Poor ol’ Tesla Motors Inc (TSLA) has seen the charge in its battery slowly fade in recent months. The once mighty momentum stock is $100 off its high and has now fallen below the $200 price level.
TSLA fanboys are no doubt viewing the recent plunge as a mouth-watering fire sale, while its haters are trumpeting the descent as just punishment for the stock’s long-held defiance of gravity.
Whether the ongoing slide in the stock is a mere bump in the road or the start of something more ominous, I can’t say.
What I can say, however, is TSLA has dropped both far enough and long enough to make it interesting for a rebound play.
How far a stock typically drops before rebounding varies widely. One indicator I’ve used to measure when a stock has moved too far too fast is something called “pay range.” Pay range measures the average number of dollars a stock typically moves between support and resistance. If a stock moves multiple pay ranges then we know it’s statistically stretched.
The pay range of TSLA stock is currently $26.33. Since its most recent resistance of $260, TSLA has fallen some $60 without finding support. That’s almost two-and-a-half pay ranges — abnormal to say the least, and perhaps making Tesla stock overdue for some type of bounce.
One caveat worth mentioning for trying to catch a bounce is that the devil’s in the timing. Oversold stocks can become even more oversold (see Russia and oil, for example).
Play TSLA Stock With Options
For those wanting to try their hand at gaming a rebound in TSLA stock, bull put spreads are worth a look. When you use far out-of-the-money options, you can structure a trade that wins even if the stock declines another 5% or 10%.
Enter the Jan $170-$165 put spread by selling the $170 put and buying the $165 put for a net credit of 50 cents. Consider it a bet that TSLA stock will remain above $170 by Jan expiration. The max reward is the 50-cent credit and will be captured if TSLA can stay above the $170 level. The max risk is limited to the distance between strikes minus the net credit, or $4.50, and will be lost if TSLA falls below $165.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
