The Tesla Motors Inc (TSLA) stock slide may well be ending. And it’s about time. Elon Musk fanatics have been insisting that TSLA will return to its momentum ways, and it appears their calls are finally right.
The market gods delivered a rousing 6% rally to Tesla stock holders on Wednesday.
The high-volume surge was reminiscent of the good ol’ days and could be signaling that TSLA’s next advance is commencing.
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The detour in Tesla’s ascent over the past six months has taken on the form of a downward-sloping channel. With each rise ending in a lower pivot high and each downturn driving the stock to a lower low, the bears have been firmly in control of Tesla stock.
Their dominance is confirmed by the downward sloping 50-day moving average.
TSLA stock owners will want to see the 50-day moving average eventually turn higher to confirm the stock’s trend reversal. In the short run, TSLA is testing the upper end other channel and appears poised to finally break out.
Traders seeking a bit more evidence that Tesla is actually turning higher can watch for a breakout above the $239 level. The pivot that formed earlier this week at $215 is the threshold to watch for failure. Provided Tesla stock remains above this support level, the trend turnaround remains in play.
Due to its significance, you can consider using the $215 level as a stop-loss for any type of trend-reversal trade placed on TSLA in the days ahead.
How to Trade Tesla Stock
While the implied volatility in most stocks has imploded this week, it actually has remained somewhat elevated for TSLA options. This sets up nicely for those wanting to structure a trade with a high probability of profit just in case Tesla stock sputters a bit before the trend reversal finally gains traction.
Sell the Jan $215/$210 put spread for $1. Consider it a bet that TSLA stock remains above the aforementioned $215 support level. If it does, the spread will deliver a $1 profit. The potential loss is limited to the distance between strikes minus the $1 credit, or $4. To minimize the risk, you could exit swiftly if Tesla’s stock price breaches $215.
By risking $4 to make $1, the potential return on investment stands at 25%. Since the delta of the short 215 put sits at 24, the probability of Tesla stock sitting above $215 at expiration is 76%, giving you a relatively high chance of success.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
