Tesla Inc (NASDAQ:TSLA) is a contentious stock to say the least. Emotions run high in the name, and it definitely is a momentum stock. Those are usually hard to trade. When they fall, they look like they are headed into an abyss. You may try to catch the proverbial knife, only to find out it’s a machete that cost investors’ digits.
Yesterday TSLA stock fell as much as 3% on a day where other momentum stocks were setting all-time highs. There were fears that Elon Musk’s position of control was in jeopardy. There are some investors who want to strip him of his chairmanship. Overnight, the efforts failed, things are back to normal and the stock is bouncing.
The reason that the Tesla stock commands this high a valuation is that Wall Street is totally enamored with Elon, and that is crucial to its operation. The company depends on the ability to borrow. Elon can spin capital raises as a good thing, so he has been able to easily finance their many forays so far. If this stops then TSLA’s cash infusions may become scarce and thereby weaken their operation.
This is not a knock against the company. In fact, I’ve been on record for over a while saying that the bullish thesis in TSLA has many prongs and this makes it a tough stock to short. The bears need several years to kill all facets of the bullish thesis.
No, I am not a perma-bull on TSLA stock. Go back a few years and you will see that I was extremely negative on its outlook. I still am, but I don’t see trouble for at least a year.
Of late, Mr. Musk has had a few strange outbursts on Twitter and one even during the earnings call. That was a strange situation that was completely avoidable. They should not even hold the calls if he is doesn’t like tough questions. But that’s Elon!
The arguments on both sides of the fence are valid, so this creates incredible tension circa the situation with Iomega. This benefits premium sellers … provided they find proper levels.
Today I am sharing a bullish trade but one that doesn’t even need a rally to profit. I merely bet on scenarios that are not likely to happen.
Instead of risking $300 per share without any room for error I will use TSLA options, where I can build a proper buffer so I can better sleep at night especially when stock markets are near or at all time highs.
The key to winning with my method is picking the right levels. Click here for a video that explains the important TSLA levels in play here.
TSLA Stock Trade Ideas
The Bet: Sell the TSLA Sep $220 naked put and collect $6 to open. Here I have a 85% theoretical chance that I would retain maximum gains, but if the price falls below my strike then I accrue losses below $214.
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 the TSLA Sep $230/$220 credit put spread, where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 12% if successful.
I do have a cautionary note about being short TSLA puts. The fact that Elon is such an integral part of the Tesla thesis makes him a giant liability. If we get a headline that Musk is leaving, then the stock will immediately drop and all bets would be off. I know he said that he is committed to it but he can’t control every variable. I offer the situation in Apple Inc. (NASDAQ:AAPL) except I believe that Elon is more important to TSLA short-term than Steve Jobs was to Apple. Before you send in the hate mail, I believe that AAPL will suffer from losing Jobs, but not before they milk his beautiful setup first.
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.
