Tesla Inc (NASDAQ:TSLA) is overbought and overvalued. TSLA stock traders know it. Options traders know it. My colleagues here at InvestorPlace and at Banyan Hill know it. Even CEO Elon Musk knows it.
And yet, Wall Street keeps pushing the shares higher and higher.
My colleagues are right on many levels. Serge Berger believes traders should stop chasing the stock. Lawrence Meyers believes the stock is priced perfectly for 2020. And way back in April, Banyan Hill’s Chad Shoop raised serious valuation concerns.
And yet, and yet, and yet … TSLA stock continues higher. In fact, the stock is more likely to top $400 at this point than it is to trade below $350 any time soon.
It reminds me of my favorite quote on the market by John Maynard Keynes: “Markets can stay irrational longer than you can stay solvent.”
That’s what’s educating a pair of trade ideas I’d like to show you today.
Tesla Sentiment and Options
The problem with traditional analysis of Tesla stock is that the shares have a cult following. Remember Apple Inc. (NASDAQ:AAPL) back when Steve Jobs was in his prime? The company could do no wrong, and investors hung on Jobs’ every word.
Tesla finds itself in a similar situation. The company has a loyal following of shareholders who have bought into Elon Musk’s ideal completely. They aren’t swayed by analysts’ valuation concerns or calls by Wall Street talking heads to sell now!
Another problem for Tesla analysts is that sentiment never reached a bullish peak. The brokerage community remains largely negative when it comes to Tesla, with Thomson/First Call reporting that 15 of the 21 analysts following TSLA stock rating it a “hold” or worse. What’s more, the 12-month price target of $269.56 represents a significant discount to Tesla’s current trading range near $371.
Elsewhere, short sellers are betting heavily against Tesla. As of the most recent reporting period, 30.9 million shares have been sold short. This sizable position accounts for roughly 26% of TSLA’s total float, and could create a significant short-squeeze rally if Tesla stock continues its ascent.
Turning to TSLA’s options activity, we find that short sellers don’t appear to be worried about an extended rally at all. Specifically, the July put/call open interest ratio stands at a moderate reading of 0.97, with puts in near parity with calls among options set to expire within the next month. Heavy call OI would have been a sign that short sellers were hedging their positions.
Overall, monthly July implieds are pricing in a potential move of about 9.7% for Tesla heading into expiration. This places the upper bound at $407.14, while the lower bound lies at $334.87.
A pullback to $334 would be a healthy move for TSLA stock, as it would shake out some of the weak bullish hands and allow the shares to resume their uptrend in short order. A breakout above $400, however, could result in just the opposite, upending nervous short sellers and creating a rush of capitulation from bearish holdouts.
Let’s look at the trades.
2 Trades for TSLA Stock
Bull Call Spread: Let’s face it: Tesla is trading in irrational territory right now, and there is no sign that Wall Street is coming to its senses any time soon. While my colleagues are right that the shares need a correction, I don’t see anything shy of a Model 3 delay or broad market retreat eliciting such a reaction right now.
As such, I’m remaining on the short-term bullish bandwagon for Tesla stock.
Traders looking for a TSLA breakout driven by Model 3 production news might want to consider a Jul $400/$405 bull call spread.
At last check, this spread was offered at 68 cents, or $68 per pair of contracts. Breakeven lies at $400.68, while a maximum profit of $4.32, or $432 per pair of contracts, is possible if TSLA stock closes at or above $405 when July options expire.
Bear Put Spread: If you’d rather bet on the market finally coming to its senses, there’s a trade for that too. Those looking to side with the bears might want to consider a Jul $340/$350 bear put spread.
At last check, this spread was offered at $3.28, or $328 per pair of contracts. Breakeven lies at $346.72, while a maximum profit of $6.72, or $672 per pair of contracts, is possible if Tesla stock closes at or below $340 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
