Short Tesla Motors Inc (TSLA) Stock While It’s Overhyped

Advertisement

Shares of Tesla Motors Inc (NASDAQ:TSLA) rose over 2% yesterday on the heels of an upgrade by Morgan Stanley analyst Adam Jonas. TSLA stock also broke out past some major resistance at the $235 level as well.

While Tesla bulls are rejoicing for now, however, the party should be short-lived, if history is any guide. To me, it’s time to take a (guarded) short stance in Tesla stock.

While one can debate the valuation of Tesla stock and the aggressive sales projections of the all-important Model 3, the fact remains that buying TSLA stock at current levels requires a huge leap of faith. Some may even consider it blind faith, especially as the market cap approaches $40 billion and price-to-sales still exceeds 6.

From a technical perspective, Tesla shares are becoming extremely overbought. Previous instances when shares were at comparable overbought readings were indicative of significant intermediate-term tops in TSLA.

Tesla stock chart RSI
Click to Enlarge

Tesla did break out past some significant resistance at the critical $235 level. While this may serve the bullish thesis well for the short-term, it also provides the potential for a quick and sharp reversal if that level fails to hold. Given that TSLA shares are up over 30% since bottoming at $180 in early December, a significant pullback would not be a surprise.

TSLA stock chart regular view
Click to Enlarge

Much of the recent rally may be attributed to short covering, as short interest continued to climb while the rally began in earnest. But the shorts have been severely punished, so that tailwind is diminished.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.

Also interesting to note that Morgan Stanley is a lead underwriter on both the secondary stock issuance and convertible bond issuance for Tesla. Morgan Stanley upgraded Tesla stock prior to the last two times Tesla issued more stock and convertible bonds. Kinda makes me wonder.

Given the magnitude of the recent rally and the grossly overbought levels of TSLA stock, I think a counter-trend put calendar play makes sense. While the $235 support may hold in the short-term, I think it eventually will give way to a sharp reversal once the faith is broken.

How to Trade TSLA Stock Here

Buy Feb $235 puts and sell 27 Jan $235 puts for a $5 net debit. 

The trade is 14 deltas short at inception with a maximum risk of $500 per spread. Ideally, TSLA stock pulls back towards the $235 level over the coming week.

The short strike expires before earnings due on Feb. 8.

 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.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/short-tesla-motors-inc-tsla-stock-overhyped/.

©2024 InvestorPlace Media, LLC