Consider buying Tesla the smart way

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Elon Musk is a revolutionary on many fronts. Solar City, SpaceX and Tesla are just three of his ideas. He does not think small. And that gets him a lot of attention. In the press, from potential customers and from short sellers.

Tesla ($TSLA), the stylish electric car company, has been the biggest focus of the three in the media lately. With the launch of the Model 3 there came a flood of pre-orders. So many that the short sellers started lining up, I guess thinking that either they would not possibly be able to deliver, or that their cost structure would go through the roof and they would need to raise capital. That happened last week, causing the stock to drop all of about nothing.

Now it is time for the company to just build and deliver cars. And it may be time for you to consider buying the stock. The chart below shows the price action in the stock over the 12 months. Outside of the drop with the market at the start of the year into the February low, it has moved sideways in a $60 range. In fact it has been in this range since the start of 2014. That started after a monstrous run higher off of a base around 30.

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The recent price action since that February low bounced off the top of that range again. From there the pullback retraced 50% of the move up and now seems to have reversed. Should this continue it creates an AB=CD pattern that targets a move to 330. This would gain some confidence on a move over the November-December consolidation over 240. And there is a natural stop loss now at the May low just over 200.

Momentum is building as well. The RSI is rising to the mid line with the MACD crossing up. Again, continuation of the momentum build would also give more confidence. So what does an investor or trader do with this scenario, where you are faced with accepting 10% downside risk for a chance at all-time highs?

The options market can help. The company is not expected to report earnings again until August 3rd. One way to participate is to plan to be out before then. In this case buying the stock and a July 220/200 Put Spread for $8.50 gives protection for that downside to 200. Selling a September 260 Covered Call for $6.50 cuts that cost to $2.

As second method might be to avoid the stock altogether. A July 220/260 Call Spread give the upside to the top of the big consolidation and costs $10, one quarter of the range, and with risk limited to the cost of the spread.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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