I have certainly been less than bullish on Tesla Motors Inc (TSLA) over the past few months, pointing to the valuation concerns and technical resistance levels in previous articles.
But after closing 2015 at $240.01, Tesla stock has sold off sharply, dropping 21.6% so far this month to close at $188.07 on Wednesday.
While I am not a raging bull on Tesla, to be certain, the recent drubbing in TSLA stock has certainly tempered my bearishness, because ultimately price does matter. TSLA is now trading near a critical long-term support level at $185, a level that I think will hold over the short-term.
Click to Enlarge The last time TSLA stock traded at this level was March 27, which was subsequently followed by a strong rally in TSLA, as seen it daily chart.
A look at the longer-term weekly chart also shows Tesla stock bouncing hard off the $185 area in May 2014, after earlier breaking through resistance at this same level in February 2015.
Click to Enlarge Tesla stock is usually correlated strongly to the price of oil, but recently that correlation has broken down.
With oil now looking like it has found some semblance of a near-term bottom, I look for TSLA to close the correlation gap and be a relative out-performer to the price of oil.
Implied volatility (IV) is also at a heightened level, trading near recent highs and at the 76 percentile over the past year. High levels of IV have been prescient contrarian indicators in the past for Tesla stock.
High levels of IV also favor option selling strategies, and with earnings for TSLA due Feb 10, I want to use options that expire before the then to avoid any earnings risk.
TSLA Stock Trade
I am looking to sell a short-term out-of-the-money put spread to position for the $185 support level to hold over the next week, selling the TSLA Feb 5 $180 puts and buying the TSLA Feb 5 $177.50 puts for a 60-cent net credit or better.
The maximum gain on the trade is $60 per spread, with the maximum risk being $190 per spread. Return on risk is 31.6%. The short $180 strike price is 4.3% below the $188.01 closing price of TSLA stock and also well below the $185 support level.
I would close out the trade on a meaningful break of the $185 support level, while looking to have the spread expire worthless and keep the initial 60 cents credit if Tesla stock remains well-behaved.
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.
