You know it’s getting bad for Tesla Inc (NASDAQ:TSLA) when not even a tweet by CEO Elon Musk can get much of a reaction out of TSLA stock.
His tweet on Sunday of the first Tesla Model 3 to come off the assembly line was met with a relative yawn, especially in light of a Wall Street Journal report out of Hong Kong that new registrations for Tesla cars fell to zero (that’s right, zero) after .
Tesla stock dropped to a point that sat more than 20% from its all-time intraday high of $386.99 yesterday before getting a quick bounce to finish in the black.
However, the faith is clearly shaken in TSLA, and I’d look to sell into any rallies.
InvestorPlace Market Strategist Anthony Mirhaydari does a superb job in delving into some of the issues facing Tesla in his article from yesterday. I brought up some similar concerns in
my previous dive from a month ago when I thought shares were looking toppy. Those same issues still linger in Tesla and will provide a serious headwind to any rally in TSLA stock.
Momentum darlings like Tesla trade more on technicals than fundamentals-and the technicals have deteriorated greatly. The key $325 support level was recently obliterated and should now provide serious resistance going forward. The next level of major support is at the $295 area.
While shorting TSLA stock outright can be a fairly dangerous game, the options market provides a safer alternative. Implied volatility (IV) is near the highest level of the past six months, meaning option prices are comparatively expensive, which favors option selling strategies.
My suggestion? A defined risk call credit spreads provides a way to capture this rich option premium to position in a guardedly bearish manner.
How to Trade TSLA Stock
Buy the Aug $355 calls and sell Aug $350 calls for a $1.00 net credit.
Maximum gain is $100 per spread with maximum risk of $400 per spread. Thus, return on risk is 25%.
The short $350 call strike provides a 10.7% upside cushion to the $316.05 closing price of Tesla stock and is well above the key resistance level of $325.
Also worth noting: Tesla’s second-quarter earnings report is due out Aug. 2, and that could provide some further headwinds for the shares.
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.
