Let’s get this out of the way right up front. As an automaker, Tesla Inc (NASDAQ:TSLA) is overvalued. Even CEO Elon Musk has said as much about TSLA stock, recently telling The Guardian, “I do believe this market cap is higher than we have any right to deserve.” Musk also pointed out that Tesla produces just 1% of General Motors Company’s (NYSE:GM) total output.
If the company were just an automaker, that would all certainly be worrisome, and the 70% surge in Tesla stock since November would certainly be more than overdone.
But Tesla has become so much more than just an automaker, and that’s what’s fueling a pair of bullish trade ideas I have for today.
Tesla (via its acquisition of Musk brainchild SolarCity) is now a major player in the consumer solar power market, with affordable solar-cell tiling for home use,. It also has invested considerable cash into high-output long lasting battery technology — a market that could be bigger than either solar or electric cars, and one that many investors are overlooking.
That said, most of Tesla’s products will take time to develop a significant market presence. Right now, the valuation of TSLA stock is based mainly on the Model 3 getting off the ground smoothly, and benefiting from the more than 400,000 preorders for the vehicle.
It is certainly a valuation with plenty of risk involved. As such, Tesla stock may be in for a pause before the Model 3 storm really hits.
Click to Enlarge That 70% run from November has pushed TSLA north of $300, and the shares have spent the better part of the past month bouncing around between support in the region and resistance near $330.
With little news on the Model 3 front lately, traders seem reluctant to push Tesla stock north of $330, while support is rising into the $300 region in the form of Tesla’s 50-day moving average — potentially leaving the shares range bound for the time being.
On the sentiment front, pessimism continues to hound TSLA stock. Currently, Thomson/First call reports that only eight of the 22 analysts following Tesla stock rate the shares a “buy” or better. Additionally, the 12-month price target of $275.20 represents a considerable discount to Tesla’s current perch at $310.35. News on the Model 3 front could spark some bullish activity here, but expect analysts to remain in a holding pattern until such news arrives.
Short sellers are also loading up. As of the most recent reporting period, some 31.4 million TSLA shares were sold short. This wealth of short interest represents about 26% of Tesla’s float, and could provide fuel for a short-squeeze on any positive Model 3 data.
Finally, Tesla options traders are also firmly in the bears’ camp.
The June put/call open interest ratio stands at 1.40, with puts easily outnumbering calls among front-month options. Overall, June implieds are pricing in a potential move of about 7% for Tesla stock by expiration.
This places the upper bound at $331, while the lower bound lies at $288.90, indicating that traders are looking for Tesla stock to breakout of its recent trading range by June expiration.
2 Trades for TSLA Stock
Call Spread: Bearish sentiment remains high on Tesla stock, mainly due to valuation concerns that Tesla shouldn’t be worth more than the major U.S. automakers. But Tesla is more than just an automaker, and the company still has more ways to surprise investors than even storied automaker GM. Traders looking for a contrarian play ahead of any new Model 3 data might want to consider a June $320/$325 bull call spread.
At last check, this spread was offered at $1.67, or $167 per pair of contracts. Breakeven lies at $321.67, while a maximum profit of $3.33, or $333 per pair of contracts, is possible if Tesla stock closes at or above $330 when June options expire.
Put Sell: For those with a more neutral-to-bullish outlook on Tesla stock, a June $280 put sell position may better fit your expectations.
At last check, this put was bid at $2.02, or $202 per contract. If Tesla stock closes at or above $280 when June options expire, traders entering this position will retain the premium received for opening the position. However, if TSLA stock trades below $280 ahead of expiration, then traders may be assigned 100 shares at a price of $280 per share, for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
