I’ve had good luck trading Tesla Motors Inc (TSLA). All my previous trades were bearish in nature using TSLA stock options. I mainly bought debit put positions financed by sold calls.
So far this year, TSLA stock is down 5%. It’s more than twice as bad for the past 12 months.
I know by writing this bearish note, I will ruffle a few feathers and seriously hamper my chances of winning popularity contests, so I only hope that they keep the feedback cordial.
Fundamentally, I think that TSLA will need several miracles to even stand a slim chance at a profit. It’s a long shot play that is a pure gamble.
Yes, they are trying to do good things for the world, but not all good things are fiscally doable for profit.
Click to Enlarge The latest news of TSLA combining with SolarCity Corp (SCTY) is the nail in the TSLA financial coffin. I am not sure that there will be enough synergies to allow for two cash-burning companies to survive let alone thrive. I love the car but strongly dislike the stock.
TSLA will need to institute major fundamental changes before it can become profitable. For that reason, I don’t believe it can sustain the current valuation aspiration that Wall Street carries for it. So I want to initiate yet another bearish trade setup. This time I want to buy longer dated puts and finance them with a credit call spread along the way.
TSLA Stock Trade
Trade No. 1: Buy the TSLA Mar 17 $205/$200 debit put spread. This is a bearish trade for which I pay $2.10 per contract. This is my maximum potential loss. If Tesla stock falls through both legs of my spread, I stand to double my money. I stand to gain the most if the stock falls through both legs between now and next March.
The faster and further it falls, the higher my profits.
But I want to reduce my out of pocket expense. I can do this by generating income through selling a credit calls spread.
Trade No. 2: Sell the TSLA Dec $260/$265 credit call spread. This is a bearish trade for which I collect $1.30 per contract. I will sell two contracts for every contract of first trade. This trade has a 70% theoretical chance of success if Tesla stock stays under my sold strike leg through December of this year.
The net effect of taking both trades is a small credit. This leaves me short TSLA stock through March of next year for free. So, any value I retain from the march debit put spread is pure profit. So I don’t really need Tesla to fall, I just need it to stay under my sold credit call spread.
Even though the trades are longer dated, I am not obliged to hold them through their expiration. I can close either trade for partial gains or losses at any time.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
