Electric automaker Tesla Motors Inc (NASDAQ:TSLA) is facing a wealth of skepticism as it prepares to release its fourth-quarter earnings report after the close of trading tomorrow. Headlines from many analysts and Wall Street pundits are expressing concern for TSLA stock, and it’s not the company’s revenue or sales figures that are being called into question.
Diving into the numbers first, we find that Wall Street is expecting a fourth-quarter profit of 31 cents per share, down from 33 cents in the same quarter last year. Revenue, meanwhile, is expected to come in at $1.2 billion, up sharply from $761.3 million in the year-ago period.
The problem for TSLA stock investors is that Tesla could top these estimates and still see a post-earnings selloff.
Why? Growth concerns are at the forefront, with analysts looking for strong sales in China to help assuage fears of Tesla gaining a foothold in this growing car market. Additionally, increased competition is a concern, especially with General Motors Company’s (NYSE:GM) Chevy Bolt EV expected to hit the market ahead of Tesla’s own mass-market EV, the Model 3.
Despite these concerns, there is still plenty of bullish sentiment being thrown at TSLA stock. For instance, EarningsWhisper.com reports that the fourth-quarter whisper number for Tesla earnings arrives at 39 cents per share – 3 cents higher than the consensus.
Furthermore, Thomson/First Call data reveals that 13 of the 19 analysts following TSLA stock rate it a “buy” or better, compared to just five “holds” and one out-right “sell.” The 12-month consensus price target of $300 also represents a healthy premium of nearly 38% to yesterday’s close at $217.48.
Not everyone is betting on a TSLA stock rally, however. As of the most recent reporting period, some 25.4 million shares of TSLA stock were sold short, representing a sizeable 26.3% of the stock’s total float, or shares available for public trading. While this wealth of short interest would seem like a negative up front, it does create the potential for a significant short-covering rally if TSLA stock jumps higher following earnings.
On that note, short sellers don’t appear to be all that worried about being squeezed — or if they are, it’s not showing up in TSLA’s options data. Typically, when short sellers are worried about a potential short-term spike in a stock, they will purchase call options as a way to hedge their short positions.
Given that TSLA’s weekly Feb 13 series put/call open interest ratio arrives at 1.08, with calls in near parity with puts, it doesn’t appear that any significant call buying is taking place heading into Tesla’s report. This theory holds true when we pan back for a look at the February/March series of options as well, with the put/call open interest ratio for this series arriving only moderately higher at 1.15.
Click to Enlarge Overall, implieds for weekly Feb 13 series options are pricing in a potential post-earnings move of about 8.3% for TSLA stock. This places the upper bound at $235.63, while the lower bound lies at $199.37.
While a rally would push TSLA stock above all its short-term moving averages, the shares would remain below resistance at $240 — notwithstanding a short-squeeze rally. A selloff, however, would place TSLA back below the key psychological $200 mark and could lead to additional selling.
2 Trades for TSLA Stock
Call Spread: Given the growing pessimism in the financial media, the company’s bullish long-term outlook, and TSLA stock’s rebounding price action, I’m leaning toward a taking a contrarian stance on TSLA heading into tomorrow’s quarterly report. Traders looking to take a chance on a post-earnings rally for TSLA might want to consider a Mar $215/$235 bull call spread.
At last check, this spread was offered at $8.32, or $832 per pair of contracts. Breakeven lies at $223.32, while a maximum profit of $11.68, or $1,168 per pair of contracts, is possible if TSLA stock closes at or above $235 when March options expire.
Put Spread: If you’re not willing to make an all-out bullish bet on TSLA stock ahead of earnings, you could look into a put sell position. Along those lines, a weekly Feb 13 series $180 put sell might be a way to capitalize on TSLA’s technical support. At last check, the Feb $180 put was bid at 46 cents, or $46 per contract.
The upside to this put sell strategy is that you keep the premium as long as Tesla stock closes above $180 when weekly Feb 13 series options expire at the end of this week. The downside is that should TSLA trade below $180 ahead of expiration, you could be assigned 100 shares for each Mar $180 put sold at a cost of $180 each.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
