Traders can be a rough crowd when it comes to stocks that challenge convention…
… especially for a company like Tesla Inc. (NasdaqGS:TLSA).
Team Musk is under severe pressure and, as a result, I think there’s a great trade brewing.
Tesla has never turned an annual profit, has never paid a dividend, and has racked up cumulative losses of nearly $6 billion since 2010.
Which, of course, begs the question… why is the company trading at nearly $300 a share?
He is capable of rallying investors around his vision of the future. [Yesterday] morning, for example, Tesla “leaked” a memo outlining plans to boost Model 3 production, to add a third shift at the company’s Fremont assembly plant, and to hire roughly 400 folks a week for several weeks running.
And, not surprisingly, the stock jumped in early trading.
Here’s the thing.
Like many investors, I believe he is the single most innovative and visionary executive on the planet.
Even the smallest rumor that he’s interested in an idea is enough to send competitors packing.
It doesn’t matter whether you’re talking about solar power, rocket ships, or tunneling machines. If Musk is interested, you can take that to the bank. Earlier this year he stopped taking orders for a $500 flamethrower after selling 20,000 units… a flamethrower!
To call Musk a provocateur would be an understatement.
Still, the first rule of investing is never, ever, fall in love with an asset.
Tesla’s stock is a train-wreck…
… Conventional metrics do not apply.
… Moody’s rates Tesla bonds junk.
… Tesla is the single most shorted stock on Wall Street, again, according to Institutional Investor’s alpha.
… Tesla is funding debt and losses via dilution.
… Competitors are catching up.
… The government’s tax credits are burning off for Tesla buyers.
News stories aren’t helping, either.
… “Model 3 Production Line Skids to a Halt for Tesla” – Bloomberg
… “Tesla’s Cash Crunch Will Intensify As Model 3 Production Shuts Down Again” – Forbes
… “Safety Investigators Boot Tesla from Probe into Fatal Crash of SUV on AutoPilot” – USA Today
… “Tesla Employees Say Gigafactory Problems Worse Than Known” – CNBC
Paul Price, writing for TheStreet, even went so far as to liken Tesla shares to $300 lottery tickets!
That’s generous to my way of thinking – considering I actually like Musk and believe in his vision – but what the $300 a share price lasers in on is critical.
That’s the balancing point at which shares will trade sharply higher or lower.
The fact that traders are fighting it out at this price point, in light of the headline risk and deteriorating fundamentals, tells me that the easy money is scared.
And a quick look at the charts tells me that right around $175 a share is where the stock will land if those get carried out of the game in the weeks ahead.
Playing that possibility is easier than you may think.
This is one of those trades with home run potential, so I suggest buying put options – a bet that prices will decline – as inexpensively as possible. That way price and volatility work in your favor if Tesla stumbles for any reason.
Buying put options also helps keep risk to razor-thin levels, which is always important at times when traders are struggling to process “headline risks” like the ones we just discussed.
As I write (Monday afternoon), TSLA June 15, 2018 $175 Put (TSLA180615P00175000) options are trading at $2.67 per contract. A price drop of roughly 4.35%, or $12.69 a share, would result in a quick double according to my back-of-the-envelope calculations given the stock’s current “Greeks” – a term meaning the sensitivity of these options price to changes in Tesla’s stock.
That’s well within the “average true range” of Tesla stock over the past 14 days, which is roughly $19 a share, or 6.31% – 6.61% of Tesla’s share price. That tells me the move is not only possible but that the volatility needed for such a move to happen is already reflected in Tesla’s price.
In other words, it wouldn’t take an exceptional market event to make this trade really pay off. Many times investors look for the markets to make unusual moves, thinking that they’re smarter than everyone else but, often times, it’s trades like these – that are well within daily ranges – that can pay off precisely because there’s nothing special about them.
I hope you enjoyed today’s column.
The markets are filled with terrific trades like the one I’ve outlined today which means savvy investors are never lacking an opportunity. You just have to know what you’re looking for and how to set the trade up for maximum profits and minimum risk.
Speaking of which, many people are absolutely convinced that options are “too risky,” but they’re selling themselves short… pun absolutely intended.
The right options strategies make a great complement to core investments and can actually be inherently far less risky than shorting stocks because the risk is limited to the price of the put itself and not a penny more.
In closing, this is a speculative trade so do not attempt it with anything other than your speculative money – meaning do not invest anything you cannot afford to live without. I suggest using the 2% Rule we’ve talked about many times as a rule of thumb to limit risks yet maximize returns.
Until next time,
Keith Fitz-Gerald
Source: Total Wealth Research