Tesla Inc (NASDAQ:TSLA) is a cult company with fans that rival those of Apple Inc. (NASDAQ:AAPL). The CEO, Elon Musk, is part of the appeal for traders. They love Musk’s confidence and enthusiasm, but let’s be honest, Musk has the tendency to overpromise when it comes to TSLA earnings. When the company misses milestones, investors throw a fit.
The company has many hurdles, so Musk’s promises add to their degree of difficulty. But unlike sports competitions, Wall Street doesn’t assign kudos points for valiant efforts. They want results.
Last night management reported earnings and the stock is falling fast and threatening to lose the $300 mark. Musk was combative when pressed on deadlines. When the Model 3 was announced, consumers bought it like hot cakes.
The problem is that so far it’s been vaporware. However, the TSLA bullish thesis is not one of the only autos. Perception is that it’s a tech company with many prospects, which include alternative power.
Most believe that it has years jump start on the competition in the battery power sector. I am not so sure but for now, this is enough to muddle the upside potential. This ambiguity creates support. In the absence of tangible value from the traditional sense, this is something I can leverage to create income.
Usually, I like to sell downside premium against value based on metrics like price-earnings or price-book. Here I have to sell against what others fear.
I am conservative, so I won’t be reckless. I chose levels that have been proven support. This means that I create ample room for error just in case this malaise persists longer than anticipated. Think of this as a moat around my castle.
Technically, TSLA stock had been up 50% year-to-date. So a dip here is normal. Experts in the media would have you believe that this dip is different. I disagree, and therein lies my opportunity. I can create income from what others fear.
There is no perfect time to trade momentum stocks like TSLA. They move so fast that most investors fear them. I use the options where I can use time and level choice to minimize the need for absolute precision.
Click to Enlarge Price range for TSLA on Wall Street is wide. It is now trading just below the average of them. While the $500 per share high is too far, today’s trade I merely need it to stabilize. A rally would benefit me but I don’t need it.
The Bet: Sell TSLA Feb 2018 $200 put for $2.25 per contract. Here I have an 85% theoretical chance of success. But if the TSLA stock price falls below my strike then I own shares and would amass losses below $197.75.
Selling naked puts is scary especially in a ticker as volatile as TSLA. I can mitigate much of it by selling a spread instead. I buy an equal number of puts below those I sell and this would limit the maximum loss to the net width of the spread.
The Alternate Bet: Sell TSLA Feb 2018 $210/$200 credit put spread where I have about the same odds of winning but with smaller risk. Then the spread could deliver 10% in yield.
Notice that neither of my setups requires a rally to win. In fact, Tesla stock can fall an additional 30% from here and I can still achieve maximum gains.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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.”
