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Tesla Motors (NASDAQ: TSLA) is changing the automotive landscape in a big way and has been one of the best-performing stocks in recent years, soaring more than 580% since January 2013.
As an industry disruptor, the company has utilized some unconventional strategies to grow, such as building its own electric vehicle charging stations and breaking ground on the largest battery factory in the world.
The company's latest tactic is an aggressive lease program with a 90-day "happiness guarantee."
Shares fell 6% Monday after a Wall Street Journal article about the leasing program cited data from WardsAuto showing a 26% decline in Q3 Model S deliveries in the U.S. CEO Elon Musk promptly took to Twitter, saying the figures were incorrect and that the company saw record sales in September. Shares quickly regained their losses.
I see this new leasing program as an immense opportunity for Tesla to get more drivers into its game-changing cars.
In August, I detailed why I believe Tesla will become the next great American icon, recommending a bullish trade. Those who followed my advice booked 46% profits in less than two weeks.
Now I see the next great long-side play in TSLA setting up, and traders stand to make an even higher return on this one.
The company is scheduled to report quarterly earnings on Nov. 5. Some analysts may be worried about declining U.S. sales. Part of the reason for the uncertainty has to do with the fact that Tesla reports sales quarterly, while most of the auto industry reports monthly.
But Musk's rush to defend sales figures so close to the earnings announcement makes me think he must have something good up his sleeve. In his recent tweet, he wrote North American sales rose 65% year over year in September.
Earlier this month, Tesla unveiled the Model D. The dual-engine, all-wheel drive vehicle has a maximum range of 275 miles per charge and goes zero to 60 in just 3.2 seconds. Throw in its driver assist and autopilot functions, and I think the D makes Tesla an even bigger competitor for luxury automakers like BMW and Mercedes.
Demand for luxury cars in the United States has been strong, up 8% for the year through September. The Model D should capture more of these drivers. Plus, the new guarantee will take away some of the hesitation for those considering the switch to electric, while up to 25% lower lease rates should help seal the deal.
I think next week's earnings report and analyst call should spur a rally in the stock as Musk gives details on the new program.
Turning to the chart, shares are currently in a bullish channel and recently bounced off support in the $220 area.
The first line of resistance is at the pre-gap closing level on Oct. 9, at $257, which is my inital upside target. My second target is the high from that day at $265, which is 11% above current prices.
Using a call option strategy, we stand to make 48% profits on a move to that level in less than three months.
TSLA Call Option Trade
Today, I am interested in buying TSLA Jan 205 Calls for a limit price of $40.50.
Risk graph courtesy of tradeMONSTER
This call option has a delta of 78, which means it will move roughly $0.78 for every dollar that TSLA moves, but it costs a fraction of the price of the stock.
The trade breaks even at $245.50 ($205 strike price plus $40.50 options premium), which is 3% above current prices.
If TSLA hits my $257 target, these call options will be worth at least $52. Once you enter the trade, place a good 'til cancelled (GTC) order to sell half of your calls at that price.
If my second target of $265 is reached, the call options will be worth at least $60. Place a GTC order to sell the remaining calls at that price.
Recommended Trade Setup:
-- Buy TSLA Jan 205 Calls at $40.50 or less
-- Set stop-loss at $20
-- Set initial price target at $52 for a potential 28% gain
-- Set secondary price target at $60 for a potential 48% gain in 79 days
If you have a question or comment about today's strategy, please send it to email@example.com.
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