Wall Street is a fickle beast. All you need to confirm that is Tesla Inc (NASDAQ:TSLA). The company reported a fourth-quarter loss that narrowed to 69 cents per share from $2.02 a year ago, and revenues that nearly doubled from to $2.28 billion from $1.21 billion. And yet, TSLA stock plunged roughly 6.4% following the report.
That even ignored Tesla’s announcement that Model 3 production was on pace with expectations and that it would deliver between 47,000 and 50,000 vehicles in the first quarter compared to just 76,000 vehicles in all of 2016.
What gives?
Well, there are several reasons that the financial media are floating for the drop in Tesla stock.
- Earnings missed expectations for a loss of only 43 cents per share (even though revenue bested Wall Street’s forecast for $2.19 billion).
- There is also the narrative that margins and revenue are cloudy due to the SolarCity acquisition.
- Finally, the prevailing story for the knee-jerk selloff in TSLA stock is that CEO Elon Musk hinted that the company could issue more shares to raise capital for Model 3 production.
All of these are valid reasons for a selloff.
The problem is that Wall Street and investors knew about all of these factors prior to Tesla’s quarterly earnings report. In fact, after Oppenheimer said on Feb. 14 that investors should expect Tesla to take advantage of its recent highs to issue new stock to raise funds for Model 3 production, TSLA stock went on a two-day 4% rally to a new all-time high.
Which brings us to the real reason Tesla stock is down following earnings: profit taking.
What’s Going on With Tesla?
Click to Enlarge Shares are up an impressive 32% since the November elections, with most of those gains coming since the start of 2017. As a result, TSLA was considerably overbought, and traders are taking this opportunity to use previously known issues to take profits off the table.
If you’re in holding TSLA stock for the long-term, don’t panic. According to Tesla’s quarterly report, the Model 3 is still on track for full production in July, and deliveries are ramping up in fine style (remember 47,000 and 50,000 vehicles in the first quarter compared to just 76,000 vehicles in all of 2016?) And that’s not to mention the opportunities that Tesla is working on outside of is electric vehicle operations.
In fact, with Tesla trading at a discount near $255 on Friday, TSLA stock is a buy.
The problem isn’t whether shares will bounce back, it’s a matter of how to pick them up amid the current market volatility.
The answer is options.
Looking out over the short-term, March TSLA options implieds are pricing in a potential move of about 7% heading into expiration. As a result, the upper bound lies at about $269, while the lower bound rests near $234.
With key support near $250, I would be extremely surprised to see TSLA stock trade near $235, and the upper bound of $269 rests well shy of the stock’s recent all-time highs, leaving plenty of room for a rebound run higher.
2 Trades for TSLA Stock
Married Put: On way to buy Tesla at current levels and ensure you have peace of mind in your portfolio is to enter what is called a “married put.” In this strategy, traders buy to open one front-month at-the-money or out-of-the-money TSLA put for every 100 shares purchased.
The strike of the purchased put should reflect your risk tolerance. So, a March $250 put offers nearly full protection at current levels, with losses limited to about the cost of the put and brokerage fees. An out-of-the-money March $245 put would allow for TSLA to dip a bit further before the “insurance” kicked in.
At last check, the TSLA March $250 put was offered at $6.78, or $678 per contract, while the stock position would total $roughly $252 at pre-open levels. If TSLA closes below $250 when March options expire, you would be able to exit the position and avoid any additional losses by exercising the put.
Finally, if Tesla holds above $200 through March expiration, you can roll the $250 put forward into April if you feel you still need the protection.
Put Sell: You’ll usually see me recommend put sell positions as a way to capture premium on a stock, but you can also use these options as a way to essentially name the price you want to pay for a stock. If you want to own TSLA stock, but want to wait for it to dip below $250, you could sell the March $250 put for $6.78, or $678 per contract, collect the premium, and wait for the shares to pull back.
If Tesla doesn’t trade below $250, you still keep the premium and can roll your target out to the next contract month and try again. The downside here is that if TSLA never hits your target, you never own the shares at the price you want to pay.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
