Shares of Tesla Inc (NASDAQ:TSLA) have undoubtedly been under severe pressure over the past several weeks. The recall of 123,000 Model S sedans along with another auto-pilot fatality weighed on Tesla stock. Moody’s also downgraded Tesla’s debt yet another notch lower on the junk rating to B3, citing the near inevitability of yet another cash raise to avoid a liquidity shortfall.
Rumors of potential bankruptcy also reared their head as well. Now that the faith has been shattered, the long awaited unwind in TSLA may have finally begun — watch out below.
In my previous article on Tesla stock from early June, I postulated that TSLA had reached a top around the $371 level. Much of the bearish outlook was predicated on the continued dilution of shareholder equity due to relentless additional cash raises and the extreme hubris shown by CEO Elon Musk. Both of these negatives have continued, and worsened, over that time frame. While the delivery numbers of 8,180 Model 3 units in Q1 led to a relief rally yesterday, it still fell well short of analysts estimates of 8,800.
From a technical perspective, Tesla stock is definitely troubled. TSLA broke major support at the $300 level, which will now loom as major overhead resistance.
The gap area bounded by $280 to the upside will also prove to be a formidable area to pierce. Interesting that a nearly identical gap arose a year ago to the day for Tesla stock on the way up, fueling a move higher. Now that the great unwind has begun in TSLA , the same chart pattern should fuel a similar move lower.
Click to Enlarge TSLA options are also reflecting some major fear with implied volatility (IV) now at the 80th percentile. Over the past week, there has been an unrelenting buyer of the January 2019 $50 puts, with over 30,000 contracts trading. These puts are so far out of the money that they can be termed a bankruptcy play. Some big player is definitely betting on zero in Tesla stock.
So to follow along bearishly with the big put buyer, but also take advantage of a big spike in implied volatility on those puts they are buying, a cheap long term put spread makes sense.
TSLA Options Trade Idea
Buy TSLA Jan $75 puts and sell TSLA Jan $50 puts for a $1.50 net debit
Maximum risk on the trade is $150 per spread with maximum gain of $2350 per spread if TSLA is below $50 at January 2019 expiration. Potential return on risk is 1566%.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.
