So much for continued rotation out of tech stocks. The more time that passes without another downturn, the more it looks like the June 9 smack in the Nasdaq Composite was a mere one-hit wonder. Some big winners have come roaring back, such as Tesla Inc (NASDAQ:TSLA), Nvidia Corporation (NASDAQ:NVDA), Amazon.com, Inc. (NASDAQ:AMZN) and Tesla Inc (NASDAQ:TSLA). And if this Wednesday’s price action is any indication, TSLA stock is about to pop again.
Let’s look at why, as well as the best way to trade this looming breakout.
Tesla shares have obviously been strong for months now, but that doesn’t make its recent rebound any less impressive. It took all of two days for Elon’s flagship to reclaim all that was lost during the June 9 tech drubbing.
Meanwhile, the Nasdaq — as reflected by its ETF, the Powershares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — still remains below its prior peak.
In fact, QQQ has another 2.2% to go before it forges into new territory.
TSLA Stock Charts
There’s no doubt Tesla remains a leader laced with relative strength. I’m going to skip our typical perusal of the weekly chart, but rest assured it looks like a rocketship.
Overbought? Yes, but as the daily chart will attest, Tesla stock is absorbing any and all selling pressure like a champ.
The trend of the daily needs no elaboration. It’s bullish, complete with rising moving averages of virtually every duration. The 20-, 50- and 200-day moving averages are all stacked atop each other in bullish form.
What’s more, the uptrend just increased in momentum showing buyers were getting more aggressive during the latest swing.
Skeptics are certainly justified in pointing out the overbought posture of TSLA stock. Indeed, the popular Stochastics indicator has been flashing an overbought signal for weeks now. Had you asked me last week how to play the stock, I would have said to bet on its upside slowing. In fact, I did say that.
And yet, I find this past week of sideways churn most impressive. Rather than correcting its overstretched conditions by price, it has corrected — at least in part — through time. The past five days of pausing have allowed the 20-day moving average to play catch-up. And while the stock could use a few more days of chop before its next ascent, I don’t know if buyers will wait that long.
Wednesday’s 1% pop in the Nasdaq definitely raises an eyebrow when compared to the dismal performance of the S&P 500 and Russell 2000, which both finished lower on the day. The rotation back to tech helped propel TSLA higher throughout the trading session, ending with a bullish hammer candle.
With resistance resting close, it looks like we could have a breakout on our hands. A pop above $380 would confirm the break and signal the next upswing is upon us.
How to Trade TSLA Stock
Implied volatility has been creeping higher alongside TSLA’s stock price. At 43%, the IV Rank is making short option strategies attractive here. Remember, more expensive options mean premiums sellers get a higher payday. They also mean we’re able to sell further-out-of-the-money put options than is usually possible.
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To capitalize on the higher IV Rank and to create a position with a high probability of profit, consider selling the Jul $335/$330 bull put spread for 70 cents or better.
This short vertical consists of selling to open the Jul $335 put while buying to open the Jul $330 put. The ideal scenario is for Tesla shares to sit above $335 at expiration. If the puts expire out-of-the-money at expiration, you will pocket the max reward of 70 cents.
Based on current option pricing, there is an 85% chance we will capture the entire reward at expiration. On the risk side, this bull put spread carries $4.30 of potential loss.
I suggest exiting to minimize the damage if TSLA stock falls below $335.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.