Tesla Inc (NASDAQ:TSLA) is about to shift into overdrive. The Model 3 is now rolling off assembly lines, the company is revolutionizing energy storage and earnings are just around the corner. I like TSLA stock as we start to near the company’s second-quarter earnings report, and I have two trades in mind to capture any potential upside.
When we last checked in with Tesla, the company was about to release its report on second-quarter deliveries. The reported vehicles delivered, 22,000, put first-half total deliveries at 47,100 — the low end of Tesla’s original projections.
But while Tesla hit its own targets, the brokerage community touted the report as a miss and a huge negative for TSLA stock. The now infamous Goldman Sachs note reiterated a “sell” rating and cut its price target to $180, citing “potential for downside as the Model 3 launch curve undershoots the company’s production targets and as 2H17 margins likely disappoint.”
Goldman wasn’t alone, as Bernstein, KeyBanc Capital Markets, Cowen and several others weighed in with their own bearish commentary.
But for all their flailing and bemoaning Tesla’s valuation, the stock rebounded from its initial losses following the deliveries report. The Model 3 launch went off without a hitch, and TSLA stock is once again trending higher.
And it is precisely Tesla’s wealth of pessimism that will send Tesla shares into overdrive following next month’s earnings report.
The thing is, traders see the company’s true value, even if Wall Street does not. Electric cars are on the rise, with several nations around the globe pledging to end reliance on the combustion engine by 2040. While nearly every automaker in the world is now racing toward some form of electric vehicle, Tesla is already racing laps around the competition domestically.
What’s more, Tesla is leaps and bounds ahead of the competition in terms of energy storage. For example, within the next 100 days, Tesla will install the world’s largest lithium-ion battery system in South Australia — charged entirely by renewable energy.
Tesla is the future. And while the shares might be a bit overvalued at the moment, the company is sure to catch up to valuations in short order.
Sentiment and Options
But, as I noted above, analysts on Wall Street don’t appear to see the bigger picture.
Currently, Thomson/First Call reports that 15 of the 21 analysts following TSLA stock rate the shares a “hold” or worse. The 12-month price target also low-balls the shares, arriving at $299.34, versus TSLA stock’s close at $$327.78 on Friday.
Short sellers are also aligned against Tesla, even after a round of profit taking. As of the most recent reporting period, 27.3 million shares of Tesla stock have been sold short, down about 6% from mid-June levels. Profit taking surrounding shares’ recent drop is telling, from a sentiment perspective. In short, Tesla short sellers are getting out while they can instead of doubling down.
As for options activity, we find another bastion of bearish sentiment.
Currently, the August put/call open interest ratio stands at a considerably bearish reading of 1.35, with puts easily outnumbering calls among front-month contracts.
Against this backdrop, August implieds are pricing in a potential move of about 10% for TSLA stock heading into earnings. This places the upper bound at $359.89, while the lower bound lies at $294.11.
By the numbers, Tesla is expected to post a loss of $1.69 per share on the quarter, down from a loss of $1.61 per share in the same quarter last year. Revenue, however, is expected to more than double to $2.58 billion. That said, any Model 3 news or guidance on deliveries will likely trump earnings figures in this report.
2 Trades for TSLA Stock
Bull Call Spread: With the recent correction now out of the way, Tesla is free to resume its former uptrend. Traders looking to take advantage of a bullish reaction to earnings might want to consider an Aug $340/$350 bull call spread.
At last check, this spread was offered at $3.45, or $345 per pair of contracts. Breakeven lies at $343.45, while a maximum profit of $6.55, or $655 per pair of contracts, is possible if Tesla stock closes at or above $350 when August options expire.
Put Sell: If a more neutral -to-bullish play fits your risk profile, then an Aug $300 put sell has a good chance of finishing out of the money.
At last check, this put was bid at $7.35, or $735per contract. In this trade, you keep the premium as long as TSLA stock closes above $300 when August options expire. On the downside, if Tesla trades below $300 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $300 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
