Tesla Motors Inc (NASDAQ:TSLA) investors appear to have finally put the SolarCity Corp deal behind them. TSLA stock has rocketed more than 40% higher since early December, and the shares have even broken through former resistance at $350.
But how long can Tesla shares keep this momentum going?
The company has a major roadblock just ahead: fourth quarter earnings. Tesla has missed the consensus estimate in each of the past five reporting periods, save the last quarter when the company blew past the Street’s projections.
For the fourth quarter, Wall Street expects Tesla to post a loss of 28 cents per share, up from a loss of 84 cents in the same period last year. Revenue is seen rising 27% to $2.22 billion.
As with every Tesla earnings announcement, TSLA stock’s reaction may depend more on guidance, delivery projections and news on pending and current projects than the actual figures. Traders should keep a close eye out for news on the new gigafactory and any delivery/production updates on the all-important Model 3.
Turning to TSLA’s sentiment backdrop, we find little in the way of optimism. For instance, Thomson/First Call reports that only seven of the 21 analysts following Tesla stock rate the shares a “buy” or better. Furthermore, the 12-month consensus price-target of $240.94 represents a discount to the stock’s current trading range north of $250.
Elsewhere, short sellers are loaded for bear heading into next month’s report. As of the most recent reporting period, roughly 35 million shares of Tesla stock were sold short, accounting for nearly 30% of the stock’s total float, or shares available for public trading.
And if these short sellers are nervous about a potential post-earnings rally, they aren’t buying calls to hedge their positions. At last check, the February put/call open interest ratio arrived flat at 1, with puts and calls in balance.
What’s more, this ratio rises to 1.49 for the 10 Feb series (i.e., those options most affected by Tesla’s quarterly report).
Implieds are pricing in the usual post-earnings move for TSLA stock of about 6.5%-7%, placing the upper bound near $269 and the lower bound at $236. The $269 region is home to Tesla’s 2016 highs, and a breakout here could force analysts and short sellers to capitulate. Meanwhile, the lower bound lies near 10-day and 20-day trendline support.
So, how do we trade Tesla from here?
2 Trades for TSLA Stock
Put Spread: While TSLA stock is on a solid run higher, I’m expecting a sell-on-the-news event following next month’s earnings. Unless the results are stellar and/or the Model 3 is ahead of schedule, expect Tesla traders to take some profits off the table, resulting a pull back in the ensuing week.
To take advantage of this retreat, traders might want to consider a Feb $240/$245 bear put spread. At last check, this spread was offered at $1.46, or $146 per pair of contracts. Breakeven lies at $243.54, while a maximum profit of $3.54, or $354 per pair of contracts, is possible if TSLA stock closes at or below $240 when Feb. options expire.
Call Spread: On the other hand, if Tesla blows out earnings like it did last quarter, and has some positive news to throw in as well (CEO Elon Musk is known for throwing in that one more thing), then TSLA stock could remain in bull mode for a while longer.
Traders looking to take advantage of such a bump might want to consider a Feb. $260/$265 bull call spread. At last check, this spread was offered at $2.02, or $202 per pair of contracts. Breakeven lies at $262.02, while a maximum profit of $2.98, or $298 per pair of contracts, is possible if Tesla stock closes at or above $265 when Feb. options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.