After five straight up days in a row, shares of Tesla Motors Inc (NASDAQ:TSLA) stock are running into some major overhead resistance at the $220 level.
Given the recent bearish stock reaction following the SolarCity Corp (NASDAQ:SCTY) deal announcement and negative press surrounding the auto-drive fatality, along with lower second-quarter sales I look for Tesla stock to have trouble moving appreciably higher.
From a technical perspective, TSLA stock is fast approaching the key $220 resistance level on the chart. Tesla also has made a series of lower highs since making its all-time high of $291.42 on Sept. 4, 2014.
Shorter term, TSLA has been up each of the past five days, rallying 15% off the intraday low of $187.87 on June 27.
Tesla stock is getting also overbought on a five-day RSI basis. These previously have been reliable indications of a short-term top in shares.
More importantly, some of the faith in Tesla CEO Elon Musk has been tarnished following the announcement that Tesla would be acquiring SolarCity, another company run by Mr. Musk.
Many analysts, including famed short seller Jim Chanos, viewed the move as a bailout for the debt-ridden SCTY. Certainly the immediate reaction of TSLA stock, dropping nearly 8.5% following the announcement, echoed the concerns.
It also changed how investors viewed Mr. Musk, with the previously hailed visionary being now viewed as more of a charlatan.
Also, it’s interesting to note that both Tesla and SCTY rely heavily on government subsidies to fuel their profits. So with the faith certainly diminished, that sky-high valuation on TSLA stock may be diminished as well.
The negative press surrounding the recent fatal crash involving the auto-drive feature on the Model S sedan will also add to the headwinds to TSLA stock. While the ultimate cause of the accident is still under investigation, the fact that the much-vaunted safety features of Tesla failed to respond properly only adds to the recent negativity surrounding the company.
The company also just released the second-quarter sales numbers, which missed analysts’ projections, coming in at 14,370 units versus a consensus estimate of 17,000.
So with Tesla stock looking tired and toppy, a defined risk bearish option spread makes intuitive sense to me.
TSLA Trade Idea
Sell TSLA July $225 calls and buy the July $230 calls for 75-cent net credit or better. These are the regular monthly options that expire July 15.
The short strike is positioned above the $220 resistance level on Tesla stock. The maximum gain on the trade is $75 per spread, with the maximum risk being $425 per spread. Return on risk is 17.65%.
I would close out the trade on a meaningful move above the $220 resistance area, while looking to let the spread expire and keep the initial $75 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 email@example.com.