Tesla (NASDAQ:TSLA) downed an Ambien last month and has been sleeping ever since. It’s a rare spell of slumber for a stock known for its fireworks. Momentum lovers used to the raucous volatility have had to adjust to a new, duller regime of TSLA stock.
If you’re one of them, take heart. I think the sluggish movement is temporary. Like a coiled spring, TSLA stock is squeezing tighter and tighter in preparation for what could be a fantastic breakout.
Today, I’m going to show you how to profit from it.
Volatility Cycles
Stock prices move in cycles. Bull markets lead to bears, and bear markets lead to bulls. It was ever thus. But the rotation of asset prices from up to down isn’t the only phenomenon you can bank on.
Volatility also moves in a cycle of sorts. Periods of expansion give way to compression. And times of compression ultimately lead to expansion. After a stock has consolidated for a while, something arrives to upset the balance and a big move ensues. Breakout traders are all about capturing the outsized move. And I guarantee many are salivating over the current setup in TSLA stock.
One of the ways to help measure the volatility squeeze is by using the Bollinger Band indicator. It’s an adaptive volatility envelope that consists of an upper and lower band plotted around a 20-day moving average. The distance of the bands is set at two standard deviations. You’ll see the bandwidth fluctuate depending on how volatile the stock is. When volatility declines, the bands constrict. When volatility rises, the bands expand.
Advocates of the indicator look for a squeeze in the bands to signal a breakout could be imminent. As shown in the accompanying chart, that’s precisely what we have with Tesla right now. The Bollinger Bandwidth indicator shown in the lower panel has fallen to $14, which is quickly approaching the tightest range we’ve seen over the past year.
If we look at a more traditional chart, a few more signals of note become apparent. First, the trend across all time frames is pointing higher. The 200-day, 50-day, and 20-day moving averages are all rising. Though momentum has waned in recent days, bears have proven impotent in reversing the trend. But it hasn’t been for a lack of trying. We’ve seen multiple attempts to jam the stock below the 20-day moving average. The latest failed breakdown bid was Wednesday.
On the top end of the range, resistance at $840 has proven quite stubborn. A side benefit of its continual rejection of rallies is that it marks itself as the critical threshold to watch. Instead of buying now in anticipation of a breakout, you could wait for confirmation and then pull the trigger.
While there’s always a chance the resolution to the current stalemate is lower, I wouldn’t bet on it. Wednesday’s sharp intra-day rebound keeps the series of higher swing lows intact and suggests the bid beneath the surface is still very much alive.
In looking for an upside target, the record high from February near $970 is a logical number to shoot for. But I also think $1,000 is within reason given the typical swing distance we’ve seen on prior breakouts in TSLA stock.
Bull Calls for Big Profits in TSLA Stock
With actual volatility in the tank, it should come as no surprise that implied volatility has been trending lower. It now sits at the 23rd percentile of its one-year range, making long premium plays the way to go.
I like buying out-of-the-money call vertical spreads for a cheap upside bet. You can structure the trade with whatever spread width you desire, depending on how much risk you want to take. Here’s a $10-wide using July options that boasts a potential 150% return on investment.
The Trade: Buy the July $880/$890 bull call spread for $4.
The max loss is $4, and the max gain is $6.
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