Following earnings on Wednesday, shares of Tesla Motors Inc (TSLA) initially responded positively after hours but were subsequently met with further selling pressure. TSLA stock is fast approaching the critical $205 support level, an area I expect it to hold, at least for the short term.
The chart below highlights the importance of the $205 level from a technical perspective, with TSLA stock bouncing off the $205 area in August, October and November of last year, before finally succumbing. $205 also proved to be the springboard for a breakout in April 2015 after a long period of consolidation.
TSLA is also getting deeply oversold on a nine-day RSI basis, with a reading of 18.
Previous instances when TSLA stock reached these extremes proved to be significant short-term lows in the TSLA stock price.
Tesla’s earnings report actually beat slightly on the top line, with revenues of $1.15 billion coming in slightly better than forecast. Preorders of the Model 3, which had driven the stock to recent highs a month ago, continue to pour in.
The main impetus behind the recent selloff post-earnings seems to be the fear of the cash burn rate, with expectations that TSLA will need to do another capital raise to fund their lofty production mandates. Ultimately, TSLA is about belief, and I believe the stock will hold these levels for the next few weeks.
In my previous post on TSLA from April 8, I was somewhat bearish on TSLA with the stock trading at $257.20. At that time, I suggested selling an out-of-the-money call spread to position bearishly with defined risk.
With TSLA stock now down nearly 18% since then, I am getting somewhat bullish on shares of TSLA, because price does matter. Using an out-of-the-money put credit spread strategy to position guardedly bullish provides a further cushion to the current $211.53 price of TSLA while having defined risk.
The TSLA Stock Trade
Sell the TSLA May $190 puts and buy the TSLA May $185 puts for a 55-cent net credit or better. These are regular May monthly options that expire May 20.
The maximum profit on the trade is $55 per spread, with the maximum risk of $4.45 per spread. Return on risk is 12.4%. The short strike price of $190 is 10% below the $211.53 Thursday closing price, providing a nice downside cushion and also well below the critical $205 support level.
I would look to close out the trade on a meaningful break of the $205 support, while looking to let the spread expire worthless and keep the initial $55 credit if TSLA 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.
