MorningWord 9/13/13: Crazier to Get Long or Short $TSLA up 386% YTD?

by Dan September 13, 2013 9:29 am • Commentary

MorningWord 9/13/13:   Last night on Fox Business, Elon Musk, the fairly brilliant CEO of TSLA, was asked the fairly odd question of a CEO of a publicly traded whether he thought his stock was a good short?  Here was his answer (watch here, 4 mins in):

“Our valuation right now is assuming a lot of good execution……in the past, I said it’s really crazy to short Tesla. Is it so crazy to short Tesla right now? I mean, it’s not as crazy, but I still think it’s probably not a good idea.”

This comment is in fairly stark contrast to a similar question that he received from the same interviewer a year ago (watch here, 4:30 in):

“I think it’s very unwise to be shorting Tesla…….there’s a tsunami of hurt for those holding a short position. It’s going to be very unpleasant. I advise people to exit while there is still time.”

From where I sit, and having nothing to do with the stock’s nearly 400% ytd gains, Musk is a genius and it is my belief that over the next few decades he will likely cause the sort of disruption or positive change that Steve Jobs can be credited to doing over the last couple decades.  But just because you are in love with a story, a product, a stock and CEO doesn’t exactly mean there won’t be opportunities to make money taking a slight contrarian short term view.

A couple weeks back, soon after TSLA made a new all-time high, it appeared that the upward momentum appeared to be slowing when looking at a few technical inputs.  On the sentiment side I am not sure the news flow could have gotten any better, and the famed short interest was hitting 2 year lows – as Musk said, they felt a Tsunami of hurt!

As a trader, these are the sort of set ups we are looking for to express a view with defined risk.  The short biased trade that we put on (below) was based on psychology more than fundamentals.  We wanted to place a bet with a healthy potential payout over a defined period time.  This is not a short thesis – if we are wrong on one or more of our inputs that causes the trade to be a loser, we will not become hellbent on getting our money back.  It’s a trade, one that would benefit from a decline in a stock of a company that we like very much.

 

 

 

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Original Post Aug 28th, 2013:  New Trade TSLA:  Does This Car Have Reverse Gear?

We have written a lot about TSLA this year as the stock has captured the imagination of investors, and car enthusiasts, while also grabbing a ton of headlines in a stock market rally that has been powered by few of the usual suspects.  Year to date we have had 2 profitable long biased trades in the name, first when the stock was just above $41 back in early April (New Trade $TSLA – Electric Slide) and then again 6 weeks later, after the stock had more than doubled when the stock was just above $91 (New Trade $TSLA: The Volatility Has Been Electric For Options Traders).

We have avoided all urges to attempt short structures as the sentiment around the stock has been too powerful, and given the high concentration of ownership among the top holders (top 10 holders own ~65% of the shares outstanding), short interest at 25% of the float and the CEO and Founder having purchased $100 million worth of stock on a secondary in May when the stock was around $93, all amounts to a NO TOUCH for us.

But maybe just maybe the news flow has approaches as good as it gets in the near term.  Let’s not forget that the stock’s year to date gains of nearly 400% adequately reflect good news.  Trying to pick tops in mania stocks is stupid. Trying to find a low risk way to do so with defined risk at or near a point that could be an inflection point in the stock, or in the broad market is exactly what options traders try to do.

We are gonna take a stab it here, after months of watching in AWE, we think one little bit of sentiment shift could have the stock drain some of the FAST momentum money out of the name and take the stock back to technical support.

The year to date chart below shows the $120 break-out level, which happens to be just below the 50 day moving average at about $130, also the gap level from Q2 earnings.  I want to target that support level, while risking a little to possibly make a lot if the stock were to get back below $140 in the next couple months.

TSLA YTD chart from Bloomberg
TSLA YTD chart from Bloomberg

In trying to set up a short biased trade we wanted to look to spend the least amount of money as possible. Because of the high volatility in the name, puts and put spreads are damn expensive from this point of view. As are closer to or in the money flies. Because of that we looked for an out of the money fly where we risked a little bit of money for possible a nice reward. We’re either going to be completely right or completely wrong in the notion that the stock could reverse soon. With that in mind, we wanted to do a low premium, home run, speculative bet:   

TRADE: TSLA ($167) Bought OCT 150/130/110 Put Fly for 3.00

-Bought 1 Oct 150 Put for 8.80

-Sold 2 Oct 130 Puts at 3.50 each or 7.00

-Bought 1 Oct 110 Puts for 1.20

Break-Even on Oct Expiration:

Profits: btwn 147 and 113 make up to 17, max gain of 17 at 130.

Losses: up to 3.00 btwn 147 and 150, and btwn 113 and 110, with max loss of 3.00 below 110 and above 150.