Tesla Motors Inc (TSLA) is a Wall Street fan favorite, which makes shorting Tesla stock awfully tricky most times. But I have had success picking spots where shorting paid well with little risk.
I already know that by shorting TSLA, I won’t be winning any popularity contests. Luckily, the only result I care about is the one in my portfolio.
Tesla stock trades like a high-tech growth stock due to its ventures in battery and periphery arena. Personally, I’m rarely a fan of chasing future stories, and would rather buy current cash cows … and TSLA is far from being a cash cow in the near or mid-term future.
To me, Tesla is a car company that is struggling to meet demand due to operational constraints — not a bad place to be, but not the greatest place to be, either. Meanwhile, the Model S success is not guaranteed to spill over to its other models like the Model X, which is late hitting the streets.
I’m going to try to repeat prior wins in shorting TSLA by using the options markets, and time management will be the key to success. Fundamentally, I don’t believe that Tesla is well-positioned for intermediate success; management will need several miracles to deliver on their promises. On the other hand, none of us should underestimate the love that Wall Street has for Tesla stock and CEO Elon Musk, who is brilliant, and whose tweets are usually more of a liability to bears than bulls.
Click to Enlarge Technically speaking, TSLA stock is wound tight, which should bring a sizable move soon enough. So we need to consider this in making a short-term trade.
Tesla’s fan base is willing to buy shares regardless of valuation and the considerable challenges to its fundamentals. So I want to give myself time to be right.
My strategy is a pair trade, first buying a put spread, then financing it with cautious call writing.
- Trade No. 1: Buy a Jun $205/$200 debit put spread. For this, you will pay $2 per contract, which is the max potential loss should TSLA remain above $205. Conversely, if Tesla stock falls past $200 (about 8%) in the next few months, you stand to gain $3 per contract.
- Trade No. 2: To reduce out-of-pocket expense, you can write TSLA calls. So, sell a Sep $295 call for $5.50 per contract. This has an 80% theoretical chance of success, but the risk here is considerable, especially if Tesla stock spikes on a headline.
- Note: You can reduce this upside risk exposure inherent to Trade No. 2 by using variations of it. Instead of writing open-ended calls with upside risk, you can change it to writing a credit call spread instead. For this, you would sell a Sep $280/$285 credit call spread. You would collect $1, cutting in half your out-of-pocket costs for Trade No. 1. For a bigger price buffer, you could sell the Jan 17 $320/$330 credit call spread for $1 of potential income.
For maximum profits, I need Tesla stock to fall below $200 before mid-June. Thereafter, I need Tesla to not rally past my sold calls or call spreads.
If my thesis on TSLA changes, I can close any of these trades before the expiration dates for by reversing my trades. I can also book partial profits early on any price drops.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
