Despite an earnings report that missed on both the top and bottom line, shares of Tesla Motors Inc (NASDAQ:TSLA) managed to put in a decent rally yesterday, gaining slightly more than 2% to close at $230.61.
While the valuation debate and merits of the SolarCity Inc. (NASDAQ:SCTY) acquisition have been be fiercely debated, until Tesla stock breaks out to the upside convincingly I remain firmly in the bearish camp.
In my previous article on Tesla from July 5, I pointed to $220 being an important inflection point in Tesla stock. Since then, nothing has materially changed in the technical picture. TSLA stock still is mired in a trading range, bounded by $235 to the upside and the all-important $220 level to the downside.
As an alternative energy car company, Tesla stock is normally well correlated to the price of oil. Following the news of the SCTY acquisition, shares of Tesla sold off sharply and traded at a discount to oil.
Tesla stock has since closed the oil gap and is now trading at a premium to the black stuff. Previous instances when TSLA traded at a premium to oil did not bode well for Tesla in the short term.
I look at option implied volatility very closely as a contrary sentiment indicator. Although a drop in IV is certainly to be expected following earnings, TSLA options are now trading at only the 8% percentile in IV. Complacency has reached an extreme.
In the past, these low levels of IV and high levels of complacency have marked significant tops in the price of Tesla stock, as seen in the chart below.
I look for this pattern to continue, with TSLA having a rough patch over the coming weeks.
Low levels of implied volatility also mean option prices are comparatively cheap, favoring option-buying strategies. So, to position for a pullback to the $220 level in Tesla stock, a put diagonal spread makes sense.
TSLA Stock Options
Buy the TSLA Aug $225 put and sell the TSLA $220 put expiring Aug. 12 for a $3.20 net debit.
The trade is 15 deltas net short at inception (36 deltas short on the $225 puts less 21 deltas short on the $220 puts), resulting in a guardedly bearish stance.
Ideally, Tesla stock closes near $220 on Aug. 12 expiration for maximum gain. I would look to stop out of the trade on a meaningful breakout past the $235 resistance area to the upside.
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.
