Shares of Tesla Inc (NASDAQ:TSLA) have been struggling to head higher over the past month. Bad news is finally impacting TSLA stock in a decidedly bearish fashion. The recent litany of negativity includes fatal car crashes, management shakeups and the ongoing production shortfalls.
Now that the faith has been broken in Tesla, I look for TSLA stock to continue to languish over the coming weeks. Time to sell every rally.
Trying to value Tesla on a fundamental basis is an exercise in futility. There is still no earnings to calculate a price-to-earnings ratio. Last quarter alone, Tesla lost $3.35 per share. Instead, a quick examination of TSLA debt may prove enlightening. Tesla bonds were recently downgraded to a negative outlook by Moody’s and the rating was lowered from B3 to B2. The Tesla 2025 bonds are trading near their lowest levels ever at $87.50 — firmly in junk territory. Yet TSLA stock has rallied nearly 20% off the recent lows of $250 in early April.
Sooner or later TSLA stock will recalibrate more closely to the bond prices, with Tesla trading at lower levels.
TSLA stock has definite resistance at the $300 level. Tesla shares have tried and failed to rally convincingly back above $300 after falling sharply through that level in late March. MACD is starting to head lower and will generate a sell signal on further weakness. Tesla also broke back below the closely followed 50-day moving average at $300.88, which should provide additional significant overhead resistance.
One of the greatest benefits of using options strategies is the ability to position precisely with defined risk. Out of the money bear call spreads are a perfect example. The trade structure allows traders to collect premium up front while also having limited risk. So to position to be a seller of rallies in TSLA stock, a bearish call credit spread makes intuitive sense.
TSLA Stock Trade Idea
Buy TSLA June $325 calls and sell TSLA June $320 calls for a 70-cent net credit.
Maximum gain on the trade is $70 per spread with maximum risk being $430 per spread. Return on risk is 16.28%. The short $320 strike price provides a 9.5% upside cushion to the $291.97 closing price of TSLA stock.
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.