Name That Trade(S) – $TSLA: Eyeing Consolidation Trades

by Dan September 5, 2014 2:07 pm • Commentary

Earlier today I mapped TSLA’s share price reaction to some commentary on said share price by the company’s CEO Elon Musk over the last 13 months. There are few if any clear conclusions to be drawn as the stock is up 80% in that time period.  Investors seem to think that Musk has some ulterior motive to talk the stock down.  In the post below I highlighted TSLA’s routine habit of a once a year share secondary since their June 2010 IPO to raise cash:

Tesla Share Sale history from Bloomberg
Tesla Share Sale history from Bloomberg

If the company were going to do another secondary offering I would suspect that Musk would have the good sense to keep any cautious words to himself in an effort to get a cash raise on the books following February’s successful sale of $2 billion in convertible bonds.

For a company with such ambitious plans, they seem very focused, and rightfully so on having the resources to execute their plans, using their stock’s success as currency to do so.  Equity investors have been more than willing to absorb the dilution of the share sales with the hope that they are invested in the next Apple or Google.   Personally I think the company has an amazing future in front of it, their product is unique, and if Elon Musk has half the magic that Steve Jobs did, he is likely to be a force in technological advancement for decades to come.  But that doesn’t mean the stock will continue to work after such a large run as they face significant capital expenditures to fulfill many of their promises.

In the near term the stock could be running out of gas, and from purely a technical level, if the stock can not hold the prior breakout level of $265 we could see a consolidation somewhere below $250, but above $200 prior to the next identifiable catalyst.  With the stock within a few % of the all time highs, if I were Musk (really wish I was), I would prob try to raise a billion dollars in hard cash, right about NOW.  While shares sales in the past have not been an overhang on the stock in years past, I would suspect that in front of what will be an expensive period for the company as they push forward in geographical expansion, the impending launch of a new vehicle in the Model X, and the Gigiafctory that will cost billions (despite incentives) that more cash in the bank is better than less.  Raise while you can, not when you have too.

To be fair, I have been very positive on the Tesla story, but fairly neutral on the stock, its just not my bag to invest on hope (obviously to my determent in this case).  But as a trader the story is compelling from time to time from both directions.

In the near term I want to play for a consolidation back towards the $265 breakout level from late last month, playing for a cooling in sentiment but possibly catching some sort of cash raise in the weeks to come.

TSLA ytd chart from Bloomberg
TSLA ytd chart from Bloomberg

There are two trades that I am considering, but neither do I want to put on Friday afternoon with the stock down close to 4%, seems like a press and would rather see what sort of bounce the stock has early next week. But let me lay them out for you.  If I had the need to put one on at this moment it would probably be a put calendar, isolating the $265 breakout level:

TRADE: TSLA ($276) Buy Sept / Oct 265 Put calendar for 5.00

-Sell to open one TSLA Sept 265 Puts 3.00

-Buy to open one TSLA Oct 265 Put for 8.00

Break-even on Sept Expiration: 

-Max profits with stock at $265 on Sept expiration.

-losses of up to 5.00 if stock is significantly higher or lower than $265 on Sept expiration.

Rationale:  As I stated earlier (below), implied vol is cheap in TSLA, but if I am correct, and the stock is to move lower towards the breakout, a consolidation at that level could see a continuation of lower levels of options prices.  If the stock were to get close to my strikes prior to Sept expiration I would look to close the short leg and possibly turn into a vertical or a diagonal.


If I were inclined to make an outright bearish bet, that gives me very near the money participation to the downside, but also accounts for what I think could be a fairly well defined technical support and resistance range between $250 and $200 on any near term weakness.  Here is the other trade that I am considering:

TRADE: TSLA ($276) Buy Oct 275/250/225  Put calendar for 6.00

Buy to open 1 TSLA Oct 275 put for 13.00

-Sell to open 2 TSLA Oct 250 Puts at 4.00 each or 8.00 total

-Buy to open one TSLA Oct 225 Put for 1.00

Break-even on Oct Expiration:

Profits:  gains between 269 and 231 of up to 19.00, with max gain of 19.00 at 250

Losses: between 225 and 231 & between 269 and 275 lose up to 6.00 with max loss of 6 above 275 or below 225


WHY NOT NOW?  with an eye towards NOT forcing trades in what appears to be a very intact bull market, I see little reason to try to pick a top in one of the market leaders at least from a sentiment standpoint, but the idea of trying to finance already cheap puts for those who own the stock, or those looking to make a near term directional bearish bet, calendars or at the money put flies are the way to go in my opinion.




Previous Post Sept 5, 2014: Chart of the Day – $TSLA: Trading Tesla on an Insider Tip

Elon Musk, CEO of Tesla Motors (TSLA) has not been shy about answering the financial media’s questions about the company’s stock price.  While he is usually a bit cagey on the topic, he usually says enough to cause a little stir.

Back in late August 2013, Elon Musk stated in an interview with CNBC that the valuation of TSLA stock was “more than they have any right to deserve”.  The stock has since rallied more than $100 points, or about 65%.

Watch here:

Interestingly, investors didn’t seem to care much at the time, and the stock rallied about about 23% in the 6 weeks following until the stock ended up making an interim top with reports of fires starting in the under-carriage of the electric cars:

TSLA Aug-Oct 2013 from Bloomberg
TSLA Aug-Oct 2013 from Bloomberg

And then again in October 2013, Musk  echoed the earlier comments to Bloomberg., “The stock price that we have is more than we have any right to deserve”.

Watch here:

From that comment on Oct 24, 2013, the stock did actually decline, almost 35% to its lows in late November:

TSLA Sept to Dec 2013 chart from Bloomberg
TSLA Sept to Dec 2013 chart from Bloomberg

The stock has more than doubled from the November 2013 lows, but again last night, comments from Musk to CNBC causing some volatility in the stock today:

“I do think people sometimes get carried away with our stock, honestly. Cause I think our stock price is kind of high right now to be totally honest. Or rather, let me put it this way; if you care about the long term of Tesla, I think the stock is a good price. If you look about the short term, it’s less clear,”

Watch here (2 minutes 15 seconds in):

The stock is down 4.25% today, in what appears to be the reaction to Musk’s comments.  Looking at the one year chart below, I would suspect that the stock retraces back to the breakout level at $265 (red line below) and the stock’s ability to hold that level could be a sort of moment of truth:

TSLA 1yr chart from Bloomberg
TSLA 1yr chart from Bloomberg

I would make one other point, if Elon Musk thinks the stock is near term expensive, is the company considering another secondary offering to raise cash for what is sure to be an increasingly expensive build-out of their future plans?   The table below from Bloomberg shows the company’s initial public offering of 15.3 million shares of stock at $17 on June 28th, 2010, and the subsequent secondary offerings in every year since. Will there be one in 2014??

Tesla Share Sale history from Bloomberg
Tesla Share Sale history from Bloomberg

It will be interesting to see if the company does bring a secondary what sort of demand they will have, as I would imagine that Elon Musk will NOT be participating in this one as he did as a BUYER in May 2013, to the tune of almost $100 million!  Would Musk turn seller with the stock up almost 200% since his last buy??  If I secondary were to come in the coming months it would be the ultimate test of near term sentiment.

Oh and lastly for those who are long and strong, implied volatility, the price of options is just a few points off of the all time lows, and half of what it was just 5 months ago.  Take away here is that stock replacement strategies, or those looking to employ options to protect gains are attractive!

TSLA 1yr chart of 30 day at the money IV from Bloomberg
TSLA 1yr chart of 30 day at the money IV from Bloomberg