Shares of Tesla (NASDAQ:TSLA) have certainly been under some serious pressure recently. After trading up towards all-time highs on Aug. 7 at the $380 level, TSLA has been hammered back down over 20%, closing below $300. While many times such dramatic sell-offs are viewed as buying opportunities, the recent behavior of both the CEO and the shares point to even lower prices for Tesla stock over the coming weeks.
The crazy rally towards new highs in early August was predicated on the now infamous funding secured, going private at $420 tweet by CEO Elon Musk. The sharp rebuke by the market was predicated on the swift realization there was no funding. Subsequent news that both the Department of Justice (DOJ) and Securities Exchange Commission (SEC) were looking into potential criminal and ethics violations surrounding the tweet only added fuel to the selling.
Unfortunately the problems for Tesla don’t end with the SEC/DOJ investigation. By now, most are familiar with the fact that CEO Elon Musk smoked marijuana on The Joe Rogan Show. This shocking lapse in judgement came shortly after telling the New York Times he thought marijuana hurt productivity.
Click to Enlarge Just as important, the pot smoking incident may have violated Federal Acquisition Regulation policies that may substantially affect the Air Force contracts with SpaceX, another company run by Mr. Musk. This would be yet another black eye for Elon Musk and negatively affect Tesla as well by association.
The bad news is also evident from a technical viewpoint. TSLA stock is having extreme difficulty moving past major resistance at the $300 area. The 50-, 100- and 200-day moving averages have all converged near the $312 level which should provide some serious additional upside headwinds. Money flow continues to deteriorate as well. Once the faith is broken for momentum stocks like Tesla it is many times tough to get it back.
Implied volatility (IV) in TSLA options is at the 79th percentile, meaning option prices are comparatively expensive. This favors option selling strategies when constructing trades.
So to position to be a seller of Tesla stock on any meaningful rally, a bearish call credit spread makes sense.
Tesla Stock Trade Idea
Buy TSLA Oct $345 calls and sell TSLA Oct $340 calls for an 80-cent net credit.
Maximum gain on the trade is $80 per spread with maximum risk of $420 per spread. Return on risk is 19.05%. The short $340 strike price provides a 13.5% upside cushion to the $299.68 closing price of Tesla 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.
