There are lots of places to lay blame, but make no mistake about it — Tesla Inc (NASDAQ:TSLA) just took a turn for the worse on the price chart. But if you’re interested in shorting TSLA stock while also appreciating being nimble as market conditions change, look no further than a well-placed, long put butterfly spread. Let me explain.
Tesla stock bulls are free to point fingers in any number of directions as to why shares have made an abrupt and bearish U-turn, punctuated by Tuesday’s decline of 2.7%. A recent, bizarre and confidence-breaking conference call is one point of contention to consider.
Another possible culprit behind some of TSLA’s weakness — and closer to the action — is quite simply the broader market itself. Mr. Market experienced some vertigo Tuesday after eight straight sessions of higher prices.
Bulls can also say thanks but no thanks to Morgan Stanley. A note issued Tuesday trimmed the firm’s earnings forecast and cut its price target on TSLA stock to a mostly at-the-market $291. Analysts cited shares are “near fair value” on concerns regarding Model 3 profitability.
Regardless of who or what mix is to blame, the TSLA stock price chart might be considered a vehicle ready for traders to switch gears and test drive shares for a move south.
TSLA Stock Weekly Chart
Not long ago, I penned a cautiously optimistic outlook for TSLA stock. Since then, shares have bided the time by further consolidating the swift gains formed off Tesla’s technically, well-supported corrective low.
Typically, the mostly lateral price action that’s occurred would be a welcome event as it works to remove any speculative excesses which might exist. In this instance however, I’m worried. TSLA stock is now working on its sixth week of consolidating around its prior all-time-highs, but have quietly taken a pivotal turn for the worse.
Tesla’s current price action is bearishly confirming the prior week’s topping candle, while reversing back below the key high dating back to 2014. That’s an early warning of weakness to come in our view. And combined with a stochastics setup that has turned neutral, this strategist believes it’s time to shift gears as TSLA stock reaffirms a downtrend apparently still in progress.
Tesla Options Strategy
Given our more cautious view for TSLA stock in the immediate future, a limited-risk spread which can profit from shares driving lower makes sense. One such low-cost spread which also allows traders to remain flexible to changing market conditions without losing an arm and a leg is a moderately bearish long put butterfly spread.
Reviewing Tesla’s put options, one favored combination is the June $265/$245/$225 put butterfly. With shares at $284.18 the spread is priced for $2.10 and the equivalent of less than 0.75% of the risk associated with shorting TSLA.
Based on this pricing, the trader maintains a nice-size profit zone from $227.10 to $262.90 at expiration. The maximum profit capture of $17.90 is at $245, which for all intents and purposes, is a test of April’s corrective low.
The risks with this butterfly is if TSLA stock is outside either the $225 or $265 wing at expiration the small debit will be lost. But at the end of the day or after a few more weeks, that minor concession may come in very handy for like-minded traders appreciative of avoiding major damage to the P&L and open to switching gears for the right price as market conditions necessitate.
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.