Tonight is the big event for Elon Musk and Tesla as they reveal the new Model 3 electric car. I must say, the hype around this day has been quite exuberant and very noisy. Don’t get me wrong. I am happy we’re finally realizing the need for efficient vehicles. I’d also like to think that I’m an environmentally conscientious person. I live in Washington State, one of the most beautiful places on earth surrounded by mountains, rain forests, lakes and rivers. I love where I live partly because of the beauty here and I greatly appreciate the need for us to shepherd our planet and keep it clean for our children’s children’s children…However, that has nothing to do with why I buy and sell stocks.
Watching TSLA’s parabolic climb, 70% off the Feb low, has been like watching a firework shoot up into the night sky on the fourth of July. Some of you may remember my blog on Feb 23rd and why I thought a short trade setup was occurring around the $180 price target, see here. Although I did well on the day-trade, my thesis that $180-$190 would provide some short-term resistance was dead wrong as the stock has since climbed up to a high of $240.
The TSLA cult has pumped this stock well above the level I had imagined for the short-term. I’m not saying that TSLA can’t go higher. My point is that it has gone too high too fast and parabolic moves like this really don’t last long or end well. So, here I am once more beating the drum to short TSLA, however this time it’s for a different reason. Many investors know it’s smart to buy the rumor sell the news. Although, and in hind-sight, it would have been stellar to buy the rumor and participate in the TSLA stock rally, I think we are at a point where selling the news might be the right trade.
That is why I entered a very small yet speculative short position on TSLA. I bought the April 8, $240 put today when the stock was trading around $236 (Today’s high was 237.42 and low was $225). I only purchased one contract. I know, that doesn’t sound very exciting, but this contract cost me $1,400 and I really don’t want to take a huge gamble in-case my theory is wrong. I’ve been burned by taking on too much risk initially so in-case we do rally at the open tomorrow I’d like to save some dry powder and add to this position. I will be carefully watching how things unfold and if the TSLA maniacs are full steam ahead it will be best to cut my losses and run! Of course I think I will be on the right side of this trade and my idea may already be playing out. Notice the chart below and the sell-off before the close. TSLA fell from $237-$229. Will this firework explode soon?
April 3 update:
TSLA made a new all time high for the year after announcing the Model 3 but failed to maintain momentum into the day.
On the morning after the announcement I faded the gap up and bought 1 more put option contract at the open when the stock was at $247. This was purchased near the high of the day. My average cost basis went down from $13.95 to $11.3 and my max loss as decreased 23%. I sold one contract rather quickly for $11.75 when the stock first went below $236 (see chart below). This seemed like the logical place to reduce my cost basis since it was close to where I originally entered the trade. Now I can sit more comfortably on my remaining contract.
You might think my one contract doesn’t inspire a lot of confidence in this trade idea, and admittedly you’d be right. Usually when my confidence is high I will take a heavier position but because TSLA is a hype stock and highly unpredictable I don’t want to bet the farm on this one speculation. However, I am confident that TSLA needs to take a breather and come down. The way TSLA traded the Friday after the big Model 3 announcement strengthens my argument that selling the news is a good risk/reward proposition for this speculative position. If the announcement was anything but baked into the current stock price shouldn’t it have held the gap on Friday, or at least closed above $240? The bulls will argue that strong pre-orders over the weekend, of almost 300K, is the catalyst to pump this stock higher but I’m not buying that as this number will taper off and and cancellations pickup.
I may add to this position and will let you know when anything changes!
There have been many articles published on Seeking Alpha about Tesla. Click to image below to see.
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