What’s a bull to do in Tesla Inc (NASDAQ:TSLA) following Thursday’s braking-like action in shares? It’s our view you can’t back up the truck just yet. However, a test drive in TSLA stock using a modified bullish fence strategy looks like a smart way to test drive a slightly less friendly but worthwhile trend, without fear of being a potential crash-test dummy. Let me explain.
Broker Cowen & Co. isn’t particularly gung-ho on Tesla. In fact, analyst Jeffrey Osbourne maintains a price target of $155 on TSLA stock and Thursday’s valuation comments helped pressure shares to a loss of 2.7% on the session.
In kicking the tires though, bulls might breathe a bit easier given Mr. Osbourne’s fairly dismal track record among analysts and low-ball price target on TSLA the weakest among his Wall Street peers. The fact is this isn’t the first or so far, the most accurate shot across the bow or in this case, the hood of the EV upstart for the analyst.
The real impetus behind Thursday’s pressure in TSLA could be investors not willing to wait and see if the market is going to rhyme with historical tendencies. Friday marks Tesla’s anxiously awaited roll-out of the Model 3. In the past and very short-term, that handing off of the keys has past put pressure on TSLA stock.
So, the million-dollar question (or maybe 500,000 unit question) for the Model 3 is whether in a month or two, the historical record on the TSLA price chart will bear any resemblance to prior production launches?
Bottom-line or top-line in this instance, I don’t honestly know. And while I’m not a Tesla cultist, what I do know is I am a fan of what’s going on in TSLA shares in conjunction with a bit of necessary accessorizing in the options market.
Tesla Stock Weekly Chart
The last time I discussed TSLA, shares had retreated into a healthy correction of nearly 22%. The speed of the move may have been slightly disconcerting for some. In our view though, the depth of the move and hold of zone support backed by the 38% retracement level, as well as the pattern breakout and former all-time highs offered a fairly attractive entry point for bullish traders.
In the here and now, our bullish stance has only been bolstered. For one, over the last couple weeks and despite Tesla’s Elon Musk warning that TSLA stock is expensive, bears and weaker-handed bulls have failed to break shares lower.
The technically inspiring price action has also offered a bullish confirmation as shares of TSLA traded above $333.10 following last week’s inside decision candlestick. In conjunction with stochastics also now forming a bullish crossover in an oversold position — TSLA stock is looking good for another test drive opportunity.
TSLA Stock Modified Fence
Courtesy of OptionVue.com
Reviewing the TSLA’s options, a modified bullish fence looks appropriate continues to look attractive. However, I also don’t mind ratcheting in risk given Mr. Musk’s own point of view on Tesla and guarding ourselves even more closely against being a potential crash test dummy.
With shares of Tesla at $344.46, selling the Sep $310/$300 put spread and buying the Sep $355/$365 call vertical is priced for a debit of 75 cents and a favored combination.
If TSLA stock is trading between $310 and $355 at expiration, the trader is ultimately forfeiting the small debit to enter the spread combination. However, if shares begin to rally, the long delta position can accrue profits within that range prior to maturity.
Above $365 or roughly 6% higher, the position offers a max payout of $9.25 as the bull call spread expands to $10.00. That amounts to a staggering return on investment in excess of 1,200%.
Lastly and on the downside, should shares weaken further, below $300 the trader is risking about 3% relative to owning TSLA stock, but that’s also as bad as it gets. That means you won’t be a crash test dummy. And with earnings around the corner, that’s protection this strategist likes having in place — especially in the event it becomes a situation where the truck is being backed up for bulls.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
