Investors have known for a while now that 2018 is the year of the headlines. Nevertheless stocks are at or near all time highs. This week we even had a bearish U.S. Fed event. They raised rates and offered a very bearish statement from chairman Powell and stocks still rallied hard.
But it was Tesla (NASDAQ:TSLA) stock who stole the show. And therein lies the mother of all headlines.
Last night just after the market closed the SEC announced that they are suing Elon Musk the CEO of Tesla for fraud. The stock fell over 10% in minutes.
Up until then, the Tesla stock price action was constructive. The bulls had managed to plow their way back above the $300 per share level before it all fell apart. The legal threat to Musk is serious so the selling is understandable.
Fundamentally, TSLA valuation makes little sense. They miss almost every milestone and they burn cash like crazy. So to say that it’s cheap now on this sharp drop would be incorrect.
The opportunity here is a pure play on price action. TSLA stock has had mega fans. I have been an outspoken critic of their fundamentals but have been lucky trading the stock through bullish options trades. Luckily Thursday I closed all my short term longs for a profit so now I snipe another trade on this dip.
The overall thesis of TSLA is not one of an automaker but rather a technology play. It’s a vague one so it’s not going to die overnight. However, there is the risk from the financing aspect. Wall Street was in love with Elon so he was able to attract money on demand. This is in jeopardy with these accusations.
The SEC conference sounded like they want to make an example out of Musk but they also noted their concern for stockholders. So I can imagine a deal that would inflict minimal damage to the TSLA thesis. Musk is an integral part of this thesis. So there is a good chance that they will work something out.
I consider this an extremely speculative trade in a conservative portfolio. So there is risk and therefore I won’t buy the shares outright not even at these discounts. Instead I use options once more where I can define my risk to avoid potential catastrophic trades.
Technically, this is not new to TSLA stock. This year it’s already fallen to $250 per share twice. In April it fell to $245 per share. Investors in it are used to wild moves. But it is important to have the basic fundamentals remain the same.
Musk will need to mend his reputation somehow or cut a favorable deal. Also it is possible that after the authorities are finished punishing the CEO, they could come after the company itself. So it’s definitely trading in headline mode. Meaning expect the unexpected.
The upside hopium: Buy TSLA Dec $290/$295 debit call spread for $2.25 per contract. I need price to rally past my strikes for a chance to double my money.
The potential bank after stabilization: Sell TSLA Dec $215/$210 credit put spread for $1.14. For those who want to own the shares can sell the Dec $195 naked put for $6.
I will deploy the first now so I’d be already long the miraculous bounce in the shares and also capture the earnings event. Then if and when I see stabilization I’d deploy the put spreads which would then open more risk but lower my call entry cost.
This is a very fluid situation so caution is more than warranted. So I only risk what I can afford to lose.
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.