After more than doubling in price since last December, shares of Tesla Inc (NASDAQ:TSLA) have definitely encountered some serious difficulties recently. TSLA stock broke out to new all-time highs at $389.61 a week ago, only to subsequently drop nearly 10% from the high. Given the absurd valuation and ever-increasing competitive landscape in the electric car industry, I look for TSLA to struggle to head appreciably higher over the coming months.
Even following Friday’s sell-off, TSLA stock still sports a market cap larger than industry titans General Motors Company (NYSE:GM), Honda Motor Co Ltd (ADR)(NYSE:HMC), and Ford Motor Company (NYSE:F).
Yet revenues from Tesla, at $10 billion over the last 12 months, are dwarfed by those of GM ($170 billion), Honda ($131 billion) and Ford ($153 billion). At some point valuations such as price-to-sales do matter. Factor in the fact that Tesla gets a fair chunk of overall revenue from selling regulatory electric car credits to other automakers and the valuation gap becomes even wider.
Increased competition in electric car manufacturing from the likes of Porsche, BMW and Mercedes also looms on the horizon. Porsche is rolling out the new electric Mission E series in early 2019 while Mercedes is investing heavily in a new Alabama plant to produce electric cars. BMW has already entered the electric car field with an increased line-up of cars. This will assuredly provide some formidable competition for Tesla down the road.
From a technical perspective, TSLA stock has put in a double top at the $387 level. The price action from Sept. 18, with Tesla stock breaking out to new all-time highs only to reverse course and head lower, is a major reversal day and also emblematic of a top in the stock as well. A convincing break of the uptrend line at the $350 level will likely lead to more downside in Tesla shares.
Click to Enlarge The recent drop in TSLA stock has caused IV to rise, meaning option prices have become more expensive. This makes option selling strategies more viable. So to position to profit for a stall out in Tesla stock, a bearish call credit spread makes intuitive sense.
TSLA Stock Trade Idea
Buy the TSLA Nov $395 calls and sell the TSLA Nov $390 calls for a $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 $390 call is positioned above the $387 resistance level and provides a 11% upside cushion to the $351.09 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.
