Last week’s plunge in Tesla Inc (NASDAQ:TSLA) shares was one for the ages. The two-day trip slammed Elon Musk’s flagship to the tune of 17%. A monster support zone was felled in the process, sending red flags flying. With volatility elevated, traders are having a hey-day. Today, I’ll show you how to join them.
With as deeply oversold as TSLA stock had become, is it any wonder why we finally saw an epic snap-back yesterday? Let this be a lesson to any who try to short stocks into the hole. A vicious rally is always right around the corner. High volume accompanied the 7% ramp, showing some serious firepower. Maybe it was short sellers ringing the register. Or perhaps it was dip buyers emboldened by the broad market rally making a move.
Either way, the problem with getting giddy about acquiring TSLA shares here, or deploying any kind of bullish options position, is that a heap of resistance looms overhead. Last week’s breakdown delivered some serious technical deterioration. It’s the kind that tends to linger, making it challenging for a “v”-shaped recovery to form.
With Tesla stock already returning to $295 this morning, I think the time for this pop to die is nigh. Fortunately, we don’t have to top tick the retracement to profit. With bear call spreads, close enough is good enough.
Bet on More Pain with Bear Calls
If you’re comfortable betting Tesla sits below $350 at May expiration, then sell the May $350/$355 bear call spread for 60 cents. The max reward is limited to the initial credit, and the max risk is $4.40. Since Tesla may rally a day or two yet, I suggest scaling-in. Deploy half your spreads now at 60 cents, but wait to enter the other half at 90 cents to $1.20. That way you can capitalize on any further strength we may see in the week ahead.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
