- Tesla (TSLA) reports earnings April 20
- Expect a drop when earnings are reported, as headwinds slow the EV industry
- Buy April 29 $900 put and sell April 22 $900 put for a 5.50 net debit
Shares of Tesla (NASDAQ:TSLA) continue to consolidate in front of earnings due Wednesday after the close. TSLA stock looks to be trapped in a trading range as the benefit of higher oil prices for electric vehicle (EV) makers in general is offset by valuation concerns for Tesla in particular. Look for valuation to win out as oil prices, well off recent highs, continue to head lower. TSLA will likely head lower post-earnings as well.
It is ironic that Tesla reports earnings on 4/20. Tesla CEO Elon Musk has made a habit of using 420 in his takeover tweets. His tweet from Aug. 7, 2018 hinted at taking TSLA private at $420 per share, which never materialized. A recent tweet from April 14 announced his plans to buy Twitter for $54.20 per share. That was a definite tell that the takeover try was more of a jab than a meaningful attempt.
Who knows, maybe earnings will come in at $4.20 per share. The whisper number is for $2.41 in earnings on $17.76 billion in revenue. Last quarter Tesla handily beat expectations on both the top and bottom line. Yet TSLA stock traded sideways on the news. Maybe valuations are finally being questioned.
I noted in my previous article from Feb. 11 that TSLA stock was worth more on a market cap basis than the following nine automakers combined. That metric has gotten even more ridiculous now that that Tesla has rallied back above the trillion dollar market cap. TSLA is now worth more than the next sixteen automakers combined. Sanity has to set in at some point.
Full year 2023 earnings consensus now stands at $13.70, up from $12.73 just 30 days ago. This puts the forward multiple at a rather robust 73x. Remember, that it is a 73x forward multiple for a trillion dollar company and not some small-cap start up. Trillion dollar companies simply can’t grow fast enough on a percentage basis to justify such lofty valuations. This is especially true now that higher interest rates are a major headwind for any further multiple expansion.
Technical Take on TSLA Stock
Tesla has been rangebound for most of 2022. Upside resistance is at $1,100 with downside support at $900. Break-out attempts to both the upside and downside have both been thwarted with impunity. Currently, TSLA stock resides smack-dab in the middle of this range. A re-test of the support area around $900 may be in the offing unless earnings are a blow-out.
The options market is certainly not pricing in a big earnings-based move for TSLA stock. Current the implied earnings move for Tesla stands at just 5.08%. This is well below the average implied move over the last eight quarters of just over 7.5%.
Implied volatility (IV) stands at the 38th perecentile. This means option prices are cheaper than the average over the past year. IV is also cheap on a comparative basis to the historic volatility (HV) of 55%.
I had a similar guardedly bearish viewpoint in my last article on TSLA stock from Feb. 11. The recommendation at that time was to sell an out-of-the money bear call spread in March. The trade ended up being profitable as TSLA closed well below the short strike price.
Long volatility trade structures should be favored now given the comparatively low levels of implied volatility. A defined-risk long put calender spread trade makes probabilistic sense to position for a pullback. Low risk with potential high reward skews the payout profile to a favorable level.
How to Trade It Now
Buy April 29 $900 put and sell April 22 $900 put for a 5.50 net debit.
Buy a 68 IV and sell a 92 IV, which is a nice setup from a volatility standpoint. Maximum risk on the trade is the debit paid of $550 per spread.
Ideally TSLA stock pulls back towards the $900 strike post-earnings to realize the maximum potential gain.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.