Shares of Tesla Motors Inc (TSLA) have rallied sharply after bouncing off the May 17 low of $204.66, rising over 15% to last trade at $235.52. TSLA stock may have some trouble moving higher from current levels, however, and is likely due for a pullback.
As the chart shows, there is some considerable overhead resistance at the $240 area. On past occasions, forays toward this level were met with some significant selling. I look for this trend to continue. Shares are also getting overbought on a nine-day RSI basis, with a reading approaching 73.
Tesla stock had a technical reversal day yesterday, with shares actually trading past the $240 area before reversing to close markedly lower.
This sort of price actions usually signifies a topping action in the stock, especially following a sharp rally. It also serves to reinforce $240 as a powerful resistance level.
Implied volatility (IV) analysis is also pointing towards trouble, with TSLA trading at the lows of IV. This low level of complacency is many times a harbinger of a top in the stock price. As seen in the chart, previous lows in IV were very good indicators of impending market tops in the price of Tesla stock.
In my previous post on TSLA from May 6, I thought that $205 was a critical technical support level on TSLA stock and suggested taking a guardedly bullish stance. With Tesla now some 17% higher, the market is now telling me it may be time to be a little cautious on TSLA, because price does matter. So a guardedly bearish position is in order.
With IV at low comparative levels, long volatility option strategies are favored. So to position for a short-term pullback in TSLA stock, a put calendar spread probabilistic sense.
TSLA Stock Trade
Buy TSLA July $225 puts and sell the TSLA June $225 puts for a $5.20 net debit.
Both the options used are the regular monthly expiration options. The maximum risk on the trade is $530 per spread. Ideally TSLA stock closes near $225 on June expiration to achieve the maximum gain on the trade. Make sure to close out the position if TSLA is below $225 near June expiration to avoid any risk of assignment.
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.
