Elon Musk is a revolutionary on many fronts. SolarCity (NASDAQ:SCTY), SpaceX and Tesla Motors (NASDAQ:TSLA) are just three of his ventures. He doesn't think small and that gets him a lot of attention. In the press, from potential customers and from short sellers.
Recently, the media has been focused on Tesla, Musk's electric car company. With the launch of the Model 3 came a flood of pre-orders. So many that the short sellers started lining up -- I guess thinking that either Tesla would deliver or that its cost structure would go through the roof, forcing it raise more capital. Which is exactly what happened last week, causing the stock to drop all of about nothing.
Now it's time for the company to build and deliver. And it may be a good time to buy the stock. The chart below shows the price action over the past 12 months. Outside of the drop with the market at the start of the year into the February low, it has moved sideways in the $60 range. In fact it has been in that range since the start of 2014. That started after a monstrous run higher off of a base around 30.
The recent price action since that February low bounced off the top of that range again. From there the pullback retraced 50% of the move up and now seems to have reversed. If this continues, it creates an AB=CD pattern that targets a move to 330. This would gain some confidence on a move over the November-December consolidation over 240. And there is a natural stop loss now at the May low -- just over 200.
Momentum is building as well. The RSI is rising to the mid line with the MACD crossing up. Again, continuation of the momentum build would also give more confidence. So what's a trader to do with this scenario? Remember, you're looking at a 10% downside risk for a chance at all-time highs.
It's All About The Options
The company is not expected to report earnings until August 3. One way to participate is to plan to be out before then. In this case, buying the stock and a July 220/200 Put Spread for $8.50 gives protection for that downside to 200. Selling a September 260 Covered Call for $6.50 cuts that cost to $2.
A second approach is to avoid the stock altogether. A July 220/260 Call Spread gives the upside to the top of the big consolidation and costs $10, one quarter of the range -- with risk limited to the cost of the spread.