Name That Trade – TSLA: Electric Boogaloo

by Enis May 7, 2014 2:03 pm • Commentary

While it’s been quite a ride, TSLA is almost flat over the past 8 months.  The roller coaster has taken the stock as low as $116, and as high as $265 during that time.  The stock is now right around the pivotal $200 level, with everyone awaiting the wise words of Elon Musk in tonight’s release.

We laid out our thoughts on TSLA ahead of the earnings event in this morning’s Earnings Preview, with the following takeaway:  

Perhaps if TSLA corrects through time or price in the coming months and years, and the business continues to expand as expected, we can get more excited about the stock’s long-term prospects as an investment.  In the short-term, technicals are our main guide.  At the moment, the stock looks rangebound, but our main concern is the price action in other momentum stocks.  TSLA’s high short interest (still around 30%) has likely supported the name more than other former high fliers.  Regardless, we’d only get interested on the long side for a potential trade on a test of the rising 200 day moving average, now around $175.  As for the short side, the high short interest and Musk’s habit of newsworthy announcements makes any short in TSLA an unappealing affair.

In sum, TSLA is not a standout situation on fundamentals, technicals or volatility, in either direction, so no plans for a new position here, though we will keep our eye on it if the situation changes.

Though we don’t have a directional view, we wanted to lay out a couple ways to play this event with options for those so inclined.

We would much rather try to fade a bounce, or press a short than have worse odds than a coin flip with a position into the print.  Here are a couple examples of trades to play the bullish and bearish side.  We have not put either trade and all prices are approximate.

Bullish Trade:

We wouldn’t look to risk much premium for the earnings since it’s such a binary coin flip. So we’d look to do a multi legged structure for a small amount that targeted a realistic move to the upside:

Example: TSLA (~$200) Buy the May9th 220/240/260 call fly for 2.50

Rationale – This is risking slightly more than 1% of the underlying for the chance at a big profit if the stock gapped up above 220 on the report. The only risk to the upside is if the stock were to go back to or above previous highs near 260 but we feel that is unlikely. Near 240, which is much more realistic this structure would have really nice gains and it would even do well near 220 tomorrow, which is entirely possible.


Bearish Trade:

Considering the damage being done in last year’s momentum darlings after recent earnings reports one would probably want to be a little more aggressive on downside structures:

Example: TSLA (~$200) Buy the May9th 185 puts for 4.00

This is risking about 2% of the underlying to play for the big one. If this stock got hit like others have recently who knows where it goes. 180 seems like the first bit of support and this put would be fine there, a small winner, but if 180 didn’t hold there’s alot of air below that level. Since this put expires on Friday if the stock goes up or doesn’t go anywhere it would basically be worthless fast so this is risking 4.oo knowing you could lose it all immediately.