Shares of Tesla Inc (NASDAQ:TSLA) have fallen sharply from the recent highs around the $360 area. While some of it is most assuredly market related risk-off selling, the recent drop has certainly made Tesla stock more attractive. While the liquidation may not be done quite yet, I think the selling is getting close to overdone with TSLA finding support at lower levels
In my previous post on Tesla stock from Jan. 23, I expressed a bearish short-term outlook on TSLA, which proved to be accurate. At that time, TSLA shares were trading above $350 and the rally looked to be getting extreme. Now that Tesla has pulled back nearly 5%, my view has decidedly tempered, because price does matter.
From a technical perspective, Tesla stock looks to have put in a double top at the $260 area. There is also major downside support looming at the $300 area. I expect TSLA to consolidate and trade between these two price points over the coming few months.
While not looking to jump into Tesla near current levels, I would be a buyer on a meaningful further drop towards support. Rather than waiting for that possibility, I can position now using option spreads and collect some fairly rich premiums upfront.
Implied volatility (IV) in Tesla options is at the 53rd percentile, making option selling strategies still very viable. So to position to be a buyer of Tesla stock on another 10% drop, a bullish out of the money call spread makes intuitive sense.
Tesla Stock: Trade Idea
Buy the TSLA Apr $295 puts and sell the TSLA Apr $300 puts for a $1.00 net credit
Maximum gain on the trade is $100-per-spread with maximum risk of $400-per-spread. Return on risk is 25%. The short $300 strike price is structured at the major support level and provides a 10.44% downside cushion to the $335.12 closing price of Tesla stock.
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.
