You know it’s getting bad for Tesla Inc (NASDAQ:TSLA) when not even a tweet by CEO Elon Musk can get much of a reaction out of TSLA stock.
His tweet on Sunday of the first Tesla Model 3 to come off the assembly line was met with a relative yawn, especially in light of a Wall Street Journal report out of Hong Kong that new registrations for Tesla cars fell to zero (that’s right, zero) after tax credits were reduced and capped.
Tesla stock dropped to a point that sat more than 20% from its all-time intraday high of $386.99 yesterday before getting a quick bounce to finish in the black.
However, the faith is clearly shaken in TSLA, and I’d look to sell into any rallies.
InvestorPlace Market Strategist Anthony Mirhaydari does a superb job in delving into some of the issues facing Tesla in his article from yesterday. I brought up some similar concerns in my previous dive from a month ago when I thought shares were looking toppy. Those same issues still linger in Tesla and will provide a serious headwind to any rally in TSLA stock.
Momentum darlings like Tesla trade more on technicals than fundamentals-and the technicals have deteriorated greatly. The key $325 support level was recently obliterated and should now provide serious resistance going forward. The next level of major support is at the $295 area.
While shorting TSLA stock outright can be a fairly dangerous game, the options market provides a safer alternative. Implied volatility (IV) is near the highest level of the past six months, meaning option prices are comparatively expensive, which favors option selling strategies.
My suggestion? A defined risk call credit spreads provides a way to capture this rich option premium to position in a guardedly bearish manner.
How to Trade TSLA Stock
Buy the Aug $355 calls and sell Aug $350 calls for a $1.00 net credit.
Maximum gain is $100 per spread with maximum risk of $400 per spread. Thus, return on risk is 25%.
The short $350 call strike provides a 10.7% upside cushion to the $316.05 closing price of Tesla stock and is well above the key resistance level of $325.
Also worth noting: Tesla’s second-quarter earnings report is due out Aug. 2, and that could provide some further headwinds for the shares.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
