There was a time when Tesla (NASDAQ:TSLA) stock was a shining star on Wall Street, and Tesla CEO Elon Musk could do no wrong. This has all changed in the last 12 months. The pool of fans for both has dwindled in size.
This a self-inflicted wound as the TSLA leader played chicken with legislators on social media and it landed him in court. As innovative as he is, Musk’s shenanigans were jaw-dropping.
The consequences hit TSLA stock hard. Year-to-date, it’s down 33% while the S&P 500 is up almost 20%. The TSLA stock bulls are no longer buying the dips with conviction like the olden days.
On Thursday, a rumor broke out that Volkswagen CEO was looking to buy a stake in TSLA. This turned out to be fake news, but it helped some of the headline pop. And therein lies an opportunity as this is a trade-able event.
TSLA Stock Pop’s Thanks to Rumor
Today’s thesis is that as bad as Tesla stock performance has been, the mere existence of the rumor places a bid below the stock. Simply stated, if Tesla stock falls low enough, someone will buy it.
Consider the theoretical scenario where Tesla drops well below $200, there will be big money looking to buy the company. The hope exists now and where there is rumor this is truth in-the-making. The fact that Thursday’s pop held suggests that there are believers still.
The accomplishments of Elon Musk are undeniable. But he needs to hand TSLA over to more competent operators so they can take it to the next level. The least he could do is hire better help to do it on his watch.
This is nothing against TSLA, in fact it’s a testament to what they’ve accomplished so far and the potential that the company still has. In the right hands, Tesla could blossom into a formidable global competitor to the current major auto manufacturers.
General Motors (NYSE:GM) and most other majors, are making a serious push into the electric market. They are on Tesla’s heels, so the window of opportunity is closing. Being the first mover gave Tesla an advantage, but the longer they take to get their act together, the easier it will be for the majors to catch up and stifle them.
Trade the TSLA Stock Rumor With Certainty
I am not a fan of buying the shares and hoping that Mr. Musk comes through. But I could take a bullish trade that requires no hopium. I can sell downside risk 30% below current price and generate income for what others fear.
For example, I can sell the March 2020 Tesla $140 put and collect $9 to open. This way I don’t even need a rally to profit. As long as Tesla stock stays above $140 between now and next march, I retain maximum games. Otherwise I own the shares and break even at $131.
Alternatively and to limit the downside risk, I can sell a spread instead. This way the maximum exposure becomes finite and equal to the width of the spread minus what I collect to open it.
Bottom Line on Tesla Stock
This trade setup is not entirely dependent on the buyout rumors. TSLA stock has intrinsic value to count on. Even though they are still not profitable, the stock sells at only 1.8 times sales. From that perspective it’s not bloated. Low rates for long also helps its operations remain well-funded.
This strategy works well when volatility is high. And since the overall markets are still nervous about the Federal Reserve actions, geopolitical headline risk, and Tesla-specific uncertainties, the put premiums are higher than normal. They are ripe for selling.
This wan, if and when the CBOE Volatility Index (VIX) reverts closer to normal levels near $13.5, this trade becomes profitable without any price movement at all. Nevertheless, these are uncertain times and I don’t sell naked puts unless I am willing and able to own the shares. And I never risk more than I can afford to lose.