Tony Zhang, OptionsPlay chief strategist, joins 'Power Lunch' to discuss Zhang's trade around Tesla.

Austin

Tesla's market capitalization is approaching $1.5 trillion, prompting concerns about overvaluation from investors such as Michael Burry. Tony Zhang, chief strategist at Options Play, notes that Tesla is beginning to underperform relative to the S&P 500 and highlights slipping fundamentals as reasons for caution.

Zhang recommends a bearish options strategy, specifically a put debit spread with a January expiration, to capitalize on potential downside. He emphasizes that current market conditions and inexpensive options pricing make this a favorable time for such a trade, offering a nearly three-to-one risk-reward ratio if Tesla's stock declines.

Tesla headed for a decline?

With Tesla's market cap now nearing one and a half trillion dollars, some people are questioning whether the company is overvalued and Michael Burry is among them. The big short investor writing in a weekend blog post that the company is, quote, ridiculously overvalued. Our next guest has some thoughts on that as well. And he says Tesla faces some serious challenges heading into the new year. Let's bring in Tony Zhang. He's the chief strategist at Options Play. I guess I wouldn't say you're shorting this in options parlance, Tony, but what are you doing exactly for this trade? Yeah, well, I am taking a bearish position here, and I think the recent rally here to that double top around that 470 level, now that we've seen that the stock has pulled back a little bit, we're starting to see some underperformance relative to the S&P 500. I think the timing on this looks quite strong here to take some bearish exposure. As you said, you know, the stock is ridiculously overvalued, but I think we could argue that for pretty much any time over the last few years that the stock has remained ridiculously overvalued. So I think that itself alone is not necessarily a good reason to take a bearish exposure in this particular stock. But you have to look at the timing on this. And I think the stock starting to underperform here is starting to show some cracks here alongside with the fundamentals really starting to slip here this year with Tesla. So what's the trade? Yeah, so I'm looking at going out to the January expiration, and I'm looking at using a put debit spread because options on Tesla right now are incredibly inexpensive. So I think you can buy some downside protection for cheap by using a put spread. So I'm going out to that January expiration. I'm looking at buying a 425 370 put spread earlier today, you can pay a little under $17.50 for that debit spread right now with the stock rallying nearly 4% on today's price action, I think you could probably pick it up for even a little bit under $17. This way, you could basically have a nearly three to one risk reward ratio. If we see a little bit of volatility ahead for the overall markets between now and that January expiration, and we see a bit of a pullback here for Tesla. All right, I'll be thinking about you if that price action moves to the downside. Tony, thanks for joining us today. Appreciate it.

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