Tesla Motors Inc (NASDAQ:TSLA) has been on a serious bull run lately after Goldman Sachs cited the company as one of its top green energy picks. With the Global Climate Summit in Paris in full swing, Tesla’s stock price rallied sharply on the news, closing 3.01% higher to end Tuesday’s session at $237.19, clearing vertical resistance at $234.50 to break above its Nov. 5 high of $234.58.
But while the technicals are obviously bullish, it’s the questionable fundamentals that could short circuit Tesla’s electric run.
Sure, the Tesla stock price traded through the closely followed 200-day moving average of $233.68 after retreating from that level several times in the past few weeks, and even pierced the 50-day moving average of $226.48 several days earlier on on Nov. 25. But the company is still cash flow negative.
At Tesla’s current cash burn rate, it will likely have to do another capital raise via equity issuance in the coming quarters, which is dilutive for current Tesla stock holders. Famed short seller Jim Chanos, who is short TSLA, states that Tesla stock is currently valued at selling millions of cars.
TSLA stock performance is also highly correlated to the price of oil, with that correlation diverging dramatically of late. Since Nov. 1, shares of TSLA are up nearly 15%, while oil has fallen roughly 10% in that same time frame. Past instances of such a wide divergence have been negative for TSLA.
Implied volatility, a useful market-timing metric, is at the lowest level since July 2, which marked the end of the previous rally in TSLA.
Low IV levels also point to cheap option prices, so I am looking to take a counter trend position by going long puts on TSLA.
With the hoopla of the Global Climate Summit likely to fade shortly, and with oil prices continuing to weaken, I think Tesla stock has a good chance of breaking below the 200- and 50-day moving averages, which would paint an even more negative technical picture.
For the trade structure, I would employ a put diagonal trade, going long the Jan $235 puts at $11.40 while selling the shorter-term Dec 1 $230 puts at a dollar for a net debit of $10.40.
I would look to sell additional shorter-term weeklies to further hedge the position if the Dec 1 $230 weeklies expire worthless. The spread is net short 24 deltas, and benefits from an increase in IV (net long vega), with the max loss limited to the total debit paid.
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 tbiggam@deltaderivatives.com.
