Shares of Tesla Inc (NASDAQ:TSLA) have broken the bullish trend line following an earnings report that missed on nearly every metric. TSLA is still up a staggering 45% so far this year as faith and belief, not revenue or earnings, had taken shares to fresh all-time highs before the recent pullback. Faith and belief can only go so far, though, and I look for Tesla to have trouble heading appreciably higher for the foreseeable future.
Source: Mike Lau via Flickr (Modified)
In my previous post on TSLA from Oct. 24, I felt that Tesla stock had topped out and was headed to $303, which proved to be the case. In a recent CNBC interview, noted TSLA bear Gabe Hoffman of Candens Capital highlights numerous issues surrounding the Model 3, autonomous driving and cash burn.
He also says Tesla CEO Elon Musk makes Donald Trump look like an angel. While it certainly may be his short position in Tesla shares talking, many of the points made are absolutely valid.
TSLA stock has suffered some serious damage from a technical perspective. Both the 50- and 200-day moving averages have been broken with conviction.
A major head-and-shoulders double top has formed with the $320 neckline having been obliterated. The 200-day moving average of $320.42 also coincides with this major resistance area.
TSLA is now down 20% from the all-time high near $390, which is indicative of a bear market. This all points to serious upside push back at the $320 level going forward for Tesla shares.
Any discussion of TSLA from a fundamental viewpoint borders on ludicrous. The company continues to lose money and the cash burn rate is becoming rather alarming. Another capital raise is almost a virtual certainty, with even more dilution on the horizon for shareholders. Add in the Model 3 production delays and quality issues and the picture is not exactly rosy for Tesla in the coming months.
So with TSLA looking terrible technically and flawed fundamentally, a short call spread position makes intuitive sense. TSLA options are still trading at a fairly high implied volatility (IV) level so option selling strategies are favored.
TSLA Stock Trade Idea
Buy TSLA Dec $330 calls and sell TSLA Dec $325 calls for $1.00 net credit
Maximum gain is $100 per spread, with maximum risk of $400 per spread. Return on risk is 25% The short $325 strike is above the major $320 resistance level and provides a 7.25% upside cushion to the $302.99 closing price of Tesla stock.
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 email@example.com.
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