Tesla Stock: Trading Opportunity Emerges Amid Sell-Off
Following a sharp post-election rally, Tesla Inc. shares have embarked on a rapid decline, creating a potential trading opportunity for investors.
Despite the recent rout, Tesla's valuation remains elevated compared to other mega-cap tech firms, suggesting further downside potential. The stock has decoupled from its automotive fundamentals, fueled by expectations of President Donald Trump's re-election and Elon Musk's political influence.
Market watchers like Michael Purves, CEO of Tallbacken Capital Advisors, recommend buying Tesla put spreads, such as the $300/$250 spread expiring in May. Implied volatility has declined, reducing the cost of options protection, particularly for spreads where lower strike sales offset a portion of the overall expense.
"This not only provides a directional trade but also acts as a quasi market hedge," Purves explains. If the broader market experiences a selloff, momentum and sentiment-driven stocks like Tesla tend to face significant selling pressure. Conversely, if the market continues to trend sideways or higher, this trade offers a favorable risk-to-return profile.
Tesla's current price-to-earnings ratio of 109x dwarfs the industry average of 30x for the Bloomberg Magnificent 7 Price Return Index and 22x for the S&P 500 Index. Additionally, the stock exhibits technical weakness, falling below its critical 100-day moving average and extending losses for five consecutive sessions.
Options traders have become less optimistic after initially betting heavily on Trump's election benefiting Tesla. The premium for one-month calls over puts has vanished, signaling a reversal in sentiment. Volatility has also picked up after a steady decline since年初, indicating that traders are not only shunning call options but also paying more for downside protection.
The electric vehicle maker's stock has shed 32% since its mid-December peak, erasing $484 billion in market capitalization. Negative news, including weak fourth-quarter results and declining sales figures in Europe, China, and California, have further contributed to the downturn.