Shares of Tesla Motors Inc (TSLA) are currently stalling out at the $235 level, having failed three times since Nov. 9 to move above this resistance area.
The analysts’ debate on the valuation metrics surrounding Tesla stock are widely dispersed, with JPMorgan in the negative camp, issuing a “sell” rating and a $180 price target, while Morgan Stanley is firmly in the bullish camp with an “overweight” rating and a $450 price target.
Click to Enlarge I prefer to let Tesla stock’s price action dictate a target … and currently the price action aligns with the Goldman Sachs’ $234 price target and “hold” rating.
Both the 14-day Relative Strength Index reading of 51.88 and mid-range levels of implied volatility also align with Tesla stock that is having difficulty pushing higher.
TSLA stock, which normally is correlated to the price of oil, has recently diverged greatly. Since Nov. 13, shares of Tesla have moved higher by 10.5% while oil has fallen by 11.63%.
I think that Tesla stock will revert to the mean and close the relative valuation gap to oil — which means TSLA should struggle moving forward.
How to Trade Tesla Stock
To position for continued difficulty in Tesla stock, I would look to sell an out-of-the money call spread just above the $235 resistance level, selling the TSLA Jan $240 calls and buying the TSLA Jan $242.50 calls for a 65-cent net credit.
The short $240 strike price provides a 4.83% upside cushion to Monday’s $228.95 closing price of Tesla stock, with Oct. 6 being the last time TSLA traded above the $240 level.
The maximum gain on the trade is $65 per spread, which you’ll make as long as Tesla shares stay below the $240 mark. The maximum loss is $185 per spread, incurred if TSLA tops $245. The return on risk is 35.14%. More aggressive traders could elect to use a higher strike than the $242.50 for their protective call, which would increase the net credit, but also the overall loss potential.
I would close out the trade on a meaningful move through the $235 resistance level, while letting the spread expire worthless and keeping the initial $65 net credit per spread if the resistance level is not significantly breached.
TSLA is not due to report earnings until Feb. 10, well after January expiration of the options.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
