While the stock markets have done well this year after a shaky start, Tesla Motors Inc (NASDAQ:TSLA) has not been so lucky. Year-to-date it’s down 16%. Yet I still think its valuation is bloated.
Fundamentally, I am not a fan of Tesla’s current model. I’ve been criticized for “not seeing the vision,” but maybe that’s because it’s too murky and distanced from reality.
Elon Musk is burning cash and missing milestones. Yet Musk keeps tightening the deadlines. That said, Tesla is certainly not lacking vision. It’s lacking focus.
I often see experts compare Amazon.com, Inc. (NASDAQ:AMZN) to Tesla. This is completely inappropriate. AMZN is entirely self-sufficient. It is profitable and generates its own cash for new ventures. Amazon has decades of execution as proof, as it dominates dozens of major markets and is the trailblazer in dozens more to come.
Amazon has executed miraculously well, whereas Tesla needs several miracles for it to grow into its valuation. Unless it completely revamps its operation, TSLA stock is headed much lower in the long-term. Which is why I think a bearish near-term options trade is the way to go.
Click to Enlarge Technically, Tesla’s stock chart shows potential weakness that could invite more sellers if it doesn’t bounce off this dip. So I have to account for that possibility in my trades.
Today the goal is to profit from the current range. I want to generate income by selling against upper and lower limits that I think will be unattainable by either bulls or bears.
Trade No. 1 – bearish side: Buy the TSLA Dec $245/$250 credit call spread for 55 cents per contract. This trade has an 80% theoretical chance of success, yielding 12% for my risk. Ideally, I need shares of TSLA stock below $245 by mid-December. This leaves a 20% buffer from current prices.
Trade No. 2 – bullish side: Buy the TSLA Dec $160/$155 credit put spread for 90 cents per contract. This trade has an 80% theoretical chance of success to yield 20%. I need Tesla stock to stay above $160 by mid-December, leaving me with a 20% buffer from current price.
Taking both trades would make a sold iron condor. Since I can only lose on one side or the other, taking both sides would reduce my max risk exposure.
The iron condor is is a range-bound trade for which I collect a net credit $1.45 per contract. If successful, this trade would yield 35% on money risked. For this, I need TSLA stock to trade above $160 and below $245 by mid-January. This leaves me with a +/- 19% buffer from current prices.
Tesla options are liquid enough to allow me to trade in and out of this trade should the need arise. I am not obliged to hold either of these trade through expiration. I can close either for partial gains or losses.
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.
