price, so if it goes down even a penny, you’re losing money.

The TSLA share price could hit $420 as soon as the deal is announced, or it could go down more than 8 percent and this options trade setup would still profit.

One of the reasons that trading options is so powerful is that you can create a trade that can profit as a stock goes up, down or nowhere at all. This is like the holy grail of investing.

So while Space X may never reach Mars and TSLA’s stock price may never reach $420, this is a high probability way to trade the stock no matter the outcome.

Christopher M. Uhl, CMA, MOSM
Email: chris@10minutestocktrader.com
Twitter: @10minutetrading
Instagram: @10minutetrading