Tesla's Post-Election Rally Unwinds, Offering Trading Opportunities
As the post-election rally in Tesla Inc.'s (TSLA) shares rapidly dissipates, market analysts are identifying a potential trading opportunity.
Despite the recent correction, Tesla's shares remain significantly overvalued compared to its earnings prospects within its peer group of mega-cap technology companies. This suggests a potential downside risk.
Furthermore, Tesla's stock has detached from the fundamentals of the car industry due to speculation that President Donald Trump's prospective return to the White House and Elon Musk's increased political influence would accelerate Tesla's ambition for developing fully self-driving vehicles.
Michael Purves, CEO of Tallbacken Capital Advisors, recommends purchasing Tesla put spreads, such as the $300/$250 spread expiring in May. He notes that implied volatility has recently declined, reducing the cost of options protection.
"While this trade can be executed as an outright directional trade, we also believe it can serve as a quasi-market hedge," Purves said. "In the event of a stock market selloff, a momentum-driven stock like Tesla tends to be strongly sold off."
"However, if the market maintains its sideways or upward trend, this trade still offers a favorable risk-return profile," he added.
Tesla shares currently trade at approximately 110 times projected earnings, significantly higher than the Bloomberg Magnificent 7 Price Return Index (average of 30 times) and the S&P 500 Index (average of 22 times).
In addition to valuation concerns, Tesla is also facing technical weakness. Shares declined as much as 6.2% on Tuesday, their fifth consecutive day of losses. The stock has now fallen below its crucial 100-day moving average.
Options traders have also become less bullish on Tesla after initially betting that the stock would rally under a Trump presidency. The premium for one-month call options over put options has now disappeared for the first time since the election.
In recent days, volatility has increased after a steady decline since the beginning of the year, indicating that traders are not only refraining from acquiring call options but are also paying higher premiums for contracts that protect against further downside potential.
Tesla's stock has retreated approximately 30% since reaching an all-time high in mid-December, eroding $468 billion from its market capitalization. The decline has been fueled by a string of negative news, including weak fourth-quarter results and disappointing sales figures from Europe, China, and California.