New Trade $TSLA: Electric Slide

by Dan November 5, 2014 11:58 am • Commentary

Earlier we previewed Tesla’s Q3 earnings event (below).  Given the stock’s recent realized volatility, the implied move in the options market of about 8.5%, which is shy of the 4 quarter average of around 9.75% and the 8 quarter average of around 12%, looks fair, if not cheap.

Speaking of volatility, it is important to note that realized volatility over the last 30 days has been about 50 (white line below), implying daily moves of upward of 3% a day, while the 30 day at-the-money implied vol is only about 56 (blue line below).

TSLA 1yr chart of 30 day at the money IV (blue) vs 30 day at the money relaized vol (white) from Bloomberg
TSLA 1yr chart of 30 day at the money IV (blue) vs 30 day at the money relaized vol (white) from Bloomberg

So why have we seen the pick up in realized vol? Well, obviously the market was a bit more volatile, but there were also a couple of situations specific to TSLA that also created volatility.  First, the cryptic tweet from TSLA CEO Elon Musk about a product announcement on Oct 9th:

The announcement that stirred initial interest after the tweet did not live up to the hype, and the stock sold off 8% the next day (red circle below).

TSLA 1 month chart from Bloomberg
TSLA 1 month chart from Bloomberg

And then the two day action on October 27th and 28th, when the stock first declined 6% on the 27th on the WSJ article titled “Tesla Unveils Lower-Cost Lease Program-suggesting theElectric-Car Maker Looks to Lift Sagging U.S. Sales Through New Incentives“.  The following day Musk tweeted the following, igniting a 10% rally in TSLA shares (green circle above).

So the stock has been moving on news, and I suspect tonight’s report should be NO different.  I would also add that the technical set up is a bit curious here.  As some astute readers may recognize, an ominous technical pattern is emerging, the Triangle of Death:

TSLA 6 month chart from Bloomberg
TSLA 6 month chart from Bloomberg

There are a couple ways that I think of this INPUT.  First, a failure at the downtrend line, which it did this week, and a retest of technical support near $220, could be just the thing to cause the stock to establish a new range below $220, with a near term target of about $200.

Also as regular readers know, I would not short a stock like this given its high short interest (28%) and concentration of large holders (Musk owns 23% of the shares outstanding).  But in front of an event, with options prices cheap, I will look to use a defined risk structure instead.

I would also add that the Gigafactory is going to take some serious funding as we have written about in the past.  I would expect a capital raise some time in the near future.  From Sept 5th “ Trading Tesla on an Insider Tip

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

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.

TSLA did issue $2 billion in converts back in February (read here), so another raise may not be in the immediate future, but I would expect one in the beginning of 2015.

The waning momentum in the stock, coupled with Musk’s comment about record high North American sales could suggest that the only news left to come out on tonight’s call would be negative.

So here is the trade:

Disclaimer, this is a highly speculative and volatile stock, and there is a fairly narrow margin of error when trading options in a stock like this around an earnings event.  Thus, I am sizing my position accordingly.

TRADE: TSLA ($232.50) Buy to Open Nov 22nd Regular 225/200/175 Put Butterfly for 4.40

-Buy to open 1 Nov22nd 225 put for 10.25

-Sell to open 2 Nov22nd 200 puts at 3.45 or 6.90 total

-Buy to open 1 Nov22nd 175 put for 1.05

Break-Even on Nov 22nd Expiration:

Profits: btwn 220.60 and 179.40 make up to 20.60, max gain of 20.60 at 200

Losses: btwn 220.60 and 225 lose up to 4.40, btwn 175 and 179.40 lose up to 4.40, below 175 and above 225, max loss of 4.40

Rationale:  The $190-$200 area is important long-term support for TSLA.  This put butterfly targets a break of $220 support, anticipating a move to near $200 in the next 2.5 weeks after the earnings event.  If TSLA gaps higher, this trade will with high likelihood be a total loser, so it’s not the type of high probability trade where you can risk a lot of premium.  However, given the fundamental, technical, and volatility setup, we like risking a small amount of premium on a move lower to near $200 after earnings with this put butterfly.



Tesla Q3 Earnings Preview – November 5th, 2014:

Event:  TSLA reports its Q3 earnings today after the close.  The options market is implying a 8.5% move for the event, lower than both the 4 quarter average of around 9.75% and the 8 quarter average of around 12%.  The lower implied move is somewhat surprising given the recent volatility in TSLA.

Sentiment:  Wall Street analysts have been mixed on TSLA throughout the stock’s advance over the past 2 years. Today there is a bit more optimism, with 13 buys, 8 holds, and 3 sells on TSLA, with an average 12 month price target of $278.  The stock is still up 59% in 2014, even after the recent weakness.  Short interest in TSLA remains at the low end of the 3 year range:

TSLA short interest, courtesy of Bloomberg
TSLA short interest, courtesy of Bloomberg

The total float in TSLA is about 86 million shares.

Options Open Interest:  Puts actually outnumber calls by a ratio of 1.35 to 1 in terms of total open interest, rare for a stock that has had such outsized gains over the past couple of years.  The average volume over the past month has favored calls, though, by a ratio of around 1.1 to 1.

The 200 strike puts and the 250 strike calls generally have the most open interest across maturities.  However, the Jan15 300 call and the Jan15 150 put have the most open interest of any relevant line, at over 10k.

Price Action/Technicals:  Throughout the uptrend of the past 2 years, TSLA has remained above its 200 day moving average:

TSLA daily chart, 200 day moving average in yellow, courtesy of Bloomberg
TSLA daily chart, 200 day moving average in yellow, courtesy of Bloomberg

The stock’s recent test of the rising 200 day ma held, maintaining the long-term uptrend.  Having said that, the stock has made two lower lows and two lower highs since its high of $291.42 in early September.  A break above $250, and ideally $270, would change that short-term downtrend.  In the meantime, $220 is crucial support on the downside.   

Volatility:  30 day implied volatility in TSLA is in line with where it was prior to last quarter’s report, but substantially lower than the pre-earnings level of the past 2 years:

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

One big reason is that TSLA has calmed down as a stock, with much lower realized volatility in 2014 vs. 2013.  TSLA is flat over the past 8 months, with some big swings in the interim, but not nearly the level of volatility that was persistent in the rally in 2013 and early 2014.

Our View:  TSLA is a very difficult company to value.  There is uncertainty regarding the potential market size for electric cars, the future of battery technology, the success of the Gigafactory in bringing about cost reductions in batteries, the success of building out a recharging network globally, and numerous other obstacles along the way including but not limtied to an onslaught of competetion.  Investors in TSLA are willing to take on that risk because of the prior achievements of Elon Musk, and the efficient execution of the company’s plan to date.

For us, the implied volatility looks fair to slightly cheap heading into today’s earnings report.  The stock continues to trade close to its rising 200 day moving average, which poses the risk of a gap lower through that ma on today’s earnings event. We will follow up with trade ideas prior to today’s close.