Tesla Inc (NASDAQ:TSLA) has seen a historic rally so far this year, rising an astounding 74%. Certainly TSLA is one of the most hotly debated stocks, with the skeptics pointing to ludicrous valuations and true believers adamantly stating Tesla is at the forefront of a driving revolution.
While both sides can make a compelling argument, as a grizzled old option trader, I prefer to let the market tell me where stocks are heading. In the case of TSLA stock, the market is saying that Tesla is looking a little tired at current levels.
For anyone interested in delving into the valuation discussion, Investorplace contributor Bret Kenwell does an outstanding job breaking that down. With fundamentals generally discounted (not only in Tesla but the overall market), I prefer to focus on the technical aspects of trading, at least for now. The failure of TSLA stock to hold on to the opening gains following bullish news out of China yesterday is an indication that shares may have gotten ahead of themselves. The inability for good news to take TSLA stock to new highs means even the true believers may be starting to question the stock price.
Click to Enlarge TSLA stock is starting to consolidate around the $375 area. The chart pattern is looking very similar to the mid-February time frame which marked a short-term top in Tesla.
Tesla stock ultimately pulled back 13% from the closing high of $280.98 on Feb 14 before resuming the rally. I expect TSLA to follow a similar pattern as we approach the normally languid summer months as the rally fades.
One of the big advantages to trading options versus stock is the ability to make Money for Nothing, to borrow from the Dire Straits song. So to position for a period of consolidation in TSLA, an out-of-the-money short call spread makes intuitive sense.
TSLA Trade Idea
Buy TSLA Aug $425 calls and sell TSLA Aug $420 calls for $1 net credit or better.
Maximum gain on the trade is $100 per spread with maximum risk of $400 per spread. Return on risk is 25%. The short $420 strike price provides a 12.8% upside cushion to Tuesday’s $372. 24 closing price of TSLA stock.
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 timbiggam@gmail.com.
