If any stock trades on faith and not fundamentals, it is Tesla Inc (NASDAQ:TSLA). TSLA stock rallied nearly 14% following its Aug. 2 earnings report, where it delivered a $1.33 loss versus expectations for $1.81.
Important to remember, however, is that this earnings beat was predicated on selling $100 million in ZEV tax credits to manufacture earnings out of thin air. Without the tax credits, Tesla would have missed its number.
With the momentum finally looking to have stalled out, now is an opportune time to take a guardedly bearish stance on Tesla stock.
Tesla Is Running Out of Gas
InvestorPlace contributor Neil George delves deeply into the valuation argument (or rather, overvaluation argument) in his latest research piece. Needless to say, Tesla’s valuations are beyond comprehension. Tesla also just burned through another $3 billion in cash over the past nine months, requiring yet another cash raise, this time of $1.5 billion.
Tesla CEO Elon Musk himself said the company was about to embark on six months of “production hell,” with the company deciding to forego the typical production prototyping — effectively risking safety and quality in an attempt to ramp up production at all costs.
Analysts’ opinion diverges decidedly on TSLA stock, with eight bulls, eight bears and nine neutral opinions. The median price target is $328 — or nearly 10% below the current closing price of $363.53 — but consensus has a funny feeling when the highest target is $464 and the lowest one is $155. Still, I can say with confidence that the analyst community isn’t making a glowing case for Tesla.
As a trader, I prefer to let the market tell me when enough is enough, especially for momentum-based stocks like TSLA.
Yesterday’s price action smacked of a top in Tesla shares. TSLA traded higher early in Thursday’s action, making a run to once again break out past $370. That rally was quickly staunched as some serious selling ensued, and shares closed just off the lows of the day, down nearly 8 points. This type of reversal day is very emblematic of a top in a stock, especially following such a strong rally.
Bollinger Band analysis also shows how overbought Tesla had become with readings over 110%.
Previous instances when the Bollinger Band percentage exceeded 110% and began to revert proved to be very good times to take a counter-trend bearish position in Tesla.
How to Trade TSLA Stock
So with Tesla looking tired and topped out, a bearish call credit spread is the ideal way to position for a period of consolidation.
Buy the Sep $395 calls and sell the Sep $390 calls for a 75-cent net credit.
Maximum gain on the trade is $65 per spread with maximum risk of $435 per spread. Return on risk is 14.94%. The short $390 strike price for TSLA stock is well above the $370 resistance level provides a 9.7% upside cushion to Tesla’s $355.40 close.
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 email@example.com.