Tesla Inc Has Tired Out and Is On the Way to $303

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The recent news out of China that Tesla Inc (NASDAQ:TSLA) had reached an agreement to build cars in Shanghai normally would be cause for celebration in TSLA. Instead, Tesla stock actually closed lower on the day as traders focused instead on the recent production issues, alarming cash burn rates and the earnings report due Nov. 1.

TSLA Stock: Tesla Inc Has Tired Out and Is On the Way to $303

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The recent negative price action in TSLA, combined with the ludicrous valuation, points to a meaningful top in Tesla shares.

While the initial reaction on the China news was met with buying, the euphoria soon faded yesterday. TSLA opened nearly 5 points higher, only to succumb to the selling onslaught, ending lower by nearly 8 points.

This type of reversal price action is often indicative of a short-term top in the stock. It is also a clear indication that the faith is being challenged in Tesla.

 


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As mentioned earlier, Tesla earnings are due on Nov. 1. Expectations are for a loss of $3.09 per share on revenues of $2.95 billion. Cash burn rates remain alarmingly high. Valuations remain beyond absurd, with price to sales still over 5. Certainly it won’t take much of an earnings miss to get the sellers back in force in Tesla shares.

The technical backdrop paints a similar bearish picture, with Tesla now having a clearly defined double top at the $387.50 level.

A break of the $335 intermediate support area will likely lead to a move towards major support at the $303 level.


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In my previous article on Tesla from Aug. 11, I recommended a bearish call spread to profit from the expected top in TSLA stock. This proved to be the case, as Tesla shares did indeed top out. In a similar vein, I want to position bearishly but use a bear put spread to prepare for the expected move towards the $303 price level.

TSLA Stock Trade Idea

Buy TSLA Nov $320 puts and sell TSLA Nov $315 puts for a $1.25 net debit.

Maximum risk is $125 per spread with maximum gain of $375 per spread. The potential return if TSLA is below $315 at November expiration is 300%.

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. 

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/tesla-inc-tsla-stock-topped-out/.

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