After a monstrous 80%-plus rally off the Feb. 9 low of $141.05, shares of Tesla Motors Inc (TSLA) finally showed a little weakness yesterday.
I look for TSLA to continue to have some difficulty moving appreciably higher over the coming month.
TSLA stock opened up at a fresh recent high yesterday, but failed to hold on to the gain and sold off to close down just over 3% on the day.
This type of reversal pattern, especially following such a huge rally in Tesla stock, many times is indicative that the bulls may be getting exhausted.
Click to Enlarge TSLA is also getting extremely overbought on a 14-day RSI basis, with readings approaching the 80 level. When sentiment reaches these levels, it many times forebodes a period of consolidation in the underlying shares.
Huge pre-sales of the newly launched, more affordable Model 3 were the impetus behind the much of the rally in TSLA stock, with 300,000 or more customers putting down the $1,000 deposit. These deposits are fully refundable, however, and aren’t necessarily a sale.
Click to Enlarge More importantly, the majority of Model 3 buyers won’t be eligible for the $7,500 tax credit now available to buyers of Tesla cars, a decided negative for potential buyers.
Standpoint Research came out with a note yesterday highlighting the valuation concerns surrounding Tesla stock at these levels. In the note, analyst Ronnie Moas compared Tesla to General Motors Company (GM) on a market cap and revenue basis. Both companies are valued comparably from a market cap perspective, but GM has nearly 10 times more in sales.
Tesla Stock Trade
Shorting TSLA shares outright has proven to be both risky and unprofitable of late, not to mention expensive from a margin requirement standpoint. An out-of-the-money, defined risk bear call spread can establish a short position in TSLA while providing some upside cushion.
Specifically, I would look to sell the TSLA May $300 calls and buy the TSLA May $305 calls for a 65-cent net credit or better. These are the regular May monthly options that expire May 20.
The short $300 strike is more than 16% above the $257.20 Thursday closing price of TSLA and also above the all-time high price of $286.65. Maximum gain on the trade is $65 per spread, with the maximum loss of $435. Return on risk is 14.94%.
I would look to close out the trade on a meaningful break above the $286.65 all-time high level, while looking to keep the initial credit if TSLA stock remains well-behaved.
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.
