Name That Trade – $TSLA: Electric Avenue and Then We’ll Take it Higher?

by Dan February 19, 2014 3:19 pm • Commentary

Yesterday we previewed tonight’s Q4 report from TSLA (below), which the options market expects an almost 13% one day move tomorrow.  While this expectation is eye-popping, the stock on avg has moved above 15.5% over the last 4 quarters.  Some of the good news is obviously in the stock at current level as the company had pre-announced better than expected Model S sales announced on Jan 14th. had a very nice preview of what to watch for earlier today (here), with highlights below:

After the third quarter, Tesla CEO Elon Musk said told investors he was “pretty confident” they could hit 25% gross margin in the fourth quarter (excluding zero-emission vehicle credits). He’ll be pressed hard for an explanation if the company misses this one.

anything Musk says about 2014 deliveries will be crucial. It’s the one basic metric Tesla shares with every other car company, regardless of the technology they use. Currently, analysts are looking for about 29,000 vehicle deliveries this year, though some estimates run as high as 32,000.

Capital spending is another number in the crosshairs. Tesla’s fourth-quarter expenditures are seen coming in at about $73 million, a level analysts expect the company to hold through the rest of the year.

While it is not in our DNA to play for a breakout in a stock like this, despite very much liking the story, the stock is nothing more than a trading vehicle.

If I were inclined to play for a move lower in line with the implied move, which also gets you to the stock’s prior consolidation at about $170 I would use the following options trade:

Hypothetical Trade: TSLA ($196.50) Buy the Feb 200/180/160 Put Fly for 5.50

Risk 5.50 to make 14.50 btwn 194.50 and 165.50, wouldn’t take much to make this trade break-even by Friday’s close, BUT YOU HAVE TO GET DIRECTION RIGHT or the trade is a total loser. Anything above 200 means a total loss of the bet.

Or, if you are inclined to play for a breakout because you think the company is going to suggest that unit sales could be much higher going forward, as was the case in Q4, and that any good news would be the death blow to the shorts (stock has 37% short interest) then I would consider the following options trade:

Hypothetical Trade: TSLA ($196.50) Buy the Feb/March 225 Call Calendar for 3.50

If this stock goes higher on the print, who knows how high it could go, but risking 3.50 that it’s at or below $225 with the possibility of owning that call in March for a dollar cheap look seems like the best way to play for a breakout without risking a ton of premium.



Original Post Feb 18th, 2014:  $TSLA Q4 Earnings Preview

Event:  TSLA reports its Q4 earnings, Feb. 19th, after the close.  The options market is implying about a 12% one day move, which is slightly below the 4 quarter average of 15.5%, but above the 8 quarter average of about 10.75%.  TSLA first went public in mid-2010.

Sentiment:  Wall Street analysts have been mixed on TSLA throughout the stock’s 435% return over the past year. There are 7 buys, 5 holds, and 3 sells on TSLA, with an average 12 month price target of $161.  Short interest in TSLA remains very elevated, at 37% of the outstanding float.  In fact, total short interest in TSLA approached its all-time high in January, just short of its 32.3 million share high from the spring of 2013:

TSLA short interest, Courtesy of Bloomberg
TSLA short interest, Courtesy of Bloomberg

The total float in TSLA is only 79.4 million shares, though here are 122.6 million shares outstanding.  Elon Musk owns more than 28 million shares, or about 23% of the company.

Options Open Interest:  Total open interest is slightly skewed towards puts, with a call to put ratio of about 0.9.  However, the one month average daily volume has favored calls by a ratio of 1.5 to 1, as TSLA stock has rallied more than 30% since the start of 2014.

There are only two strikes that have over 10k of open interest:

-Feb22nd 200 calls

-Mar22nd 200 calls

In Jan15 expiry, the 200 calls are once again the line with the most open interest.

Price Action/Technicals:  After TSLA’s IPO in mid-2010, the stock essentially traded in a range between 20 and 40 in 2011 and 2012.  When the stock finally broke above $40 in the spring of 2013, it was off to the races for TSLA.  As a result, the 1 year daily chart captures the relevant action in TSLA over the last year.

The stock has not looked back since that breakout above $40 last spring.  TSLA is making a new all-time high this morning:

TSLA daily, 50 day ma in pink, 150 day ma in yellow, Courtesy of Bloomberg
TSLA daily, 50 day ma in pink, 150 day ma in yellow, Courtesy of Bloomberg

The September 2013 high of $194.50 (red line) was broken last Monday, on decent volume.  The stock has held a couple of tests of $194.50 since then, and gapped higher this morning.

The rising 50 day and 150 day moving averages are both in the 155-170 area, which is now important support on the downside after the mid-January move higher in TSLA shares on the news of better-than-expected Model S deliveries for the 4th quarter.

Fundamentals/Valuation:  Tesla is a very difficult company to value since so many investors are interested in the long-term prospects of the electric car as a disruptive technology, rather than simply the discounted cash flow valuation of the company.

As for earnings, analysts expect 1.53 in earnings in 2014, 3.09 in 2015, 5.13 in 2016, and 7.28 in 2017, though 3 years is an eternity for Tesla.  Therefore, in TSLA’s case, the long-term earnings potential is the key for the stock.

TSLA is now a $25 billion market cap company, about half the size of the American giants, Ford and GM.  Of course, TSLA’s main attraction to investors is its significantly higher margins, and potential scalability for a mass market car in the future, given the technology.

At the January automotive conference in Detroit, Tesla detailed its potential plan for the mass market car.  Here was GS research:

On the Gen 3 the company stated it intended to keep the price of the vehicle essentially unchanged in the mid $30k range, despite the fact that the Federal Buyers Credit will expire putting the additional burden on cost performance. Key cost drivers are reduced components costs through volume discounts, design improvements, fixed cost leverage and of course improvements in the powertrain where the company expects an annual cost reduction of 5-10% a year. Ranges being debated for the Gen 3 are 200 miles, 300 miles and even possibly a 400 mile variant.

Once again, the actual details, both financial and technological, will be crucial to the success of TSLA.  For now, speculation reigns.

Volatility:  Implied volatility in TSLA is a bit lower than usual ahead of the earnings event, compared to the prior 3 earnings releases, when 30 day implied vol was between 80 and 90:

30 day implied volatility in TSLA, Courtesy of LiveVolPro
30 day implied volatility in TSLA, Courtesy of LiveVolPro

A big reason why TSLA implied volatility is lower is that there is less uncertainty surrounding the earnings event after TSLA disclosed in mid-January its 4th quarter car deliveries of nearly 7,000 Model S cars.  Moreover, Elon Musk has continued to be quite vocal about the car and the company’s strategy in the past month.  

Given that the stock is at an all-time high, the stock might actually be more volatile after earnings if the stock goes higher on the earnings event, rather than lower.  Regardless, the 50 level is likely a spot to buy implied volatility in TSLA if it gets there.

Our View:  Elon Musk is truly a modern-day pioneer.  Investors in TSLA have significant confidence in Musk’s ability to deliver on his promise of revolutionizing the car industry.  In the past year, the success of the Model S has been reinforced that confidence.

Surprisingly, sentiment surrounding TSLA shares remains quite negative, exhibited by the stubbornly high short interest.  The valuation is obviously rich, but for a momentum name with an innovative technology like TSLA, investors are much more interested in sales growth and technological momentum.

While we don’t have a strong directional view, the high level of implied volatility despite the pre-announced sales guidance could make calendars interesting, as one of our subscribers pointed out in our Your Questions Answered section this past week.