Tesla Motors Inc’s (TSLA) current stable of vehicles isn’t for everyone. The Model S is a high-end, luxury performance sedan, while the Model X is an upper-tier crossover SUV. Both are priced well out of reach for most budget-minded Americans.
But Tesla is looking to change all that with the unveiling of its Model 3 sedan this Thursday, and it could have major implications for Tesla stock.
At an estimated $35,000 before tax credits, the Model 3 is well within the budget of many average American families. But before Tesla stock investors cheer the potential flood of consumers rushing to avoid fluctuations at the pump — or even address the lack of charging stations in many major U.S. cities — the company needs to prove it can deliver the Model 3 in a high enough volume to satisfy demand.
With the current quarter coming to an end tomorrow, Tesla will be gearing up to release its first-quarter deliveries report — which should arrive next week. Current company projections place deliveries at 16,000 vehicles, with the Model S making up the bulk of those deliveries. The figure is up 16% year-over-year, but down 8% sequentially.
But many analysts believe this figure to be on the conservative side, especially following CEO Elon Musk’s fourth-quarter assertion that “Winning needs to feel like winning.” This is where sentiment comes into play for Tesla stock, and the picture is far from rosy.
For instance, data from Thomson/First Call reveals a rather bearish outlook on Tesla stock. Currently, TSLA has attracted 13 hold or worse ratings, compared to just eight buys. Furthermore, the 12-month price target of $236.38 represents a miniscule premium to yesterday’s close at $230.13. While there is ample room for bullish sentiment to grow here, Tesla will need to prove it can make good with deliveries.
Among the most bearish TSLA indicators is the stock’s amount of short interest. As of the most recent reporting period, Tesla stock was the 16th most shorted stock on the NASDAQ, with 32.2 million shares sold short. This sizeable position accounts for nearly 32% of TSLA’s total float.
Click to Enlarge Options traders are also placing large bets against Tesla stock. Specifically, the April/May put/call open interest ratio stands at 1.13, with puts outnumbering calls among short-term options. Ahead of the Model 3 unveiling, the weekly April 1 ratio rests at 1.00, while the monthly April put/call OI ratio rises to 1.10, taking into account next week’s deliveries data.
It’s also important to note that the lack of heavy call OI hints that short sellers are not buying calls to hedge their positions.
Overall, monthly April implieds are pricing in a potential move of about 10.5% for Tesla stock by the time these options expire on April 15. This places the upper bound at $254.29, while the lower bound lies at $205.97.
2 Trades for Tesla Stock
Bull Call Spread: With the Model 3 unveiling and next week’s deliveries information, the drivers are in place to send Tesla stock higher — especially if short sellers get squeezed or if analysts upwardly revise their positions. As such, traders looking to bet bullish on TSLA might want to consider an April $240/$250 bull call spread.
At last check, this spread was offered at $1.65, or $165 per pair of contracts. Breakeven lies at $241.65, while a maximum profit of $8.35, or $835 per pair of contracts, is possible if Tesla stock closes at or above $250 when April options expire.
Bear Put Spread: On the other hand, given Tesla stock’s rally off its February lows, TSLA could be in danger of a sell-on-the-news event. Furthermore, any discrepancies with expectations on the Model 3 or deliveries would have a serious negative effect on Tesla stock. Those looking to side with the bears on TSLA might want to consider an April $220/$230 bear put spread.
At last check, this spread was offered at $2.30, or $230 per pair of contracts. Breakeven lies at $227.70, while a maximum profit of $7.70, or $770 per pair of contracts, is possible if Tesla stock closes at or below $220 when April options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
