The recent short-cover rally in Tesla stock provides a better price position to take advantage of a further pullback in TSLA.
Tesla (NASDAQ:TSLA) is in trouble. It is down $80 per share (40%) in the past month and a half and $260 per share (67%) since the high last April. And it’s becoming increasingly clear that China – the market the company once seemed to depend on for survival – may end up posing even more problems for Elon Musk in the weeks and months to come.
In October, Morgan Stanley analysts said Tesla Motors is so dependent on the Chinese market that it is essentially a Chinese technology stock. “We estimate that Tesla derives as much as half of its profitability from the Chinese market,” they said noticed, “making the stock likely a derivative of a Chinese tech stock.” That’s a problem when you consider that Musk’s sales in China continue to fall and Musk’s business ties to China continue to spur congressional moves.
After China dropped a pro-Tesla subsidy program, deliveries of its Chinese-made cars peaked. lowest point in five months in December, leading TSLA to cut prices in the country for the second time in three months. As of today, prices are down 12% to 24% from September.
Is this a minor stock blip? History indicates that this may not be the case. In fact, in 2017, when the country significantly scaled back its tax subsidies, car registrations plummeted more than 95%, so Tesla’s trials may well begin. Even China has admitted that Tesla may have to take drastic measures to stay afloat, with the China Merchants Bank International (CMBI) proverb that “Tesla needs to lower prices further and expand its sales network in China’s lower cities amid aging models.”
Worse news for TSLA is that even if Musk does well with China, the new congress is expected to crack down on companies it believes are too closely tied to the communist regime this year. And Musk’s companies seem to be at the top of this list.
Last year, The Wall Street Journal published a news report that expressed “legislators’ concern … about the potential for China to access the classified information held by Mr. Musk’s scrupulous Space Exploration Technologies Corp., including through its foreign suppliers of SpaceX that may have ties to Beijing.” The piece went on to say that some lawmakers are troubled by “the lack of clear lines between SpaceX and automaker Tesla Inc.” These concerns led Representative Chris Stewart (R-UT), who sits on the House Permanent Select Committee on Intelligence, to call for classified briefings and Senator Marco Rubio (R-FL) to submit a bill that would seemingly stop the government from using contractors like Musk who maintain their ties to the Chinese Communist Party.
With the House and Senate split between Republican and Democratic control, you can expect regulating companies like Musk’s to become an even bigger congressional priority as it’s one of the few ways they can go in 2023 in a bipartisan way. to govern. As a senior fellow at the Chongyang Institute of Financial Studies put it, “Only by containing the subject of China is it possible for both sides to form a united front. This is not because China has really become the enemy that will destroy the US tomorrow morning, but because they cannot reach a consensus on many US domestic issues, they can only use China to change the subject.”
Kevin McCarthy’s election as Speaker of the House has only heightened concerns for TSLA’s future. He said this summer that he will suffer a congressional delegation to Taiwan and co-authored an op-ed with Rep. Mike Gallagher (R-Iowa), Chairman of the Select Committee on China, titled, “China and the US are in a cold war. We have to win it. That’s how we’re going to win it.” Expect him to work with Senator Majority Leader Chuck Schumer (D-NY) to address the perceived Chinese threat in some capacity.
Sure, some big players are looking to reverse the recent uptick in Tesla stock. Nearly 10,000 of February’s $100 puts traded around $3.00 on Friday. This equates to a bet of about $3 million that the sell-off in Tesla should continue.
The big buyer of these put options is positioning more pain in Tesla stock and a meaningful break from the $100 support level. Using bearish put options instead of shorting the stock allows the trader to participate in the trade in a certain risky way. downward trend.
Put all this together and it looks like TSLA is in a classic “damn if you do, damn if you don’t” scenario. Resolving its profitability problems in China may help it in the short term, but doing so could only fuel looming congressional regulatory crackdowns in a way that could significantly impact sales in its largest market, the United States. Investors would be wise to stay away until this dust settles.
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TSLA shares closed Friday at $122.40, down $1.16 (-0.94%). Year-to-date, TSLA is down -0.63%, versus a 4.20% increase in the benchmark S&P 500 index over the same period.
About the author: Tim Biggam
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His main passion is to make the complex world of options more understandable and therefore more useful for the everyday trader. Tim is the editor of the POWR options newsletter. Learn more about Tim’s background, along with links to his most recent articles.
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