While the S&P SPDR S&P 500 ETF Trust (NYSEARCA:SPY) decides whether it wants to retest the early February lows or note, Tesla Inc (NASDAQ:TSLA) has its own issues to deal with. Last night we learned that accounting chief Eric Branderiz is leaving the company. The stock fell 2% on the headline and I want to capitalize on that move.
Tesla stock is obviously a momentum stock so catching this falling knife is a scary proposition let alone when the CBOE Volatility Index is as violent as it is now. But therein lies my opportunity. I use the options to set a bullish trade while leaving room for error.
Of late, the stock market in general has been on pins and needles over a slew of headlines. TSLA has been in the line of fire for some of the headlines to the point that Elon Musk’s tweet made it into President’s Donald Trump’s Thursday announcement of the tariff proclamation. Nevertheless, the stock has held its own.
So this blip inside their accounting department is not going to kill the ongoing bull thesis in the stock.
Fundamentally, Tesla stock is definitely not cheap from the traditional valuation perspective. But that’s not a worrisome point for as long as they can raise cash to burn. The long term bullish thesis for the stock is so muddled that killing it will take years. Until then, the bulls will buy every dip in a rising equity market.
Sales are not a problem for TSLA — the cars are cool and in demand. Delivery is where the challenge remains. So for them to succeed as a car company, they need several miracles to work out in their favor. Luckily they have forays into other industries, like batteries and solar panels. So for now I am not ready to call it a success nor am I announcing its demise.
While I don’t like the odds for Tesla stock to grow into its valuation, I do like to trade the dips. I don’t short it because I fear the love that Wall Street has for Elon Musk. So I will continue to profit from selling into fears inside the defined price ranges.
Click to Enlarge Technically, TSLA stock currently has a solid floor near $300 per share. So that’s my first line of defense. Below it I favor $265 as an important pivot zone and those usually also provide support. Neither bulls nor bears would want to given them up easily so they fight hard and create a stalemate.
For this trade and under the current macroeconomic conditions, I don’t anticipate needing lower support levels, but they are there in the event we get a surprise crash.
While the retail traders love TSLA stock, the experts are more cautious. Most analysts rate it as a hold or under-perform. Furthermore it’s still trading below their average price targets so I see no imminent reason to get a deluge of downgrades. If anything we could have upgrade surprises.
Tesla Stock Trade Idea
The Trade: Sell the TSLA APR $260 naked put and collect $2 to open. Here I have an 85% theoretical chance that I would retain maximum gains. But if the price falls below my strike then I accrue losses below $258.
Selling naked puts carries big risk especially for a stock as expensive and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the TSLA APR $275/$270 bull put spread where I have the same odds of winning. Then the spread would yield 15% on risk.
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.