Is the broader market driving you crazy as it motors up, only to abruptly reverse and idle back into the midsection of its horizontal trading lane? If it is, try looking at Tesla Motors (TSLA) to “sell, sell, sell” with a neutral or bearish vertical spread.
Tesla Motors is a cult stock according to CNBC’s Jim Cramer and a rare large-cap momentum name that he’s not on board with. Don’t get me wrong, he’d love to test drive the car, just not Tesla stock and the TSLA ticker associated with the company’s financial picture at this point in time.
Incidentally and regarding other potential cult stocks, Tesla stock may even be the Shake Shack (SHAK) of the auto industry if we’re to infer, twist or extrapolate some other dialogue of his found in a recent acticle from James Brumley right here at InvestorPlace.
You know the expression, “Don’t stand in front of a freight train?” Well, in the case of Tesla stock, neutral-to-bearish traders aren’t. Aside from Tesla being an electric car (and battery) company, TSLA shares have hit a technical wall with shifting momentum suggesting bulls have lifted their collective lead foot off the gas pedal.
If you look at the provided daily chart of Tesla stock, the first technical item of notice and potentially thwarting TSLA’s progress is resistance from its 62% Fibonacci retracement level.
A flattened and curling lower Bollinger Band in TSLA is also worth mention as technical resistance. Also, with Tesla stock having tagged the highs of a prior and key bearish session back in November (yellow oval) is viewed as possibly good news for bears going forward.
The interpretation on the latter point is many bulls in Tesla stock may be happy to have exited recently after months of holding to get back to or near breakeven. It’s suspected those same traders are now likely to be less interested in supporting TSLA shares for a second go-around.
Additionally, Tesla stock is showing signs of reversing from an overbought chart. That’s based on Stochastics turning lower and forging a crossover from extremes on both the daily and the weekly chart and suggests to us Tesla stock could, at a minimum, be a stalled vehicle for a bit of time.
Based on this analysis, using a pullback to Tesla stock’s 38% retracement level wedged between the key longer-term 50- and 200-day simple moving averages, I’d estimate TSLA bears are looking at a reward-to-risk proposition of roughly 3:1 in the stock.
The 3:1 ratio in Tesla stock is if traders incorporate a stop-loss in shares above the recent highs and target a downside price of $225 in TSLA for profit-taking.
Pair of Tesla Stock Vertical Spreads
As mentioned, Tesla stock may not be a freight train, but it can on occasion race higher out of nowhere. When it does, the best of intentions when it comes to using stop losses will often find a trader’s profit and loss statement looking a good deal worse than promised on paper when simply using a stock position.
I can’t promise losses when trading TSLA won’t occur. But, using a limited risk spread like a bear vertical in Tesla stock does establish a maximum loss regardless if TSLA happens to motor higher down the road or even around the corner of the next trading session.
A bear vertical in Tesla stock allows traders to minimize volatility risk in the underlying shares, as well as the implied volatility priced into the options premium. As TSLA is a high-priced stock in terms of dollar cost, verticals become all the more attractive from a practicality standpoint, even when volatility looks cheap overall.
Checking the options board in Tesla stock and with plenty of liquidity in its calls and puts, there’s a multitude of ways to position with a vertical. Not only that, you can make the vertical a more neutral spread which has the opportunity to profit if shares simply stall.
Alternatively, a trader might position with a more bearish vertical which requires Tesla stock to move in the intended direction in order to profit. It all comes down to a matter of preference and what the trader is willing to accept on a risk versus reward basis. Given what’s been said, one spread priced for a simple stall in Tesla stock is the TSLA Jun $250/$255 call vertical for a credit of $1.50.
The trader selling the TSLA vertical would collect the entire credit at expiration if Tesla stock remained below $250. Above, $255 and on that third Friday of June, the trader would be out a maximum of $3.50.
A second vertical for slightly more bearish Tesla stock traders is the TSLA Jun $240/$235 put for a cost or debit of around $1.45. In this situation, if TSLA shares don’t continue to steer lower the trader would lose the entire debit above $240. A price of $238.55 in Tesla stock is needed to breakeven at expiration.
And if all goes as intended and Tesla stock skids towards the described technical target area in the next couple of weeks; a profit of $3.55 would be realized. Below the sold TSLA Jun $235 strike, the spread expands to the distance between strikes and the trader takes in the $5 difference minus the debit paid.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
