Tesla Motors Inc (NASDAQ:TSLA) finally showed some signs of life recently, bouncing off the $196 level on Sept. 2. Tesla stock had dropped by more than 13% in the prior eight trading days from an intraday high of $227.15 on Aug. 24, so the respite clearly was welcome.
Unfortunately, this bounce is likely to be short-lived. Tesla stock has had to claw for every bit of ground, and it simply isn’t set up to move appreciably higher in the coming weeks.
Click to Enlarge A look at the chart shows big overhead resistance at the $205 level. This has proven to be a crucial inflection point in the past. There is also a further layer of resistance at the $215 area. There is little, if any, meaningful downside support.
Yesterday’s price action was telling as well. Tesla stock traded well through the $205 resistance area before succumbing to renewed selling pressure and closing on the lows of the day.
Click to Enlarge This type of reversal pattern is an indication that sellers have taken charge, with further downside likely.
Certainly the news of another fatality involving a Tesla driver only adds fuel to the bearish fire, especially when the headlines use the term “electrocution.” The recent acquisition of another Elon Musk-run company, SolarCity Corp (NASDAQ:SCTY), was ill-received, especially by critics like famed short-seller Jim Chanos.
Factor in the recent announcement of another round of financing that will further dilute current shareholders, and it’s easy to see why Tesla stock is dropping like a rock.
In my previous post on TSLA from August 5, I looked for a short-term top in Tesla stock. Well, one was there. However, while Tesla has fallen sharply from there, I think there’s even more room for downside damage.
Even given the recent drubbing, TSLA stock options remain cheap, trading at only the 12% percentile.
This favors option buying over over selling in trade structuring, so I’ve put together the following trade idea.
Tesla Stock Trade
Buy TSLA Sep $197.50 puts (expire 9/16/16) and sell Sep $195 puts (expire 9/9/16) for a $3.20 net debit.
The short $195 strike is positioned just below the recent low of $196.20. The trade is short 25 deltas at inception, which is equivalent to being short 25 shares of Tesla stock. Maximum risk is $320 per spread.
Ideally, Tesla stock closes near $195 on tomorrow’s expiration for maximum profit.
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.
