Dan initiated a new trade on TSLA on Friday. Here was the key excerpt:
After such a massive run, and the new equity issuance, I would expect the stock to consolidate a bit, but I think the story is far from over. Despite the fact the future of this company is anything short of cloudy, I would be very surprised given their new found financial footing and the potential for geographic expansion that the story will end anytime soon. Who knows whether or not $90 will be a good entry point for bulls, but one thing is for sure, the high implied volatility in the stock will offer plenty of trading opportunities for options traders.
Indeed, so far this week, we have already seen a big move in implied volatility in TSLA, as the stock has moved lower the past two days. How has that impacted Dan’s trade, and does that change how we view the position going forward?
When Dan traded the June / Sept 100 Call Calendar in TSLA on Friday, the June 100 Call was priced at 74 implied volatility, and the Sept 100 Call was priced around 62 implied volatility. Fast forward to today, and the June 100 call is priced around 67 implied volatility, so down 7 points, but the option has lost half of its value (worth $2.50 now, vs. $5.00 when Dan sold it) since TSLA stock has sold off $5 and the option has decayed a bit. Meanwhile, the Sept 100 call is now priced around 64 implied volatility, so substantially higher than it was on Friday. As a result, the Sept 100 call is only down about $2.25, or from $10 to $7.75. The calendar is now worth $5.25 today vs. $5.00 when Dan traded it, solely because of the move in implied volatility.
If the volatility hadn’t changed, the call calendar should be worth less today than it was on Friday since the Sept 100 call has more delta (exposure to the stock’s underlying move) than the June 100 call. But since Dan took advantage of a wide volatility differential, he has more cushion than a pure stock trade, even if the directional move is not in his favor, as in this case.
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Original Post May 17th, 2013: Trade $TSLA: The Volatility Has Been Electric For Options Traders
Enis highlighted TSLA’s monster technical break-out in his Chart of the Day (below) back on April 3rd, a couple days after the company stated they would post their first profitable quarter in their history. Since then we have been fairly adamant about not trying to be contrarian in the face of what could be a a legitimately revolutionary story.
Back on April 5th I debated my Options Action cast mate Mike Khouw when the stock was about $41 as to the merits of the breakout and why the stock should still work given a variation of fundamental and technical factors.
That week I rode Enis’ coattails and bought a June 42/47 Call Spread (read here, closed here as we clearly did not expect the sort of price action to come) to play for further upside.
Again last week on Fast Money responding to a viewers question whether or not to short the stock I had the following to say:
Well here is the deal, the company appears to be hitting on all cylinders, but the stock is practically un-ivestable given the recent run. Trying to call a top of when this sort of price action will end is a fools errand. The top 5 holders, including the founder Elon Musk own close to 60% of the shares outstanding, top 10 holders own almost 75% of the shares outstanding, and more than 40% of the total shares are short.
Last night the company priced a 3.39 million share secondary and a convertible note that raised over $1 billion, of which founder Musk purchased himself 1 million shares.
After such a massive run, and the new equity issuance, I would expect the stock to consolidate a bit, but I think the story is far from over. Despite the fact the future of this company is anything short of cloudy, I would be very surprised given their new found financial footing and the potential for geographic expansion that the story will end anytime soon. Who knows whether or not $90 will be a good entry point for bulls, but one thing is for sure, the high implied volatility in the stock will offer plenty of trading opportunities for options traders.
MY TRADE: I want to play for near term consolidation, with resistance at that nice round number of $100, and set up to own longer dated calls that will capture the company’s next definable catalyst, Q2 earnings in late July.
TRADE: TSLA ($91.74) Bought June / Sept 100 Call Spread for $5.00
-Sold 1 June 100 call at 5.00
-Bought 1 Sept 100 call for 10.00
Break-Even on June Expiration: The main goal on June expiration is to have the stock at or near 100 and I will look to sell a higher strike call against the Sept 100 call that I own to play for further upside over the summer.
-If the stock is 100 or below I own the Sept 100 call for 5.00. Above that I will make the difference btwn the option I am short and the one that I am long. Below 100 I will be out the difference btwn the 2. But, my max risk is the $5 premium that I paid, see payout diagram below.
Trade Rationale: Short dated implied vol is through the roof, as the stock has had a massive run in the past month, in a very volatile fashion. However, after the secondary offering, there is now more potential supply, reducing the likelihood of big rips in the near future, and the secondary signals that there is clear demand from institutions for the stock, so pullbacks are more likely to be bought by those who missed the secondary. TSLA will remain a more volatile stock than most names, but we are selling June at 71 implied volatility and buying Sept at 61 implied volatility, so plenty of cushion.
Payout Diagram on June expiry:
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Original Post April 3, 2013: Chart of the Day – $TSLA Breakout
At first glance I thought the news out of TSLA this morning was a cruel April Fools joke aimed at the 50% short interest in the shares, but the company stated that their Model S sales have exceeded previous expectations, and they actually expect to turn a profit in the first quarter. The news sent TSLA up more than 20% at one point today, and it’s still up 16% as I write.
I actually had a bullish trade structure on TSLA that I took off last month for a profit when the stock stalled near the $40 resistance level. My profit was nothing compared to what I would have made if I still held the trade today. But hindsight is 20/20. The stock could have been down 20% today and my options would be worthless.
Leaving the past in the past, what’s more important is whether there is a good trade in TSLA going forward.
Here’s the lifetime chart:
The $40 level (annotated with a red line) was resistance in 2012 and 2013, and it gapped through that resistance level today, on its largest volume since the stock’s IPO (lower panel). I anticipate that $40 will be important support going forward, as all of those who missed out on buying the breakout will look for an entry in the 40-41 level. For now, the stock is in unchartered territory, and with on reference points, I have little inclination to initiate a new trade. But if the stock does offer a pullback opportunity to near breakout support, I’ll be ready to put on another bullish TSLA trade.