Tesla Inc (NASDAQ:TSLA) needs a reason to rally. Unfortunately, TSLA stock likely won’t get one until the first week of August. That’s because sentiment has sharply shifted on the shares, and Wall Street likely won’t buy into any more hype until quarterly earnings gives them a reason to.
This means that it’s time to look at a short-term bearish position on TSLA stock.
I’m a firm believer in Tesla’s long-term business outlook. I even defended CEO Elon Musk’s brusk exchange with analysts during the company’s last quarterly earnings conference call. But the direction for TSLA stock over the next couple of weeks will remain to the downside — barring any major developments.
Click to EnlargeThe answers lie in Tesla’s technical backdrop. TSLA stock has been locked in a downtrending channel since the end of February. The lone breakout from this range was to the downside, shortly after the company’s last trip to the earnings confessional. The shares rebounded sharply from those lows, but TSLA bulls just didn’t have the buying strength to extend that rally beyond technical resistance.
And there are several layers of that. First, and foremost, TSLA’s 50-day moving average continues to apply downward pressure. Second, the $300 and $310 levels lie just overhead to create additional hurdles to the stock breaking out of its current trend. TSLA stock needs a catalyst, and it doesn’t have one scheduled until its next quarterly report in early August.
The lack of enthusiasm is readily apparent in Tesla’s sentiment backdrop. For instance, Thomson/First Call reports that only eight of the 23 analysts following Tesla stock rate the shares a “buy” or better. The 12-month consensus price target also rests at $309.09. Typically, this scenario would lead me to believe that upgrades or price-target increases could be in the cards.
Not this time. Tesla has very little good will with the brokerage community right now. Musk wants it that way, and I agree. However, the company needs to show these analysts they are wrong right now, not tell them.
Additionally, TSLA stock remains among the most shorted on Wall Street. As of the most recent reporting period, 38.8 million shares, or 31.4% of Tesla’s total float, was sold short. There’s plenty of fuel for a short squeeze rally, but no incentive at all to buy back those positions.
Even the typically bullish options crowd is heavily negative on TSLA stock. Currently, the June put/call open interest ratio rests at 1.6 — the highest such reading taken this year. You can tell that short sellers aren’t even bothering to hedge their bets with call options at the moment.
Finally, June options are pricing in a potential move of about 6% heading into expiration. This places the upper bound at $310 and the lower bound at $270. Given that the sentiment and price support just isn’t there to push TSLA stock to $310 right now, a decline to the $270 region appears most likely.
2 Trades for Tesla Stock
Put Spread: Traders looking to profit from this continued decline in TSLA stock might want to consider a June $275/$280 bear put spread. This spread was last offered at $1.15, or $155 per pair of contracts. Breakeven lies at $278.85, while a maximum profit of $3.85, or $385 per pair of contracts — a potential 230% return — is possible if Tesla stock closes at or below $275 when June options expire.
Put Sell: If you are looking to pick up TSLA stock on the cheap for a longer term holding, the June $270 put sell has a small chance of finishing in the money. At last check, this put was bid at $2.83, or $283 per contract. In this trade, you keep the premium as long as TSLA stock closes above $270 when June options expire.
However, if TSLA trades below $270 before expiration, you will likely be assigned 100 TSLA shares at $270 each per contract sold. If you are only looking to sell premium, choose a lower strike. Otherwise, owning TSLA stock at $270 is a steal from a buy-and-hold investing stance.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
