Trade of the Day: Play a Torrid Tesla Inc (TSLA) Stock Rally

EDITOR’S NOTE: Sam Collins will return on Feb. 21.

After closing higher in nine out of the past 10 weeks, shares of Tesla Inc (NASDAQ:TSLA) are fast approaching the all-time highs at the $290 level. Most of the recent near-parabolic move has been predicated on hopes for the ramp-up in production for the Model 3.

Trade of the Day: Play a Torrid Tesla Inc (TSLA) Stock Rally

TSLA, however, has a history of over-promising and under-delivering. I think the stock has come too far, too fast and is ripe for a pullback.

Certainly the stock has been huge performer since early December, tacking on a very impressive 50% gain in that time frame. Shares are reaching extremely overbought levels on a technical basis, with nine-day RSI readings over 85. Previous instances when Tesla stock reached such levels of euphoria proved to be short-term tops in the stock.

TSLA is also positioned right at the critical $270 resistance level.

tsla11

A longer-term weekly technical take paints an even more ominous picture. The last four times Tesla was at such overbought levels on a weekly basis were significant tops in the stock

tsla11weekly

Much of the recent move higher in Tesla can likely be attributed to short covering. With short interest now dropping from the recent record highs, it will take more than short covering to propel TSLA to all-time highs.

Earnings are due Feb. 22, with expectations of a 30 cent loss on revenues of $2.2 billion. Important to remember that Tesla also missed delivery numbers in 2016, delivering only 76,000 cars versus guidance in the 80,000 to 90,000 range. Once again a case of the hope exceeding reality.

With TSLA stock now just below the all-time highs at $290, the real question is how much is faith worth. Given that the stock is up 50% in less than three months and way overbought, I think faith at current levels is likely unwarranted.

With IV elevated in front of earnings, short option strategies are favored.

TSLA Stock Trade Idea

Buy TSLA 24 Feb $295 calls and sell 24 Feb $290 calls for a 65-cent net credit or better.

Maximum gain is $65 per spread with maximum risk of $435 per spread. Return on risk is 15%. The short $290 strike provides a 6.8% upside cushion and is at the all-time highs for Tesla.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities.

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