Love It or Hate It, A Tesla Inc Trade Is an Easy Bet
In the past ten days, Tesla Inc (NASDAQ:TSLA) stock had a mini correction, but this time it was a market-wide issue. Still and coming into its earnings report the stock was up 37% in one year. This morning the reaction in the stock is muted. Traders seem unsure about either side of the trade.
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I will start with my opinion on TSLA which I know will not win me any medals from its fans. I love the cars but I believe that as the company is structured now, the odds are stacked against it. It will need several miracles in many areas to grow into Wall Street’s expectations.
But before you send me your hate mail, today I am committing bullish risk to Tesla stock. So I set aside my opinion to trade the price action.
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Yesterday, management delivered a smaller loss than forecast. Even though I’ve seen only one on the street, they also reiterated their forecast for Model 3 production. But here is the catalyst for the stock price. Last night they told us that there will be difficulties in 2018, yet the stock is not falling apart. And this is in a jittery stock market, which is a great sign. It points to investor appetite to buy. So the end result should be a continuation of the rally.
I often see comparisons of the TSLA situation to Amazon.com Inc. (NASDAQ:AMZN) but I disagree. AMZN is profitable now and has sustainable businesses in several different verticals. If things get tough they can simply turn down the rate of growth and mature into a Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) type company. TSLA cannot do that yet. They need to change their current operation to be self-sustained.
I think they are closer to a Netflix Inc. (NASDAQ:NFLX) situation than AMZN. There is hope, but there also is a lot of hard work before the green pastures.
Fundamentally, TSLA is not cheap. They still burn cash so they rely on the current lending market to fund their operation. If that tightens, they will run into trouble. However, the bullish thesis is so muddled between cars, battery tech and solar that bears find it hard to squash it in the short term. The long term hopium is hard to kill here so the stock finds support.
And there in lies my opportunity.
Don’t get me wrong, I am not blessing the company as a bargain here, and I am not saying the company will succeed. I am merely betting that in this stock market and in the short term, TSLA stock has bankable support. I will sell risk against it to profit.
Tesla fans are extremely resilient and they continue to buy what Elon Musk dishes out. This is likely to continue for as long as they are able to borrow money to continue the cash burn.
Technically, TSLA stock has support below and a neckline opportunity above. So with a little help from the equity markets, it can retest $360. My trade while it would benefit from said rally, it doesn’t need it. If TSLA stays above support, I retain maxim gains.
This is a speculative trade in a conservative portfolio.
TSLA Stock Trade Idea
The Bet: Sell the TSLA APR $260 put for $3 or better. Here I have a 85% theoretical chance of success. Otherwise and if the price falls below that level then I would suffer losses below $252.
Selling naked puts carries big risk, especially for a three-digit stock as frothy as TSLA. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the TSLA APR $265/$260 bull put spread where I have the same odds of winning. Then the spread would yield 10% on risk.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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