Tesla Inc (NASDAQ:TSLA) stock continues to defy gravity. It entices traders to short it, only to rally in bursts and cause carnage in their portfolios. It is truly a Teflon stock that brushes off bad news and rallies much like Amazon.com, Inc. (NASDAQ:AMZN) has been doing for a decade.
The reason that TSLA is doing this is different than AMZN, however. Bezos was on a mission and delivered uber growth at the expense of profitability, whereas, Tesla’s Elon Musk has muddled the TSLA mission into a blend of auto manufacturer and energy company.
The goal line success picture for Tesla is so vague and long-term that the bullish thesis cannot be refuted for years. You cannot call a marathon at the halfway point because there is so long to go still … And therein lies my opportunity.
Click to Enlarge Traders are buying all dips in Tesla stock and using the events to extend even higher. This creates consolidation zones that would become short-term support. I can use them to create income and without any expense out of pocket.
The idea is simple. I choose a level where price is not likely to go and sell risk against it. If time passes and TSLA stock stays above my level then I would have created profits out of thin air.
Usually I don’t do this with frothy stocks like TSLA. The valuation here is astronomical. The company is bleeding cash and they keep borrowing to continue to execute on plans. But Wall Street has a crush on the CEO Elon Musk, so they give him anything he wants.
Technically, TSLA stock is trading above its average price target so in theory there is just as much opportunity above and below current price. Unlike the common opinion, analysts are not excited about the company prospects. Most of them have an unfavorable rating on it. This is good news since it lowers the chances of surprise downgrades.
Nothing phases TSLA fans. They meld their love for the car with their adoration for Elon Musk and their commitment to the stock. This by itself is strong support for the stock, and I am willing to sell risk against it.
It took me a long time to develop this view. For a while I judged it as an auto manufacturer, and the picture there is ugly. Sure, the cars are beautiful but the financial metrics that produce them are awful. Imagine if Apple Inc. (NASDAQ:AAPL) bled cash to produce the all-mighty iPhone.
Today I set my own judgement aside to profit from what others see in TSLA stock.
TSLA Stock Trade Idea
The Trade: Sell the Nov $280 put for $2.80. This is a bullish trade which has an 85% theoretical chance of winning. If the price stays above my strike, then I retain maximum gains. Otherwise I own the shares and accrue losses below $277.20.
Selling naked puts is not for all investors, especially in a stock as expensive as TSLA. I could mitigate the risk by selling a spread instead. There, the maximum loss is smaller.
The Alternate Trade: Sell the Nov $285/$280 bull put spread where I have about the same odds of winning and the spread would yield 12% on risk.
Investing in stocks is risky, and regardless of how careful I am, I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
