Name That Trade $TSLA: Alternating Currents?

by Dan October 25, 2013 3:35 pm • Commentary

On Sept 29th I drove my friends Tesla Model S, I didn’t want to get out of the car but we drove for so long that the thing ran out of juice.  It was awesome.  The next morning on Sept 30th I wrote a post titled “PSA For TSLA Shorts, Go Test Drive A Model S, You May Want To Cover“.   It is no coincidence that the stock made what is now its all time high on that very day, and the joke at the water-cooler at RR.com Global HQ is that I was positioned short at the time (disclosed), but a statement like that had to mark the top!

Well Since that day the stock has made a series of lower highs and lower lows, the upward momentum appears to be broken a bit with the stock down some 13% from Sept 30th.  My sense is that the story is far from done, and for all of us trying to figure out the next 10-20% in a stock that is up 400% ytd maybe missing the big picture.  Regardless of what the stock does in the near term, the company and its founder are here to stay, and the rest in the meantime may just be noise.

To be absolutely fair, I have no idea what the next next 10-20% brings in the stock, but with Q3 earnings expected on Nov 5th there is a decent probability that the stock is going to move at least 10% one way or the other, the current implied move is about 14%.  Buying that move would be nuts given how high implied volatility is in the stock, leaving a massive margin for error.

For those who think they want to dig in and make a directional bet, outright call or put purchases offer little attractiveness aside from the defined risk and leverage aspects, which leads me to how to finance the purchase of options in the earnings expiration.  To do this you will wan to look at a calendar.

Our sense is that with the stock hovering around its 50 day moving average at about $170 that the stock could continue to consolidate prior to the Nov 5th print, as it will be the real catalyst for the next 10-20% (aside from a market meltdown).

The one year chart below shows the parabolic rise since the spring, and what looks like a consolidation about $160 over the last 2 months.  The chart is obviously insane, and there is not valuation support or resistance anywhere on that picture, so for those traders out there who would rather focus on the high concentration of the top holders (CEO Musk owns ~24%), the high short interest (~26% of the float) and the general mania sentiment towards the product and the stock, then using the near term technical support and resistance can help to set up the event trade, at least from a strike perspective.

TSLA 1 Yr chart from Bloomberg
TSLA 1 Yr chart from Bloomberg

 

Here are a couple examples of how we may look to play next week, we have not put either trade and all prices are approximate:

Bullish Trade:

For Bulls who want to own Nov 8th expiration calls for a move back towards the highs, look to sell the next week Nov 1st expiration of the same strike.

Example: TSLA $170 Buy Nov 1st / Nov 8th 180 Call Calendar for $7.00

-Sell 1 Nov 1st 180 Call at 2.00

-Buy 1 Nov 8th 180 Call for 9.00

Break-Even on Nov 1st Expiration:

-Profits are maximized at 180 on Nov 1st expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Max risk is $7.00

 

Bearish Trade:

For Bears who want to own Nov 8th expiration puts for a move back below recent support of $160 , look to sell the next week Nov 1st expiration of the same strike.

Example: TSLA $170 Buy Nov 1st / Nov 8th 160 Put Calendar for $7.00

-Sell 1 Nov 1st 160 Put at 2.00

-Buy 1 Nov 8th 160 Pur for 9.00

Break-Even on Nov 1st Expiration:

-Profits are maximized at 160 on Nov 1st expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Max risk is $7.00