There is no doubt that Tesla Inc (NASDAQ:TSLA) has been a hotly contested stock. There are strong emotions on either side of the bull/bear case. This morning the debate is even hotter thanks to the bizarre behavior of Elon Musk on the conference call.
Up until mid-march, the $300-per-share level had served as strong support for Tesla stock. But April was not kind to it. It has cratered through the $300 line all the way to test $250 per share three times. Sure the bounce off that came hard and fast but the threat to the long side still remains. Onus is on the bulls to now prove that they can retake the neckline and hold it.
Last night Tesla reported earnings and delivered a decent quarter — to my surprise, I have to admit. They met or beat expectations on almost all metrics and even said that they could have positive GAAP numbers sooner rather than later. Furthermore, they shared a decent run-rate on the Model 3 production.
So there was much to celebrate, yet the stock failed to hold a rally on the headline. When stocks can’t rally on good news often it’s a sign of bull exhaustion.
Fundamentally, I understand those who want to short the stock. Long-term I agree with them that Tesla stock needs several miracles in order to grow into today’s evaluations. But the bullish thesis is so muddled that is hard to kill in one quarter. In fact it may take several years to dispel the myth of what TSLA is to become.
So it’s a tough short, and therein lies my opportunity. Stocks that are difficult to short usually find footing off corrections.
Meanwhile, the company has its leader Elon Musk, who Wall Street generally adores. So far they keep believing what he has to sell. Last night he raised some eyebrows in the analyst community but that’s Elon being Elon.
I do worry about rising interest rates because that puts pressure on companies that need leverage to operate. TSLA needs to borrow in order to continue its operations. So as a car company I hate it, but I am trading it today the same way I’ve done it by betting on support.
I bet that this Tesla malaise shall pass and that support will hold through 2018. This is a rinse and repeat approach for me instead of chasing upside price momentum. Click here for more details on that and for free copy of my weekly newsletters.
Tesla Stock Trade Ideas
The Bet: Sell the TSLA Dec $155 naked put and collect nearly $9 to open. Here I have a 75% theoretical chance that I would retain maximum gains. But if price falls below my strike then I accrue losses below $146.
Selling naked puts carries big risk, especially for a stock as frothy as TSLA. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the TSLA Dec $165/$160 bull put spread where I have the same odds of winning. Then the spread would yield 15% on risk.
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.
