I was talking with my brother last night and he decided to let me know that he has owned Tesla (TSLA) since it was $29. It’s safe to say that I’m pretty envious of his position. He is a bit more of a risk taker than I am when selecting stocks, usually going with what is hot, like the marijuana stocks, the 3D printing stock, etc. Some of those have come back to bite him in the rear however. Me, I like to play it according to the fundamentals, taking a look at the balance sheet, cash flow statements, etc. Hence I’ve never been able to get behind Tesla. It just never seemed right to me to own it, and still doesn’t.

The company was set to report earnings after the bell on October 26^th and I was getting set to make a bearish trade in the name. I just didn’t like how things were going at the company, including its acquisition of Solar City, missing production targets, etc. It just felt primed and ready for a move lower in my opinion at the time.

Also, on a technical basis as you can see from the chart below there is a very well defined downtrend in the name starting from the beginning of April with some support around the $188 level. The stock bounced back when it hit the $188 level twice already but keeps getting rejected by the purple line pointing down each time. So naturally I wanted to ride this trend going into earnings. The one thing that could have gone against me on earnings was that 23.9% of the stock is floated short, so if there was a sniff of a good number it would have shot up.

When the stock was trading at $202 I was willing to take the chance of writing a December $235 call for $2.46 to subsidize the purchase of a December $190 put at $7.78. To subsidize it even more I ended up writing two of the December $170 puts for $2.95. I was willing to write two of the $170 puts so that I can purchase at least 100 shares of the stock at an 18.8% discount from where it was trading at that day. If the stock just lands somewhere between $190 and $235 come December then I would net $0.58 from the trade.

The stock has just acted poorly since April but when earnings came around it jumped up nearly 5% but nowhere near that $235 mark, and it just has kept climbing down steadily. It has been trading very close to oversold territory since early September relative to the rest of the market which continues to move up so that alone tells me there is trouble right now in the name.

Some of the drama surrounding the third quarter report was taken out of the stock as they pre-announced the delivery numbers prior to the report, so I felt some of the bullish winds were taken out of the proverbial sails. The one thing that was still in question for me anyway was whether or not Mr. Musk requires anymore capital raises and how it would be received by investors. Since he is always active on his twitter account I felt that he could drop that bomb at any moment in time but I wasn’t going to let that concern sway me from making the trade.

Like I said earlier, I’ve always wanted to own Tesla but I was never going to own it in the $200 range. The valuation on the stock is just ridiculously expensive. Yes the earnings growth rate looks really high, but that is off a very low basis and we all know that the auto manufacturing business is very capital intensive. Also, with President Elect Trump taking the White House shortly we know that alternative energy is not on his agenda so the Solar City (SCTY) purchase made by Tesla was perhaps a little too early so there may be some heavy value destruction for shareholders coming with that deal. It all just smelled funny to me so I had to take this bearish position in the stock. Thanks for reading and I look forward to your comments!