Name That Trade – $TSLA: Unveiling the D for All to See

by Dan October 6, 2014 2:36 pm • Commentary

Aside from chairing a solar power company (SCTY), heading a commercial space company (SpaceX) and running a car company (TSLA), Elon Musk has been busy over the last month pushing TSLA’s stock around through traditional and social media.  Back on Sept 5th, Musk’s comments to the press about the stock’s price sent the shares down 15% over the ensuing few weeks (read here), until this Tweet last week caused the stock to bounce:

Regular readers  of the site know we are huge fans of the TSLA story, their product, and their CEO.  However, given the current product portfolio, supply constraints and financial commitment to the gigafactory, we are trying to sit on our hands and wait for an opportunity to re-start a scale long position.  But that’s likely going to take some sort of fundamental mis-execution, and/or a significant broad market decline.

In the near term though, aside from closely monitoring financial performance and production, it’s important for traders and or hopeful investors to keep a close eye on how the stock reacts to news, to get a sense for expectations into and out of events and closely monitor the competitive landscape.

Since the start of 2013, a period where the stock has risen over 700%, the stock has had three meaningful sell-offs, all of which have decreased in magnitude (-40% in Sept to Dec 2013, -33% in Feb to May 2014 and -19% in Sept to Oct 2014) as the stock has advanced along the uptrend that has very impressively held throughout:

TSLA since Jan 2013 from Bloomberg
TSLA since Jan 2013 from Bloomberg

As we have noted in the past, TSLA’s stock is fairly unique in that there is 27% short interest, which is nearly matched by Musk’s ownership of 23% of the shares outstanding, a sum that he is not likely to sell anytime soon.  This dynamic creates the potential for dramatic short squeezes.  This situation might eventually resolve if the company once again comes to the capital markets to raise cash and Musk finally sells alongside the company (in their last equity offering in May 2013, Musk was actually a buyer on the deal at $92).

In any case, TSLA is still up 74% year-to-date, and options traders have bid up weekly options in anticipation of the October 9th announcement of the “D” from Tesla.  Slate had a good blog post about the possibilities for that announcement:

Rather, speculation is that the D involves some form of modification or update to the Model S, since that’s what the car in the photo appears to be. The leading theory so far is that the D will be an all-wheel-drive version of the sedan, with “D” perhaps standing for “dual motor”—one for the front axle, one for the rear.

A second plausible hypothesis is that either the D or the “something else” could be related to computer-assisted driving features. Musk has expressed interest in an autonomous Tesla in the past, and recently the first driver-assist features have begun to pop up on the Model S.

Are there other possibilities for Thursday’s announcement? Going on the photo alone, one might think that the secret lies somewhere on the upper half of the car. Could we see a Model S convertible—a drop-top, if you will? Probably not, but it’s a fun thought.Business Insider’s Matthew DeBord has an amusing list of even-less-plausible ideas, from an updated Tesla Roadster to a diesel-powered Tesla to one that runs entirely on D batteries.

It’s also possible at least one of the announcements will not be a car at all. The Wall Street Journal reminds us that Musk told it last month to expect “significant” product news in the near future that does not involve a new vehicle.

While 30 day implied volatility is low by the standards of the past 2 years, it has bounced quite a bit in the past week ahead of Thursday’s unveiling:

30 day implied volatility in TSLA, courtesy of Bloomberg
30 day implied volatility in TSLA, courtesy of Bloomberg

The weekly straddle (the put and the call of the same strike of the same expiration) in TSLA is now priced at around 4.5% (currently it costs about $11.25 for the Oct10th $262.50 straddle).    That actually looks somewhat cheap considering that TSLA has bounced more than $20 in just the past 3 trading sessions, in anticipation of the news, rather than any actual news.