Most of us don’t have a car from Tesla Motors Inc (TSLA), but taking a spin south in TSLA stock with a limited risk bear put spread is looking more than accessible and ready to rev up profits for those investors.
It’s not exactly news that Tesla stock is one of the more prominent battleground stocks in the market, with a fervent and loud chorus from its bullish supporters and bearish opponents.
Among other things, Tesla stock bulls see a technology upheaval in the auto industry from the upstart EV manufacturer and sales momentum that will hopefully build into a scalable and profitable venture down the road.
On the other hand, many bears and short interest that’s approaching 30% associate TSLA stock with an unprofitable company burning through cash and possibly playing accounting tricks to make Tesla more palatable to Wall Street.
Most recently, notorious and in our opinion, fairly astute short-seller Citron Research announced over Twitter Inc (TWTR) the firm was taking a bearish position in Tesla stock due to supply and demand issues and slapped a $100 price target by the end of 2016 on TSLA.
Following the 140-character news flash, Tesla stock experienced a bit of a U-turn to finish off about 3% after being up earlier in Tuesday’s session.
If Citron Research follows up with more detailed analysis on Tesla stock — and I fully suspect a report is forthcoming — it’s always thorough, insightful and certainly worth reading.
In the interim, a bearish Tesla stock chart setup is another factor that’s bound to give bulls trouble and bears the battleground advantage. Let me explain
Tesla Stock Weekly Chart
The weekly chart of TSLA shows a stock that’s in a developing downtrend after establishing a drawn-out topping pattern during 2014 and 2015.
For bearish shorts, a countertrend rally the past couple weeks offers an opportunity to position in Tesla stock off a flag pattern. The current formation appears to be running on fumes against 38% and price resistance from underwater Tesla stockholders.
Also favoring short positions in Tesla stock, the flag signaled an entry with Tuesday’s bearish penetration of Monday’s low.
Technically, a minimum first target in Tesla stock for position adjustments would be the recent low near $141. For a pattern stop loss, I’d allow for a bit of volatility and extra wiggle room given the decent short interest and use a 9% to 10% or $203 to $205 in Tesla stock.
TSLA Bear Put Spread
Given the discussed situation in Tesla stock, a June $160/$140 bear put spread for $6 or less is attractive. With an expiration breakeven of $154 and max payout of $14, or 233%, at or below $140, the vertical fits in nicely with a reversal occurring in TSLA.
What’s more, by positioning with this Tesla stock put vertical, the trader greatly reduces options risk associated with volatility and time decay. In turn, this allows for keeping the position’s focus and profitability tied to a directional decline in Tesla stock while assuming less risk.
Lastly, the spread’s softer directional risk also means if the outlined and fairly loose stop loss tied to Tesla stock is necessitated, the likelihood for a much smaller loss compared to the initial debit is greatly increased.
And that of course is a nice insurance policy, just in case TSLA doesn’t crash.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives 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.
