The Goldman Sachs report on the freshly coined FAAMG stocks — Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — having a valuation bubble sent the NASDAQ reeling Friday.
![3 High-Priced MOMO Stocks That Will Pay YOU: TSLA AMZN NVDA](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
While I am not one to normally argue with the behemoth Goldman, I have to say that the acronym FAAMG is clunky at best and flat out ridiculous at worst. Additionally, Facebook, Apple, Microsoft and Google all have P/E ratios well below 40, so their valuations really don’t fully embody the momentum insanity witnessed lately.
So instead, I coined my very own acronym to represent the three stocks that have been the poster children for the momo craziness: TAN — Tesla Inc (NASDAQ:TSLA), Amazon and Nvidia Inc (NASDAQ:NVDA) . Not only is it a simple and easy-to-remember name, but these three stock all have valuations bordering on ludicrous. Plus all three TAN stocks, unlike the FAAMG group, made new all-time intraday highs Friday before getting absolutely destroyed. My two previous articles from last week on TSLA and NVDA portended of possible carnage looming. The market finally said enough is enough.
Now that the TAN trio have finally stopped going straight up, we can use the massive reversals on Friday to help us structure some call credit spread trades. These defined-risk trades have an additional 10% upside cushion to the all-time highs while providing a solid 15%-20% potential return over the normally sleepy summer months.
So let’s take a look at these TAN trade ideas. With implied volatility spiking on Friday’s bloodbath, option selling strategies are the preferred way to position.
MOMO Stocks: Tesla (TSLA)
After making a new all-time high at $376.87, shares of Tesla reversed sharply to close $19.55 lower at $357.32. This type of key reversal day, especially given that TSLA was up nearly 75% year to date, is usually emblematic of a significant top.
On the highs, Tesla briefly had a market cap exceeding $57 billion. TSLA has a target sales goal of 500,000 in 2018, which would equate to a staggering valuation of $114,000 per car. Combined with a 6.8 price-to-sales ratio, it is easy to see why Tesla may have trouble heading higher. The short squeeze I talked about last week will likely turn into a long-and-wrong scenario over the coming months.
Sell the TSLA Aug $415/$420 call spread for 70 cents net credit. Potential return on risk is 16.27%.
MOMO Stocks: Amazon (AMZN)
The nearly 45% straight up rally in Amazon ended abruptly. Shares traded up to at $1,012.99 Friday before getting whacked hard, closing below the $1,000 level at $978.31. AMZN stock is up nearly 33% year to date and is now the fourth-largest U.S. company with a market cap of $450 billion. The P/E ratio of 182 is rich, to say the least. Now that the momentum-based rally in AMZN stock has been staunched, it is easy to envision a consolidation in Amazon over the upcoming months.
Sell the AMZN Aug $1,075/$1,080 call spread for $1.60 net credit. Potential return on risk is 19%.
MOMO Stocks: Nvidia Corporation (NVDA)
Hard to believe that a little over a month ago, shares of Nvidia were actually trading down on the year. The subsequent post-earnings rally of over 60% since the May 9 low was impressive indeed. Earnings were good, but not that good, and revenues beat by only a small margin. The multiple expansion in NVDA stock has been staggering as I discussed recently. With the price momentum clearly now broken, a pullback towards a more reasonable level of stock valuation is likely over the summer
Sell the NVDA Aug $185/$190 call spread for 80 cents net credit or better. Potential return on risk is 19%.
Once the faith is broken, momentum stocks tend to trade with a greater emphasis on fundamentals. With the TAN stocks finally losing the faith, now is an opportune time to protect against further exposure and put on a little SPF 50 to avoid getting burned this summer.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.