Tesla Short Trade 2.0 – Analysis And Trade Structure.

*Shorting Tesla (TSLA) using stock options. My technical analysis and the structure of the trade.*

Welcome back to the blog. This is going to be my final blog post for the year and what a year it has been. In this post I am going to share with you my latest trade that I have entered and at the time of writing, it is my only open trade position going into the year end. I will show you my technical analysis for the shares in Tesla Inc, along with how I am structuring the trade using put option contracts.

Before I continue, let’s talk about the year 2020. We have seen ups and downs (downs and ups for stocks) in all markets and some previously unimaginable events in the financial markets. Global stocks fell more than 30% in some cases before completely reversing and recovering all losses before the year end. The price of crude oil went negative for the first time in history and many central bank interest rates are either negative or heading that way real fast.

Below are some key trades/strategies that I used this year and the blog posts that explain them in more detail.

  1. Reducing duration. Switching to short duration day/intraday trades really helped me through this year when volatility across all instruments increased to multi-year highs. Market price “chop” became a thing with daily price swings reversing any attempts at price trends and this made holding positions, especially speculative positions in FX, a lot harder. For me to remain positive and continue with account growth I specifically began to take profits off the table earlier and look for smaller moves in the markets.

2. Getting lucky with hindsight. In the second quarter of this year I spent a lot of time and effort and money chasing Dow Jones short positions which proved to be futile. I got very lucky and escaped multiple trades and weeks of volatility without actually ending up in the red however I certainly learnt some lessons. The main one being that 2020 has ignored all macroeconomic fundamentals and that no one can beat the power of the US federal reserve. I also have learnt to see signs of emotional bias within myself and I am hoping this can help me in the future to avoid chasing trades that might not be so lucky.

3. Shorting the FTSE100. Shorting the FTSE100 index back in July was one of my best trades of the year which consisted of multiple trade positions all entered based on simple support and resistance and trend following analysis. As I often say in many blog posts, keeping it simple is key and the trade positions I entered on the FTSE100 were all examples of this working in real time. I covered those trade in many blog posts which I highly recommend you read.

This year was also a first for me in terms of content creation. I published my first ever YouTube video which consists of 10 minuets of me analysing the FTSE100 index and identifying a possible trade entry which went on to produce more than 500 points of profit. The link to this video can be found below.

Shorting Tesla.

For those of you who have been following my blog for some time, you will be aware that I actually bought some Tesla put option contracts back in July of this year. I covered the pre-trade analysis of that trade in a previous blog post and also the trade management of that trade in a separate post. Both of these can be read by clicking on the links below.

https://diaryofafinancekid.com/2020/07/05/i-have-shorted-tesla-tsla/

https://diaryofafinancekid.com/2020/07/22/converting-my-tesla-short-trade/

Once again, I believe that now is the time to short Tesla. In summary, I believe the stock price has climbed high enough to warrant “over bought” status and combining technical analysis with the fundamental analysis of the stock (which has not changed since my last Tesla short trade), the current price level looks good to be selling at.

Let’s start by looking at two price charts for Tesla Inc. (TSLA) and I will talk you through my technical analysis.

Technical analysis.

TSLA daily timeframe price chart A

This first chart shows the daily timeframe price chart for this year with a few technical indicators applied. The first point of analysis you will see is the upper bullish trendline drawn across the previous major highs of the year, the highs in February and the previous highs in late August. As you can see, this trendline now interacts with price at just below the 700.00 price level, if this trendline holds then that is a good resistance for price.

Another technical indicator you will see on this chart is one that I don’t ever use in my normal trading strategies. That is the Bollinger Band indicator you can see in pink. Bollinger Bands use a moving average if price and are created using standard deviations of that average to create upper and lower bands for which price should remain within.

As you can see, price has now touched the upper band and is bouncing off of it. This upper Bollinger band should act as a resistance and I believe when trading using daily timeframe charts on stocks with a long term outlook, the Bollinger Band can be a useful technical indicator.

TSLA daily timeframe price chart B

This next chart shows the last 6 months of daily price data for Tesla stock. I have kept the same indicators and drawings on the chart but I have added a few extra details including measuring the % movements for the breakout of each wedge consolidation and % movement of the subsequent retracement that followed.

Looking at the bullish breakout that happened in August, the stock price of Tesla gained more than 232 points/85% before retracing around 35% before it entered its next phase of consolidation which happened to be another price wedge.

Looking at the bullish breakout of this next wedge that occurred in November, the stock price has gained more than 287 points/72% and I am now predicting another retracement. Using the previous retracement of 35% this gives me a target price for short positions of around 450.00. However, there is a price support/resistance zone at 500.00 and I believe this large psychological number could be very popular amongst traders and investors. I feel that could see some large liquidity if price retraces that far. You can see the popularity of the 500 level within the implied volatility of Tesla options which I will show you later in this post.

Key fundamentals.

A lot of the buyer demand for Tesla stock comes from huge optimism in the future potential of the company and a lot of this in recent months came from the possible including of Tesla within the S&P500 index. This has now happened, as of Monday this week (21st December 2020) the stock index now includes Tesla which makes up 1.69% of it.

However, the inclusion of the stock in the S&P500 index should now have the opposite effect on the stock price of Tesla in the short term because that is now no longer included in the “optimism” calculations and price forecasts of investors. It is a classic case of buy the rumour, sell the fact and this is reflected in the stock price movements this week. On it’s first day in the index, Tesla shares declined around 6%.

Tesla vs the world!

Tesla market cap vs market cap of other major car manufacturers.

Another huge red flag for me is the current market capitalisation of Tesla Inc. compared to all of the other major car manufactures across the entire world. Tesla market cap is only $7bn less than all of the top 10 car manufacturers across the globe… combined! This is a ridiculous valuation.

Other key metrics that show how ridiculous the Tesla stock price is are the P/E (price/earnings ratio) and the annual net profit for the company which are:

  • Tesla P/E = 1279
  • Tesla 2019 Revenue = -$862 million
  • Tesla 2018 Revenue = -$1 billion

To put that in to perspective, the P/E ratio of Apple Inc. (AAPL), which had an annual profit of $57.4 billion, is currently 39.98.

In short, the P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings. A high P/E could mean that a stock’s price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings.

Tesla short trade structure.

Now we have established why I am shorting Tesla, let’s look at how I am shorting it. If you have read my previous 2 blog posts that followed my last attempt at shorting Tesla, you will know that I am a fan of using stock options to do so because they allow me to fix my risk whilst riding out any volatile between my time of entry and my intended trade timeframe.

I have bought 100 shares March 2021 put options. The various details of the trade are outlined in the image below and it includes the premium (price paid for the options), strike price, date of expiry, time to expiry (in days) and the implied volatility at the point of purchase.

Let’s run through the main details and I will explain what they mean.

  • Options Type – A put option is the right to sell a stock at the strike price on the date of expiry but not an obligation to do so. In this case, on the 19th March 2021 I will have the right to sell 100 shares of Tesla @ $520 per share. If Tesla is trading below $520 on or before the expiry date then I will make money, if it is trading above $520 on the date of expiry then they will expire worthless and I will have lost my premium paid.
  • Premium – The price paid per share to have the option to sell at the expiry date.
  • Strike Price – The price at which a put or call option can be exercised.
  • Implied Volatility – Options are complex derivative instruments that use the underlying stock price, stock volatility and time to expiry to calculate the price of the options contracts. Increased volatility means options become more expensive and thus you pay a higher premium when trading.

The following image shows the potential profit & loss for my Tesla options trade depending on the stock price at expiry.

Tesla Put options trade – PnL.

As you can see by the shape of the profit and loss line, my downside is fixed at the total premium paid but my upside potential is almost infinite depending on how low the stock price of Tesla might go between now and the date of expiry. This is one of the main reasons why I chose to short Tesla using options.

I doesn’t matter if the price of Tesla stock goes to $1000 next week before crashing down to 450, my risk is still the same and so is my reward. This allows me to stay in the trade with out trying to limit myself with position sizing.

There is some more detail on the various types of options trades below.

What are options?

Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures contracts, the holder is not required to buy or sell the asset if they choose not to.

Call options allow the holder to buy the asset at a stated price within a specific timeframe. This is a bullish bet or a long position betting that the value of the asset will increase.

Put options allow the holder to sell the asset at a stated price within a specific timeframe. This is a bearish bet or a short position betting that the value of the asset will decrease.

The image above shows the 4 main types of options trades and how profit and loss is effected depending on the underlying price of the asset. A long put option is the standard bearish options trade used for profiting from a decrease in the price of an asset. In the case of my trade, the Tesla stock price is the underlying asset.

End note.

I wanted to end this year with a short recap of what I got up to in the world of trading but also share with you another more complex trade that you may not know about and therefore will learn something new.

If you want to learn more about option contracts and options trading strategies then I recommend you buy a book called The Options Playbook by Brian Overby.

No one knows what might happen next year in the financial markets but US dollar weakness and quantitative easing seems to be two common themes. I would also pay attention to interest rates and perhaps look at some income generating stocks that might be trading below their fair value, these are considered defensive and will keep your portfolios growing whilst the markets sort themselves out.

I like the look of GlaxoSmithKline Plc (GSK) and I previously spoke about that stock in a blog post earlier this month. You can find that one by clicking on the link below.

https://diaryofafinancekid.com/2020/12/03/my-next-stock-pick-gsk/

And finally, may you all have a very merry Christmas and a happy and prosperous new year! If you follow me on instagram, you will know I love drinking wine and you will certainly see a lot of that featured on my stories over the next week. Give me a follow and say hi!

If you are interested in learning my personal trading strategies, please consider my Mastering The Markets – Retail Trading Course. Head over to my Trading Education page to check out all of my education packages and the deals available.

Useful Links:

All my technical analysis is done using the TradingView platform. You can get access via the link below.

https://tradingview.go2cloud.org/SH3bP

My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.

https://www.icmarkets.com/?camp=38537

FTMO Trader Funding Programme.

https://ftmo.com/?affiliates=335

Thanks for reading and please don’t forget to LIKE, SHARE and FOLLOW my blog to stay up to date with the latest market analysis and trading education posts.

DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.

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