With increased volatility, it’s easy to lose track of the big picture in Tesla (NASDAQ:TSLA) — and that may be a big mistake for investors. But to avoid being a potential crash test dummy in Tesla stock, bulls should buckle up with an intermediate-term modified butterfly spread. Let me explain.
In a name synonymous with aggressive price swings and its fair share of varied reports updating investors, Tesla stock has been pretty chaotic of late. Yet in-between the uproar of an SEC investigation, a surprise quick and favorable settlement, as well as the dope-smoking escapades of CEO Elon Musk, TSLA is inching its way towards profitability.
Analysts at Macquarie Research initiated coverage on Tesla stock late Monday with a price target of $430. That’s roughly 67% above Tuesday’s appreciative response from investors which sent shares rallying by nearly 5%. The firm sees profitability for TSLA by the second half of next year as the disruptive tech company meets production targets and moves past Tesla’s debt maturity hump.
And in this strategist’s view, the other bottom line is that while bulls (and bears too) have gotten smoked in recent weeks by Tesla stock’s combustible headlines, the big picture on the price chart is also supportive of some “vroom, vroom” in TSLA shares entering 2019 and beyond.
Tesla Stock Weekly Chart
Stepping back from the daily chart’s “[email protected]%ts and giggles” and a period punctuated by two massive and opposing news-driven price gaps, the big picture of the monthly Tesla stock chart offers up almost calming technical support favoring the TSLA bull camp.
Tesla shares are currently trading within a key price zone, backed up by a couple contrasting angular support lines and a staunch Fibonacci price cluster dating back to cycle lows in 2016 and TSLA’s 2010 all-time-low.
Looking forward, the expectation is that Tesla stock is in position to put together a meaningful intermediate low in the next month or two. From there, the sky isn’t the limit but a bullish reassertion of TSLA’s uptrend is anticipated in 2019.
Tesla Stock Options Strategy
Reviewing Tesla stock’s options, and as I’m unwilling to take on the role of a crash test dummy with additional downside exposure in the event technical support fails, I’m favoring a bullish out-of-the-money modified butterfly call spread.
With shares of TSLA at $262.80 the Mar $315/$360/$390 call combination for $5 has caught our attention. This butterfly keeps a bullish trader’s risk contained to just under 2%. And as much as I am a fan, there are no guarantees from Tesla stock’s squiggly price line, so this spread offers serious downside protection.
On the other hand, if Tesla stock does cooperate, there are also big profits to enjoy. In fact, at expiration if shares landed on $360 the gain approaches $40 or 800%. The more threatening fact is this position does require a rally of around 22% in order for this bull to simply break-even at expiration. Understandably, that’s no small potatoes. Still, this is TSLA, right?
This spread combination also allows for a handful of monthly candlesticks to form and reaffirm Tesla stock’s uptrend. Coupled with two earnings events during the life of this modified butterfly and god only knows how many other sneak peaks at sales data along the way; having this spread move firmly in-the-money is all the more approachable. And if shares really get their “vroom, vroom” back with investors, unlike a regular butterfly this asymmetrical configuration guarantees a return of 200% or $10.00 above $390.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.