While the markets were busy reacting to global tariffs headlines, Tesla (NASDAQ:TSLA) CEO Elon Musk was creating his own drama headlines. Tesla stock has been whipsawing recently over questionable Musk tweets. But that may have hit a reset last night.
Last night, Tesla stock spiked on the earnings report without any great news bits. It’s more of a relief pop that Musk delivered a boring conference call. So perhaps for now it’s back to normal and therein lies the opportunity.
Until now Wall Street had given TSLA a pass on missing milestones but that is no longer true. Now investors are holding Elon Musk accountable … but they keep moving the needle. In other words the consequences have not been severe or lasting.
Every dip has so far been an opportunity to go long Tesla, and this morning is a perfect example of it.
The TSLA shorts have conviction but are also baffled by the continued gains. It’s much like the situation that Amazon (NASDAQ:AMZN) went through for years. But unlike Amazon, Tesla still needs to prove to investors that it can indeed turn a profit.
For now the Model 3 production numbers are in focus and are the more significant headlines. Musk keeps moving the bar higher, even though he hasn’t yet consistently delivered on his lower promises. It’s almost like he’s setting it up for failure.
There are more serious concerns over the company cash position. Last night they posted comfortable cash levels, which is helping the stock spike today. So far investors are still willing to extend credit to Tesla whenever they need to raise cash. So in spite of many challenges, there are positives aspects here.
The Tesla bullish thesis is muddled and that is a plus for investors. It has several branches not just in cars. There is also the battery element and the solar venture to name two. So Wall Street is confused as to how to treat it and it will take many years to crush the thesis.
One thing is for sure — Tesla is a momentum stock, which makes it difficult to time from a trading perspective. That’s why I use options, where I can build buffers between current price and the level of my risk.
Today I share a trade that doesn’t even need a rally to profit. I m merely need proven support in Tesla stock to hold through 2018 so I can retain my maximum gains.
TSLA Stock Trades
The Trade: Sell the TSLA Dec $205 naked put and collect $9 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 $196.
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 Trade: Sell the TSLA Dec $205/$200 credit put spread which would deliver over 11% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to win.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters.
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.
