The much anticipated, not to mention easily predictable, bounce in Tesla Inc (NASDAQ:TSLA) shares has arrived. Which begs the always intriguing and potentially profitable question, what to do with Tesla stock?
Is the momentum darling done going down? Was that the end of TSLA stock’s correction? Or are there more tremors to be felt before sellers relinquish Tesla from their grip?
The answers to such intelligent queries will be laid out below, as well as how I suggest you play TSLA moving forward.
How to Trade Tesla Stock
All told, Tesla fell 22% before finally bouncing back this week. That’s an official bear market right there (at least if you care at all about the oft-quoted 20% threshold). The trouble with trusting this rally is the heap of overhead resistance. A pair of support levels were breached during the bear raid, and they aren’t likely to be reclaimed without a strong defense by sellers who now find themselves in control.
As shown below, the $355 and $335 price zones (which loosely correspond to the 20-day and 50-day moving averages) have the potential to morph into resistance zones.
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The heavy volume accompanying the downturn is also concerning. Distribution days carry a stench that tends to linger for awhile, weighing on the stock for days to come.
Another way to view this bounce is through the lens of the Fibonacci retracement tool. The typical rally in a downtrend retraces about one- to two-thirds of the previous descent before topping out.
These levels correspond roughly with the 38.2% and 61.8% fib zones. Anywhere between either line is the sweet spot for a new pivot to form.
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As you can see, TSLA stock has retraced close to 38.2% of its previous downswing, so I fully expect sellers to begin coming out of the woodwork here.
Bet With the TSLA Stock Bears
The volatility surge in Tesla stock has unsurprisingly been accompanied by a pop in its implied volatility rank. At 72%, the IV rank is signaling options are ripe for the selling. It sounds like a perfect bear call spread opportunity to me.
Sell the Aug $360/$365 bear call spread for $1.15. Consider this position a wager that Tesla stock will remain below $360 for the next month. Really, all we’re looking for is another downswing in the stock to allow us to take profits.
I suggest exiting if you can buy back the spread around 60 cents over the coming weeks. If Tesla does somehow claw its way back to $360, then exit to minimize the loss.
As of this writing, Tyler Craig held neutral option positions in TSLA. Want to learn how to master the art of option selling for high-probability cash flow? Check out the replay of Tyler’s recent webinar on how to systematically sell Iron Condors for monthly income.
