It has been a very nice test drive of sorts in Tesla Inc (NASDAQ:TSLA) the past month. Now though, it’s time to shift gears and take profits. But for TSLA bulls, that’s not to say you can’t still position long with Tesla options. Let me explain.
Love letters aren’t something often associated with Wall Street. Yet on Tuesday that didn’t prevent Jefferies & Co. from writing affectionately, yet love-torn about TSLA stock.
Analyst Philippe Houchois began coverage of TSLA with first, “a heavy heart” then followed by an under-perform rating and price target of $280. The forecast is roughly a discount of 25% from Tuesday’s finish near $375 on the heels of the Jeffries call.
The recommendation leaves little doubt Jeffries isn’t a buyer at current prices. But as InvestorPlace’s Vince Martin notes, Mr. Houchois isn’t a bear. He actually likes the company, but is stressing Tesla bulls have merrily divorced themselves from underlying price constraints away from the TSLA stock chart.
As for me? Jeffries aside, the TSLA chart is suggesting it’s time to shift gears on our recent optimism.
TSLA Weekly Chart
Click to Enlarge
Late last month on Aug. 23, I was cautiously bullish on TSLA, but also agreeable that Tesla shares could always move lower. As such, I laid out a modified bullish strategy with both higher and lower prices in mind.
Now, as the more favored outcome has manifested itself into an overbought and potential double-top situation, it’s time to gently apply the brakes on our enthusiasm in TSLA and take profits on the combination, as I’ll discuss in greater detail below.
Bearing in mind Tesla’s new pattern development, a pullback appears likely. Within the framework of the existing uptrend, I’d estimate $345 needs to hold to keep TSLA stock’s overall bullish dynamics intact.
What does that mean exactly? For the moment, a decline of up to 8% presents an opportunity to buy on weakness within an uptrend that would be expected to reassert itself. Below $345 and I’d personally be a much less confident buyer. As much, our current enthusiasm is shifting towards the use of a bull put spread.
TSLA Bull Put Spread
Courtesy of OptionVue.com
Our last proffered spread was a bullish modified fence that has performed quite well on a risk-adjusted basis. Profits have revved up by about $2.50 as of Tuesday’s close. On Monday as shares finished at an all-time closing high of $384.44 the combination fetched $3.35 compared to a max payout of $5 at October expiration if TSLA is above $370.
Given an overbought and potential pattern top and no heavy heart required, just common sense, I’m recommending taking profits. But that doesn’t preclude TSLA bulls from a long position either. As I teased above, a bull put spread sounds appropriate based on our view.
Reviewing TSLA’s options, the Oct $345/$340 put spread is priced for 90 cents with shares at $375. With this position, Tesla bulls have a margin of safety of 8% or down to $344.10 before losses begin to build at expiration. Above $345 and the full credit is captured.
If shares do go lower and continue to decline aggressively, the trader is protected by the $340 put. The spread can only expand to $5. Thus, a bull selling the vertical for 85 cents maintains risk of $4.15 or just over 1% of owning TSLA stock outright. That’s fairly nice protection, especially when shares of the EV manufacturer could always turn into a backup the truck situation.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
