There are a few stocks that continue to defy gravity in spite of severe criticism. Two prime examples are Tesla Inc (NASDAQ:TSLA) and Amazon.com, Inc. (NASDAQ:AMZN) but for different reasons. AMZN haters want it to run better margins yet it continues to deliver astonishing results. TSLA bears insist that its model is not viable under its current structure.
In Tesla’s case I somewhat agree, but before you peg me for a bearish trader, today I will go long on this dip and for free.
In the last two weeks, Tesla stock had a mini 10% correction. It failed just below $350 per share and now hovers just over $300. Markets have memory so previous battles zones usually tend to become resistance and support areas. And therein lies my opportunity.
Click to EnlargeI bet that $300, which was a weekly pivot point, will provide support on this dip. No, I will not buy TSLA shares and risk $310 without any buffer. Instead, I will attempt to generate income without any out-of-pocket expense. To do that I sell downside risk into what others fear. If support holds then I realize maximum gains.
Else I may need to own the shares at a 15% discount, which would not be a disaster in this macro environment.
Fundamentally I cannot argue for tangible value in TSLA from a price-to-earnings perspective. But I do see value on several other fronts. Wall Street has a crush on Tesla CEO Elon Musk and they continue to buy what he is selling. Consensus is also that TSLA stock is the leader in batteries mainly in the auto industry but now also in solar panels. They have unveiled plans to build a semi truck, in fact they are already taking orders.
And just yesterday we learned that they have plans to build a pickup to challenge the Ford F150 which has been the best-selling vehicle for a decade or more. So as you can see, the bullish thesis on TSLA is muddled to the point that it would take decades to demolish. So for the short term not one headline could derail the future prospects. That’s why the bears cannot sustain the selling for too long in TSLA stock, and that should help my strategy.
TSLA Stock Trade Idea
The Trade: Sell TSLA Feb 2nd $265 naked put for $2.25 per contract. This is a bullish trade that has an 85% theoretical chance of success but if I am wrong then I would accrue losses below $262.75.
Selling naked puts carries big risk especially for a three digit stock that is also frothy. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the TSLA Feb 2nd $265/$260 credit put spread which has about the same chance of winning but with smaller defined risk. Yet, the trade could yield 15%. Compare this with needing to risk $310 and hope it rallies to $356 just to match the spread without any room for error.
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.