Tesla Stock Below Moving Averages, Bear Call Spread Option Explored

Mark Eisenberg
Photo: Finoracle.net

Tesla Stock Continues to Underperform in Strong Market

Tesla stock has been struggling to keep up with the market, even in the midst of a strong bull run. Currently, the stock is trading below its 21-, 50-, and 200-day moving averages, indicating a downward trend. According to the IBD Stock Checkup, Tesla is ranked 8th in its industry group, with a Composite Rating of 42, an EPS Rating of 68, and a Relative Strength Rating of 16, all pointing towards bearish signs.

A Strategy for Capitalizing on Tesla’s Weakness

To take advantage of Tesla’s weakness, experts are recommending a bear call spread strategy. This strategy involves selling an out-of-the-money call option while simultaneously buying a further out-of-the-money call option. In this case, traders could sell the 215 call and buy the 220 call with an expiration set for April.

By implementing this spread, traders could receive a net credit of approximately 80 cents, which translates into a maximum potential gain of $80. However, it’s important to note that there is also a maximum potential loss associated with this strategy, which would amount to $420. This loss is calculated by subtracting the premium received from the difference between the strike prices and then multiplying by 100.

Maximizing Profit and Managing Risk

To maximize profit using this bearish strategy, Tesla would need to close below 210 on the specified April date. If this occurs, traders can retain the $80 option premium. On the other hand, if Tesla closes above 215 by the specified date, the maximum potential loss of $420 would be incurred.

To manage risk, traders could set a stop loss if Tesla trades above 205 or if the spread value increases to $1.60. This would ensure that losses are minimized if the stock price moves in an unfavorable direction.

Understanding the Risk and Importance of Research

It’s important to remember that options carry their own set of risks, including the possibility of losing the entire investment. This bearish position has a delta of -4, which equates to being short approximately 4 shares of Tesla stock.

This overview is meant to provide educational information and is not intended as a trade recommendation. It is crucial for individual investors to conduct their own research and consult a financial advisor before making any investment decisions.

Analyst comment

Negative news: Tesla stock continues to underperform in a strong market, indicating a downward trend. Analysts recommend a bear call spread strategy to take advantage of Tesla’s weakness. Traders could receive a net credit of 80 cents but also face a maximum potential loss of $420. To manage risk, traders could set a stop loss if Tesla trades above 205. Options carry their own set of risks and investors should conduct their own research and consult a financial advisor before making any investment decisions.

As an analyst, it is expected that the market for Tesla stock will continue to be weak, with the stock underperforming and indicating a downward trend. Traders implementing the recommended bear call spread strategy could potentially gain $80 if Tesla closes below 210 in April, but there is also a risk of incurring a maximum potential loss of $420. It is important for investors to carefully manage their risk and conduct thorough research before making any investment decisions.

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Mark Eisenberg is a financial analyst and writer with over 15 years of experience in the finance industry. A graduate of the Wharton School of the University of Pennsylvania, Mark specializes in investment strategies, market analysis, and personal finance. His work has been featured in prominent publications like The Wall Street Journal, Bloomberg, and Forbes. Mark’s articles are known for their in-depth research, clear presentation, and actionable insights, making them highly valuable to readers seeking reliable financial advice. He stays updated on the latest trends and developments in the financial sector, regularly attending industry conferences and seminars. With a reputation for expertise, authoritativeness, and trustworthiness, Mark Eisenberg continues to contribute high-quality content that helps individuals and businesses make informed financial decisions.​⬤