We previewed TSLA’s 2nd quarter earnings yesterday (included below). The key point about TSLA is that it’s a story stock, trading more off sentiment and psychology in the near-term than any fundamental valuation underpinning. That’s neither good nor bad. It is what it is.
With that in mind, the earnings report tonight is important from a momentum standpoint. While consensus estimates are expecting a 20 cent loss, the real key is how the company sets the table for the second half of 2013. If you asked me what I thought of the stock here, I’m getting skeptical from a valuation perspective. As someone who liked the potential when this was a sub-$5 billion market cap company to start the year, I’m much less enthusiastic about further stock appreciation for a $16 billion market cap company, about 1/3 the size of GM.
Bloomberg had an interesting article today detailing the future of the hybrid and electric car market, but my main takeaway was this forecast:
So far, the green-car price war amounts to more of a skirmish than an all-out assault because sales of the battery powered cars are so small. Even with all the deals on these high-tech marvels, battery-powered cars will remain a slender slice of the U.S. auto market, according to LMC.
Pure electric vehicles, such as the Leaf and Tesla Motors Inc. (TSLA)’s Model S, will remain less than 1 percent of the market in 2020, while plug-in models like the Volt and Ford Fusion Energi will command just 2 percent of the market by then, LMC forecast yesterday. Gasoline-electric hybrids, such as the Prius, will grow to 5 percent in seven years from 3 percent now, Schuster said.
Investors in TSLA are obviously more optimistic that TSLA cars will make up far more than 1 percent of the market in 2020. While it’s an intriguing discussion, in the short-term (6 months or less), none of this has much impact on the stock.
So are there any trades that we like for earnings? TSLA is down about 6% today, right to its mid-July high around $133. The obvious resistance going forward is yesterday’s high near $146, while near-term support is around the 50 day moving average near $115. In that context, here are several structures that we’ve looked at and our thoughts on each one:
Selling the earnings move (assuming 50 day as potential support and previous high as potential resistance):
TSLA (133.50) Buy the Aug 100/130/160 call fly for 14.50
- Buy 1 Aug 100 call for 35.00
- Sell 2 Aug 130 calls at 11.50 (23.00 total)
- Buy 1 Aug 160 call for 2.50
Breakevens on Aug expiration:
– Profitable between 114.50 and 145.50 with max gain of 15.50 at 130.
– Losses of up to 14.50 below 114.50 and above 145.50 with max loss below 100 and above 160.
Rationale and Risk: This is essentially selling the 130 straddle with defined risk. The problem with this structure is that the risk reward is too close to 50% on the payout vs risk for us to consider. This is a crazy stock and although it’s very possible that it does an inside move within those support and resistance levels, the risk with this trade is that it’s also very likely that it could move very close to those support and resistance levels. Meaning, the likelihood of the stock staying near the 130 strike aren’t great enough to risk what would happen if it went above or below the support and resistance, and the payout from making a little bit of money on it being at say, 120, or 140 isn’t enough reward on the fly to take that risk. (There’s no real reason for the stock to hover at 130.)
Here’s another one in the same vein but going out to Sept:
No Existing Position, But Want to Take Advantage of High Volatility and Expect Range of 110 to 140 over the next 6 weeks:
TRADE: TSLA Buy Sept 150/125/100 Put Butterfly for $7.50
- Buy 1 Sept 150 Put for $24.10
- Sell 2 Sept 125 Puts at $9.55
- Buy 1 Sept 100 Put for $2.50
Break-Even on Sept Expiration:
-Profits of up to $17.50 with stock between 107.50 and 142.50 on expiry, with max profit of $17.50 with stock at $125 on expiry
-Losses of up to $7.50 with stock between 100 and 107.50 and between 142.50 and 150, with max loss of $7.50 with stock at or below 100 or at or above 150
Rationale and Risk: This is a little safer in that it’s not risking as much and not “calling the shot” on the earnings move as much as the August trade is. The risks of this trade are obvious though. TSLA goes to new highs and you’re out 7.50. This is a slightly bearish structure but in reality what it is is a bet that TSLA has put in its high for the time being and is likely to stay in this area or even better drift lower. If that’s your perspective on the stock this is a nice structure.
Setting up for the beginning of the end of the mania (short with very defined risk):
TSLA (134.50) Buy the Aug 130/115/100 put fly for 3.00
- Buy 1 Aug 130 put for 7.40
- Sell 2 Aug 115 puts at 2.70 (5.40 total)
- Buy 1 Aug 100 put for 1.00
Breakevens – profitable below 127 and above 103 with max gain of 12 at 115. Losses up to 3.00 from 127-130 and 103-100 with total loss of 3.00 below 100 or above 130.
Rationale and Risk: This is a way to target the 50 day moving average for a an earnings report that isn’t enough to continue the rally in the stock. 115 is an obvious pullback point in the stock on weakness and would likely, at least temporarily, hold unless the report was a disaster. The problem with this trade, as with any trade that is out-of-the-money is that you really need to be right on direction and therefore, because you are paying for OTM premium, your odds of success are below 50%. If you get that right this trade is likely to do really well and the payout is favorable from a risk reward perspective. If the stock is up, you are screwed. Again, we have no idea how TSLA would react to its earnings, but if someone put a gun to our head and said, “short TSLA” this is probably how we’d do it.
You’ll notice alot of flies here. The reason for that is that vol is quite high in the name (obviously) and directional bets straight up are crazy expensive. You could very well be right on direction but get so murdered on vol coming in after earnings that your winner becomes a loser. The flies defend against that by laying off alot of the premium in the form of the middle strike being sold twice. The in-the-money flies are technically short premium and are basically betting on that vol collapse being more than the move from earnings.
We get alot of questions on how to short or go long TSLA. We don’t get alot of questions about how to hedge a TSLA long. We assume there are some of you out there that are long (crazy like a fox) and if that’s the case, the next couple of structures are for you.
For Long Holders to Consider:
1. Long the stock and want to add some juice to your long in the event of a 1 day pop to new highs (greedy):
TRADE: TSLA Long (133.50) Buy Aug9th 150/160 1×2 Call Spread for 20c credit
- Buy 1 Aug9th 150 call for 3.40
- Sell 2 Aug9th 160 calls at 1.80 each (3.60 total)
Break-Even on Aug 2nd Expiration:
-Profits of stock btwn 133.50 and 160. If stock 160 or above your stock is called away but you have made an extra 10 dollars (and 20c) so you have essentially sold the stock at 170.20. If stock is below 150 you collect 20c. If stock is between 150 and 160 you’ve made doible on your long for that part of the move (e.g. @ 155 you’ve made an extra 5 dollars on your long)
2. Long the stock, don’t want to sell but worried about the event:
Theoretical TRADE: long TSLA (133.50) Buy Sept 120/100 put spread – sell Sept 160 call for a 40c credit
- Sell Sept 160 Call at 5.60
- Buy Sept 120 Put for 7.70
- Sell Sept 100 Put at 2.50
Break-Even on Sept Expiration:
-Profits of stock btwn 1 and 230, stock called away at 160, up 20%
-Losses of stock btwn 133.50 and 120 and then again below 200.
Rationale: This is a great structure for those worried about a breakdown to that psychologically important level of 100. What’s nice about this strucure is you’d be giving up your stock at 160 to finance the protection and that’s a decent level that’s not too tight and hopefully good enough reward.= for hanging in there with the long.
Original Post Aug 6, 2013: $TSLA Q2 Earnings Preview
Event: TSLA reports their fiscal Q2 earnings on August 7th after the close. The options market is implying about a 12.5% one day move, which is above both the 4 qtr avg of about 11.25% and the 8 qtr avg of about 9.75%.
Sentiment: Wall Street analysts are somewhat positive on the stock, with 8 Buys, 3 Holds and 3 Sells, but the stock has moved so quickly that the average 12 month price target of around $118 is actually 15% below the current stock price. The stock has risen from around $55 prior to the last earnings report to around $145 today, an incredible move over the last 3 months.
I’m amazed that short interest is still over 20% of the float. Here is the chart of total short interest in TSLA:
So it is nearly half of where it was in the spring, but still substantial given how large the move higher has been.
Holders: Dan has touched on this before, but it’s worth noting that the top 5 holders of the stock own more than 50% of the outstanding stock (all figures according to Bloomberg):
- Elon Musk owns 23.76%
- FMR LLC (Fidelity) owns 14.43%
- Capital Group owns 6.44%
- Morgan Stanley owns 4.90%
- Daimler AG owns 4.09%
Options Open Interest: Open interest favors puts versus calls by a ratio of 1.5 to 1, again quite a surprise given how much the stock has risen this year (up more than 300%). In the past month, though, calls have been slightly more active than puts. The lines close to current spot that have the most open interest are the Aug17th 130 and Aug17th 150 calls, the Aug17th 130 puts, the Sept 130 calls and Sept 130 puts, the Dec 135 calls, and the Jan14 130 and Jan14 140 calls. The bulk of the put open interest is at much lower strikes, so they’re mostly worthless.
Price Action / Technicals: TSLA has not breached its 50 day moving average since it first broke out above $40 on April 1st. The stock has been stair-stepping higher ever since. I discussed TSLA’s chart structure 2 weeks ago in my Chart of the Day post. There were some signs of caution, but the stock has made new all-time highs since that post. The daily chart:
The mid-July high comes in around $133, which is initial support. More important support is around the 50 day moving average, which is rising and currently around $117. Of course, with the stock at all-time highs, there is no resistance on the upside.
Fundamentals: This is not a company that’s going to be valued by the market on traditional metrics. Investors are paying up for the stock because they view the technology and the platform as revolutionary. Whether that turns out to be the case remains to be seen, but that’s the real reason for the stock’s ramp this year. Not its $1 of expected earnings in 2014.
The real question for TSLA is not on the demand side of the occasion but on the supply side. Demand is robust in the U.S. (more than 20k units of the Model S on an annualized basis), and growth opportunities in Europe and China are evident. The real key is whether TSLA can meet its production targets for the Model S by the end of 2013.
That’s obviously a great problem to have, and many investors are probably long-term in nature, confident in Elon Musk to figure it out. But the shorter-term traders will want to see results this quarter, particularly given the stock’s move year-to-date.
The speed of the ramp up on the production side likely has more urgency today since competition is set to increase in the coming 18 months (BMW news last week was just the start). But TSLA has built a fantastic car (stellar customer reviews attest to that), so it has a major first mover advantage in the marketplace.
Volatility: IV30 is near all time highs, which makes sense considering the move higher in the stock between last earnings report and this one:
Sept vol stands at about 73, and will likely go below 60 following the event. Vol in TSLA actually used to see the 40’s and even 30’s during quiet periods but that’s changed since it became such a story stock.
Trades: Stay tuned for our thoughts on potential trade structures that we’ll be posting tomorrow ahead of the event.