Shares of Tesla (NASDAQ: TSLA) have certainly crushed the shorts following earnings that actually missed analysts expectations. TSLA stock, which closed at $300.84 pre-earnings, skyrocketed over $54 (18%) before retreating somewhat. Now that the epic short squeeze has forced many of the shorts to cover, look for Tesla to struggle to head higher over the coming few months.
Tesla reported earnings on Aug. 1, with EPS of a loss of $3.06 per share worse than analysts expectations of a $2.88 loss. Revenues were basically in line at $4 billion. The fuel behind the monster rally in TSLA stock was more promises of continued production ramp-up in the critical Model 3, alleviating some of the imminent cash raise fears. Plus CEO Elon Musk remained unusually well-behaved on the analyst earnings conference call. Important to remember that Tesla has a long history of over promising and under delivering on production and that Musk remains a loose cannon. But for now, investors believe this time it will be different.
Click to Enlarge Any discussion of Tesla on a traditional valuation basis remains an exercise in futility. TSLA has failed to turn a profit in all of the company’s 15-year existence, yet is within shouting distance of all-time highs. It really comes down to faith versus fundamentals, with faith winning out recently. But as TSLA stock heads higher, faith will likely give way to fundamentals.
From a technical perspective, TSLA stock is overbought on a 9-day RSI basis with a reading exceeding 70. Previous instances when Tesla was overbought marked significant short term tops in Tesla shares. After breaking out to new post earnings highs at $355 Friday, TSLA stock reverse course to close lower and near the lows of the day. Thsi type of reversal pattern is many times a sign that the buyers (or short covering) may be exhausted.
Implied volatility (IV) certainly came down following earnings but still remains at levels that makes option selling strategies viable. So to position for an eventual stall out in the rally in TSLA stock, an out of the money bearish call credit spread makes sense.
TSLA Stock Trade Ideas
Buy TSLA Sep $405 calls and sell TSLA Sep $400 calls for a 75-cent net credit.
Maximum gain on the trade is $75 per spread with maximum risk of $425 per spread. Return on risk is 17.64%. The short $400 strike is well above the all-time intraday high $389.61 and provides a 15% upside cushion to the $348.17 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.
