It has been anything but a joy ride for Tesla Inc (NASDAQ:TSLA) shareholders the past several weeks. But a “test drive” in Tesla stock using a bull call spread looks like an option worth purchasing.
Let me explain.
The bear brigade has been in full force in Tesla. The Trump administration’s battle of words and potential trade war with China has been one source of concern for the EV automotive upstart. The company’s all-important, but not quite dialed in battery that’s hampered Model 3 production, as well as a couple factory shutdowns in recent days to address production bottlenecks, have been other items of worry for TSLA bulls as well.
Now there’s a new investigation by California safety regulators. The state’s division of Occupational Safety and Health is looking into workplace conditions that coincidentally followed immediately on the heels of an internal memo by Elon Musk targeting increased production rates of 3,000 to 4,000 Model 3’s by May and 6,000 in June. Hmm, maybe there’s a loose whip being cracked to get all that horsepower under control?
Time will tell what dirt (or not) the investigation eventually turns up. In the meantime, some road hazards on the Tesla stock chart have been challenging, potentially harmful, but not fatal as of yet. And in fact, that same price action in TSLA may have bears finally yielding to bulls in the days ahead.
Tesla Stock Weekly Chart
I’ll admit it. Since last writing about Tesla stock in early March, shares have skidded aggressively lower and much to our dismay. The price action dismantled a corrective double-bottom testing pattern of TSLA’s prior high. That being said, there is reason to believe the larger decline has finished.
After breaking below pattern support, Tesla eventually found a meaningful low from a price zone backed by the 62% retracement level, 200-week simple moving average and an extended angular resistance line formed during the massive base formed during 2015 – 2017.
A candlestick reversal pattern off Tesla stock’s low was confirmed last week as shares moved narrowly above $309.28. For better or worse, shares subsequently pushed a bit lower and are now back testing the prior all-time-high from 2014.
It’s our view it’s make or break time in Tesla. A failure to hold at the current levels could likely find additional investors fleeing the name. But with the current stochastics set up showing a bullish divergence and sentiment generally sour on TSLA stock, it seems like a better spot for traders to position for higher prices using a very low and defined risk options strategy.
TSLA Options Strategy
Given our view, it’s make or break time, a strategy which doesn’t take on additional downside exposure on top of offering reduced and set risk makes sense. A long bull call spread using TSLA options can help towards these goals.
Reviewing Tesla stock’s options for ideas, the May $315 / $330 call spread is favored. With shares of TSLA at $293.35, the combination is priced for $4.20 or less than 1.50% of the risk associated with holding long stock on Tesla. That’s a nice insurance policy.
This bull call spread also offers a payout of $10.80 or 257% above $330 in Tesla stock. Verticals are also a nice way to ease into positioning. Aside from the reduced and defined risk, this type combination has a flexible and simple design, which can be readily adjusted if the opportunity exists. And with an earnings catalyst built into the May contract, traders can take a test drive in TSLA with confidence using this bull call spread.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
