Trade Update – $TSLA: Closing Half Feb Put Fly for a Double

by Dan January 15, 2015 2:47 pm • Commentary

TSLA’s 10% decline since placing this bearish trade on Jan 2nd has caused the structure to be worth twice as much of the original premium paid.  We have updated our prerogatives as the stock has declined, stating yesterday:

The current value is around $10, intrinsically it’s worth around $20. However, it’s a Feb expiration and the majority of that decay will not be collected until the last few weeks of Feb. However, vol did spike a bit in February today and that’s hurting the structure a little, that could reverse soon which would mean the structure would approach intrinsic a little in the meantime.

At this point I am going to take half of the position off for a double, taking my cost off of the table and allowing some time for the thesis to play out:

Action: Sold to Close 1/2 position -TSLA ($193.30) Feb 210/180/150 put fly at 10.00 for a $5 profit


Original Post Jan 2nd, 2015: New Trade – $TSLA: Charging Violation

We have marveled at the Tesla (TSLA) story along with most market participants over the past few years.  It hasn’t just been the stock’s eye-popping gains since its 2010 IPO at $17 (now $217), but the product is ahead of its time, and the charisma and vision of the CEO/founder is the closest whiff to Steve Jobs that most investors will get for years, if not decades.  As we have written about on numerous occasions, just because the “story”  is one that will have legs for years, if not decades, it appears in the near term that momentum in the stock is waning and the technicals are deteriorating. (See our two prior posts on the stock below).  For those who use valuation as a primary input on the short side, TSLA is sure to pop up on every screen for most popular metrics, but as the price action of the last two years has demonstrated, that has been a fools errand as the primary input.

For reasons of today’s trade, I want to focus on the technicals and sentiment.  As stocks like Amazon and Netflix showed us in 2014, once loved cult stocks can hit speed bumps along what can be a long successful period of positive returns. Shares of TSLA could be about to grab the baton in 2015 of prior web stock’s that not only took a pause in 2014, but saw meaningful declines.  Its not just weak oil prices that have weighed on sentiment (although most buyers of $100,000 electric cars don’t feel the impact of $5 or $2 gas at the pump) there appears to be no shortage of reasons for the stock to take a pause (none more important in my mind as the billions it will take to build out their so called gigafactory.

On pure technicals, the failure at the downtrend of the infamous “Triangle of Death” I want to make a near term defined risk play for a break of massive support at $200, and a retest of the May low:

TSLA chart since May 2014 from Bloomberg
TSLA chart since May 2014 from Bloomberg
TRADE – Buy the TSLA ($217.50) Feb 210/180/150 put fly for $5.00

– Buy 1 Feb 210 put for $11.00

– Sell 2 Feb 180 puts at $3.50 each for a of $7.00 total

– Buy 1 Feb 150 put for $1.00

Breakevens on Feb expiration:

-Gains of up to $25 between $205 and $155 with max gain of $25 at $180.

-Losses of up to $5 between 205 & 210 and between 155 & 150, max loss of $5 above $210 and below $150

Rationale: This is a fairly inexpensive way to take a shot on the short side on TSLA starting off the new year with selling pressure. $180 seems like the level to target on a break of the $200 level as $180 was about the May low.  We’d look to take this trade off on any quick move down below $200 as we wouldn’t want to stick around and hope that the stock flatlines for the balance of the expiration.



Previous Post Dec 29th, 2014:  MorningWord 12/29/14 – Triangles, Trolls & $TSLA

As a trader, there are few qualities that lead to consistent positive performance as much as patience. As a part-time financial pundit there are few qualities as important as having thick skin in what feels like a never-ending battle with haters. I can honestly say I wished I had more patience and a tad thicker skin.  Which leads me to the ol’ “Triangle of Death”.  Earlier this year, in an attempt to poke a little fun at some of the goofy names traders give to chart formations and the like, I renamed one of my favorite technical set-ups, the “head & shoulders” chart pattern. When the head and shoulders had reached its lower right corner of the triangle, that was the point it either had to bounce and exit the triangle to the upside, or things were about to get ugly. The Triangle of Death. This wasn’t a prediction one way or the other on these stocks. It was merely identifying how ugly a break below could be.

The first TOD spotting was back on February 26th, in Whole Foods (WFM). That was just prior to the stock’s downside exit of the TOD. That exit resulted in 30% drop before it was all said and done: Chart of the Day – $WFM’s Triangle of Death 

In May there was Costco (COST), which never broke the neckline and the stock has subsequently rallied almost 30%: Name That Trade – COST: Exit the Triangle of Death 

There was Wynn Resorts (WYNN) in May, that resulted in a 33% decline from its break of its neckline: Name That Trade – WYNN’s chart is “a death trap, it’s a suicide rap”… you know the rest.

And probably the most Troll inducing example was Pandroa (P) from August. It also saw a 30% decline when the stock broke its TOD to the downside: Name That Trade – $P: Pandora the Ex Roarer

There have been others.  The most important take-aways was the process of using charts to identify the weak relative performance of former stock market darlings in what remains a raging bull market.  In three of the four instances listed above, the stocks had considerable corrections in a very short period of time after having already made a series of lower lows and lower highs.  The technical set up was the cue to do a little fundamental work and then identify potential catalysts for a move.

As regular readers know, we have been eyeing the price action in Tesla (TSLA) lately, and the stock is shaping up to be a candidate to exit the TOD one way or the other..

On December 10th, I highlighted the weakening technical set up for the stock (below), but interestingly I concluded with the following:

As a trader I want to play for a bounce from a VERY oversold spot, but we aren’t there yet.

At the time I wanted to be patient, and a few days later the stock traded below $200 for the first time since May, and that was the spot to play for the oversold bounce.  I missed it, but decided to update my view on CNBC’s Fast Money on Dec 16th:

There are a couple really important caveats.  I did not play from the long side because the technical set up (which I already thought was weak) was deteriorating.  And I thought it best to wait for what I thought would be a higher conviction trade on the short side.  And very specifically as I have mentioned on many occasions, for those playing for the break lower, the most important thing to do is wait for the RE-TEST of the downtrend.

A quick look at TSLA now, it is almost right back to the 200 day moving average, the spot in which I highlighted on Fast Money on Dec 16th as an ideal entry for a short trade.  I also mentioned the impending “Death Cross”, the 50 day moving average (purple below) crossing below the 200 day moving average (yellow below), which worked like a charm in Google back in November (New Trade – Frugal $GOOGL) for a 10% decline.  The technicals are setting up, for a powerful move one way or the other. Either finally breaking the downtrend and establishing a new base above $240, or you know what comes next:

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

I guess the main point here is that there are rules.  I am not just making shit up because I think something sounds funny, or viewers at home will think I am witty. I am trying to make what sometimes can be very mundane just a tad more fun. While hopefully coming up with some smart money making trade ideas.

These funny sounding technical patterns are just potential starting points of a trade idea. Trades inspired by technicals still need to be married to other inputs to arrive at a high conviction trade.  I am not in the business of day trading, and as fun as it can be t0 catch an intra-day reversal for an oversold bounce, its just not my bag anymore.  Being patient for the right entry in a stock like TSLA could help avoid 10% losses in either direction, despite how much heat I take in the mean time from the peanut gallery.

It is my view that the TSLA story will have legs for years to come, despite the fact that the stock may never grow into its valuation. But in the near term it is important to note that the stock has been the IT stock for two years now, and I suspect at some point early in the new year investors may shift their focus to the potential of  a meaningful capital raise to fund the buildout of the Gigafacotry, potential further delays in expected new vehicles, the impact of sustained lower oil on the electric car industry, and obviously the potential for a competitor to make meaningful inroads in the high end electric market.

Despite my desire to establish a long term investment in TSLA on the next hiccup in the stock, I suspect that a failure at the downtrend, and a re-test and break of $200 could see the stock roundtrip the entire move of the last 12 months, which would be about $160.  Stay Tuned.  I may miss some fireworks if it happens this week as I am taking the week off, but I suspect this is an early 2015 occurrence if it happens at all.



Original Post December 10th, 2014:  Chart of the Day – $TSLA: Dead Battery?

Okay, you know the drill here. A good ol’ fashioned Head and Shoulders in a high-flying cult name, Tesla (TSLA) or as I like to call it a “triangle of death”:

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

And some of you more astute chartists may see the little TOD (Aug – Oct) inside the larger TOD which can NOT be good.  But here is the thing, the stock is down 20% from the mid Nov highs, and getting a tad oversold.  So for those of you have been waiting for the “big one” in TSLA, it may be a hard press here, despite the appearance of an impending collapse.  Using this technical indicator as a trade input I usually like to wait for a counter-trend rally, back to the downtrend line of the right side of the TOD.  Additionally, the stock’s moving averages, signs of momentum seem to be turning lower, with what appears to be an impending “death cross” where the 50 day crosses below the 200, which could (not always) mean lower prices ahead.

For those a bit more daring than me, who think that it could be lights out into year end as investors take profits in high-fliers then you may want to look to the options market to make a directional bet, as options prices, despite the stock’s recent weakness seem fairly reasonable.  The apparent cheapness has to do a bit with the fact that there are no scheduled events until the company’s expected Q4 results in mid February, and we are about to head into what should be a quiet holiday trading period.  30 day at the money IV in TSLA is about 40%, which is high by most stocks standards suggesting almost 3% intra-day moves, which for the most part it has been realizing:

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

On a longer term basis, the Sept 2013 high of about $195 (red below) could be an important spot to watch as the stock has recently broken the uptrend (green below) that has been in place since early 2013:

TSLA 2yr chart from Bloomberg
TSLA 2yr chart from Bloomberg

I think it is safe to say that this $195/$200 support, whether it merely be psychological is fairly important, as there is NO technical support below that until about $150.

So what’s in store for TSLA in 2015? I think it is safe to say that the discussion about valuation and how the stock can grow into it has shifted a bit from production of cars to the potential for other broader uses of their battery technology.  Many smart investors think that is the future of the company. Not solely relying on high end electric cars (read my thoughts here on the topic MorningWord 11/24/14: $TSLA – Stock Alt and Battery).  One thing that is a near certainty is that to fund their electric power aspirations for merely their own cars or that of other automakers or for other uses, the company’s planned gigafactory and continued R&D is gonna cost mad loot.  Expect continued capital raises and diluting of existing shareholders.  Since the company’s 2010 IPO they have done large cap raises every year, per Bloomberg:


This year was no different, back in February the company priced $2 billion worth of convertible bonds (read here).  Expect, more in the New Year.

So what to do with the stock here?

The stock is down almost 30% from the September highs, but still up 38% on the year.  To buy the stock here or continue to own it you have to be less concerned with valuation and potential competition and more a believer in Elon Musk’s dream. And I get that, and I am a long term believer in the man and his dreams. And I’m in that camp for a small portion of what I would deem speculative investing. I would be inclined to buy some shares if the stock were to make a meaningful break of the support I mentioned above.

As a trader I want to play for a bounce from a VERY oversold spot, but we aren’t there yet.