So you missed the perfect entry points in Tesla Inc (NASDAQ:TSLA), huh? Well, here’s a little secret: There’s never a perfect time to enter stocks, whether it’s long or short. The idea is simply to choose times when you have a high probability of riding a thesis into profits, and that’s what I have in TSLA stock today.
Tesla the company has super fans and haters alike all across Wall Street. Today, the haters are winning — Goldman Sachs downgraded Tesla stock, and it has fallen 5% on the news. The worries include “cash needs” (another round of capital raising is likely coming soon) and the integration of SolarCity.
Elon Musk set milestones that will required more funding to meet. So It’s only reasonable to expect downside pressure on TSLA stock. Usually, buyers eventually step in to support Tesla Inc, though — it’s too tempting to its fans, and every dip is treated like a can’t-miss opportunity to add to their long positions.
It’s easy to go long a stock when it’s green. Yet if I want to buy low and sell high, I must be able to buy on red days as long the thesis remains intact. While Tesla’s fundamentals are far from healthy, the story in the stock is speculative and years from fruition. So in the meantime, drops should be entry logical entry points even if TSLA falls a bit further.
I am not about to risk $245 per share on a 5%-loss day. Luckily, I can use the options markets to scalp into a position in Tesla Inc with room for error.
How to Trade TSLA Stock
The Bet: Sell the Jun $195 put. This is a bullish trade for which I collect $4.70 to open. By selling the put, I am committing to owning Tesla stock at $195 per share if it falls below it. Anything below $190.30 per share would accrue losses for me. The current 20% price buffer gives this trade an 80% chance of success; hence, the aforementioned room for error.
Selling naked puts in a volatile stock is not for everyone, so I can moderate this trade by spreading it.
The Alternate: Sell the Jun $200/$195 credit put spread. This is still a bullish trade, but one with finite risk profile. I still have about 80% theoretical chance of success, but now my downside in Tesla Inc is limited to the width of the spread less the $1 per contract that I collect to open. If successful, this trade on TSLA stock would yield over 20% on money risked.
June options are far enough that I can manage the risk with relative ease. I can add interim credit call spreads to balance the risk and/or buy shorter-term debit put spreads to cover times of extreme uncertainty.
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.