Tesla Inc (NASDAQ:TSLA) has been an ATM machine this year … if you’ve been on the long side. The trick is being courageous enough to find solid entry points. Relying on perfect timing to buy TSLA stock this fast isn’t easy, though.
The debate over Tesla’s long-term fundamentals is, um, heated. Fans and haters alike offer good points, and they offer them loudly. I think the disconnect comes from their perspectives. Expert opinions are valid from both sides of the argument, but the basis is wrong. Critics cite Tesla’s valuation and prospects as a car company, while fans argue from the alternative power angle.
I side with the bears on the auto aspect. I think that while Tesla produces cool, gorgeous cars, the auto business has its challenges regardless. But I also think TSLA isn’t a shortable stock because the prevailing long-term thesis can’t be refuted for years. Those who buy Tesla stock right now believe in its long-term alternative technologies. Until and unless that “hopium” is proven wrong, they will continue to bid Tesla higher.
This makes me a super-long-term agnostic, but unwilling to short here.
I am, however, willing to sell risk against levels where I think bulls will buy TSLA stock on the dips. I’m not brave enough to flat-out buy Tesla at all-time highs around $335, but I’m sure as heck willing to buy it lower.
In the past, I’ve used options to catch upside momentum and dips. Most recently, I shared a trade on May 4 that delivered more than $7 in profit. I may have been able to profit more by buying the shares, but I created my profits out of thin air with no out-of-pocket risk.
Tesla’s rally caused many jaws to drop but it also set analyst expectations to be realistic. Most analysts have it as a “Hold.” This reduces the likelihood of downgrade surprises.
How to Trade TSLA Stock Here
The Trade: Sell the Dec $210 put for $5 per contract. Here I have a 90% theoretical chance of retaining my maximum gains. Otherwise, if shares fall below $215, I will own them and suffer losses below $210.
The Limited-Risk Alternative: Sell the $215/$210 credit put spread, where I have about the same chance of success but with limited risk. This trade still could yield 11%.
If I wanted to chase TSLA stock, I could add a debit call spread for July or longer. I personally may delay this entry on the next dip if it ever comes.
Selling options is risky business, so only risk what you are willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.