Tesla Stock Is Priced For Perfection But Delivers Disappointment

Tesla (TSLA) stock finished last week in the red after first-quarter deliveries came in at 358,023 — below the 365,645 analysts had expected.

The company finds itself in an awkward position as it looks to transition away from being a traditional electric-vehicle seller toward autonomous driving and robotics.

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Investors have long bought into Musk’s vision, and the stock currently trades at a price-to-earnings ratio of 216 — a valuation that implies rapid growth. Yet Tesla has posted three consecutive years of earnings declines.

Whether autonomous driving and the Optimus robot ultimately succeed remains to be seen, but in the near term, both initiatives are likely to weigh further on already thin profits.

Investors who expect continued weakness in Tesla’s stock might consider a bear put spread.

Placing A Bear Put Spread On Tesla Stock

A bear put spread involves buying a put option at a higher strike price while simultaneously selling a put at a lower strike price. With Tesla recently trading around 364, investors could buy the 350 put and sell the 340 put, both expiring May 15.

This trade went for a net debit of approximately $3.30, based on recent trading. This represents the maximum loss of $330 per 100-share contract, if shares remain above 350 at expiration. The maximum profit equals the width of the strikes minus the debit paid. That amounts to $10 minus $3.30, or $6.70. Multiply that by 100 and you get $670, achieved if Tesla falls below 340 at expiration.

On Monday morning, Tesla shares fell 2% to 353. One could also consider using the 340 and 330 put strikes using the same May 15 expiration.

Unlike shorting shares outright, the risk here caps at the debit paid. That makes it a particularly useful structure for a stock like Tesla. Further, it trades well above its fundamental value and could still move sharply higher.

Watch Out For Earnings

Investors who enter this spread will also be taking on exposure to Tesla’s first-quarter earnings, scheduled for April 28. Meanwhile, earnings estimates come in at 40 cents per share on revenue of $23 billion.

Shares of Tesla are currently trading below both their 50-day and 200-day moving averages. Also, its Relative Strength Rating stands at 38, according to IBD Stock Checkup.

Steven Bell is a writer and trader based out of Vancouver, British Columbia. He is the author of IBD’s Income Investor column, focused on shedding insight on low-risk, underfollowed stocks.

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