Name That Trade – $TSLA: Recharging Station

by Dan July 16, 2013 3:49 pm • Commentary

Last night on Fast Money on CNBC we opened up the show with a discussion (below) about the massive year to date gains in stocks like TSLA, and the questioned posed to the esteemed panel was if we see continued upside?  My simple answer was and remains that the TSLA story has “legs” so to speak, and despite the eye-popping short term volatility in the stock, no one rally, or one retreat in the near-term will determine the long-term outlook for the stock.   Expanding a bit on the comment, I believe much like volatile story stocks before it (AMZN, NFLX GMCR), TSLA is not going to trade on valuation metrics for a very long time and the disconnect between traditional fundamental metrics should keep the stock volatile and remain an active traders dream.  I guess the most important point I wanted to get across to the viewer, was no matter whether you buy it at relative highs, or on dips as a trade/ investment, for most average investors, stocks like TSLA should be thrown in that “speculative” part of your portfolio that you allocate a small amount of capital too, meaning risking to a large degree what you are willing to lose.

Panelist Pete Najarian echoed a similar view and he suggested that he would play from the long side with options on pullbacks. That would be the way to define your risk, but with implied volatility through the roof one would have to be very careful how they spend their premium in an effort to avoid catching the bounce but having the vol suck cancel gains.  The chart below shows today’s increase in at the money implied vol in TSLA on the what is currently a 15% sell off.

TSLA 2 day Implied Volatility from Bloomberg
TSLA 2 day Implied Volatility from Bloomberg

The chart below shows the 30 day at the money implied volatility (blue line) over the last year vs the 30 day realized volatility (white line).  What is apparent from the chart is that IV has been steadily rising on the stocks ascent above $100, right up to yesterday’s highs.

TSLA 30 day Implied Vol (bliue) vs 30 day Realized Vol (hwite) from Bloomberg
TSLA 30 day Implied Vol (bliue) vs 30 day Realized Vol (white) from Bloomberg

The stock has earnings coming up, but these have been unconfirmed, with the estimated date being 7/24. And if the stock has any more days like today we can expect volatility to be off the charts heading into the earnings event. So playing for a quick reversal gets tricky because you don’t want to be left holding the bag, as far as premium goes, after the event.

Trying to catch the first real move down could be a bit of a fools errand, which is why we want to see the stock get oversold and approach the level that I mentioned last night ~$100, or the 50 day moving average, which should serves as the first line of support.  I think it is important to note that on the secondary that the company priced in May at ~$92, CEO Elon Musk bought about $100 million worth, this should also be a level of psychological support among investors.

Given the high level of IV and the fact that the earnings event which should fall in Aug expiration will keep short dated IV elevated, long premium trades look dicey at best, and we are likely to Sell put spreads or look at near or in the money call flys to play for a bounce.

Stay Tuned, this one is on our radar.