Shares of Tesla Inc (NASDAQ:TSLA) have started off 2018 with quite a rally. After closing out 2017 at $311.35, Tesla has moved higher by nearly 13% so far this year to now stand at $351.56. Given both the fundamental challenges and technical concerns now facing TSLA, I look for the rally to stall out over the coming weeks.
Any discussion of fundamentals or valuations borders on the ludicrous for Tesla. The company continues to burn cash and dilute shares at an alarming pace. In a note from early December, J.P Morgan analyst Ryan Brinkman stated that he expected a 40% drop in TSLA stock in the coming months. He looks for additional capital raises and share dilution and also a wind down of the government subsidies which have been a cornerstone of Tesla revenues to date.
Since his call for a pullback, however, TSLA stock has rallied almost 15%. Shorts have lost an estimated $1 billion so far this year. To me, and my contrarian view, this makes Tesla stock an even more attractive short at current levels.
Tesla is company that continues to over promise and under deliver. The most recent Model 3 production update from Jan. 3 shows TSLA pushing back the production numbers once again. After promising 5,000 cars per week by the end of 2017, CEO Elon Musk now states he wants to deliver 5,000 cars by the end of March 2018.
Of course, Tesla only delivered 1,550 Model 3 series cars in fourth quarter of 2017. Just a mere 69% shortfall in production promises. Keep the faith however!
Click to Enlarge On a technical take, TSLA shares are getting decidedly overbought. 9 day RSI is now above 70, which was a reliable indicator of a short term top in the past. The subsequent pullbacks when this level of euphoria finally ended proved to be rather significant as well. There is also major overhead resistance at the $380 area with a double top formation. This should put a damper on any appreciable rally from here before earnings.
Earnings are due late February for Tesla, with the company expected to continue to lose money. EPS consensus calls for a loss of nearly $3.75 with revenues of just $3.44 billion-yet TSLA market cap now stands at a staggering $60 billion. So to position for a stall out in the rally pre-earnings, a short term bearish call spread in Tesla options makes sense.
TSLA Stock Trade Idea
Buy TSLA Feb $382.50 calls and sell TSLA Feb $380 calls for a 60-cent net credit
Maximum gain on the trade is $60 per spread with maximum risk of $190 per spread. Return on risk is 31.57%. The short $380 strike is positioned right at the all-time highs and provides a 9% upside cushion to the $351.56 closing price of Tesla stock. These are the traditional February Tesla options that expire before earnings.
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.
