Last week we closed half of our bearish range trade in TSLA. The thought on taking off half was that we’d gotten our initial move (a break below $200) and wanted to lock in some gains. But we wanted to keep the other half because the nature of the structure allowed us to be patient. I wanted to go over why that is and what we’ll be looking for as far as management of the balance of the trade. First, let’s recap the trade and our sale of half of the position. We placed the trade when stock was $217 and the structure was out-of-the-money:
TRADE – Buy the TSLA ($217.50) Feb 210/180/150 put fly for $5.00
TSLA was already showing signs of weakness and was flirting with the $200 support level when bad headlines from Elon Musk about China sales broke the stock and it quickly went towards $190. When the stock was $193 and our structure was now well in-the-money, we closed half for a double:
Action: Sold to Close 1/2 position -TSLA ($193.30) Feb 210/180/150 put fly at 10.00 for a $5 profit
Simply put, this sale took all of our risk off the table and allowed us to be patient with the balance. The reason we wanted to be patient with the balance is because so much of the trade was unrealized and it still has the potential for a big payoff. The trade was worth $10 at $193 which was a nice profit, but it was worth $17 intrinsically at the time with potential to be worth $30 at $180 on expiration. So that’s a nice risk/reward for holding the second half but it also has alot to do with the built in cushion to the upside up to $200. (the trade was worth $10, and would be worth $10 even if the stock closed at $200 on Feb expiration, so $7 of intrinsic cushion.)
You can see how that works on a day like today where the stock bounced hard this morning and got close to that $200 level, but despite that upward move, with the stock now at $196 the structure is still worth around $10. The longer the stock spends below $200 the more that intrinsic value comes into the mark to market for the trade in the form of daily decay. That decay accelerates as we get closer to Feb expiration. We also are getting more short deltas each day from the same process. That means a move towards $180 in 2 weeks is much more profitable than a move there this week. And vice versa for moves upward. Today the structure is short about 17 deltas, not a ton. But on expiration if the stock is in the exact same spot those deltas are -100. That process also plays out exponentially into expiration.
There is one other factor at play amongst the greeks and that is implied volatility. TSLA vol has been creeping higher lately:
That higher vol has a negative effect on our structure. (if the fly was out-of-the-money it would be positive.) The easiest way to think about that reason is the increasing volatility is mathematically pricing options for bigger moves between now and expiration. (and this is why it would be increasing the structure value of out-of-the-money). In other words the increasing price of options are saying the stock is less likely to close between $210 and $150. Decreasing implied vol would be saying the opposite. The way that plays out in the structure itself is in the $180 puts that we are short x2. Those are the most sensitive part of the structure from implied vol moves and ticks up and down in all implied vol mean larger swings in the closer to the money options than the far in the money 210 puts and far out of the money 150s.
OK, so that’s your options education for the day, but what about managing this trade? We’ll continue to use that $200 level as our stop on the upside and try to milk any moves lower towards $180 for as much as we can. As I said earlier, the longer we wait the more profitable those down moves become. The only other thing we’ll need to keep an eye on besides the stock is that implied vol, if that starts chugging higher it starts to offset alot of the decay we collect, and that would be another sign to just take the rest of the money off the table.
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Trade Update – $TSLA: Closing Half Feb Put Fly for a Double
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
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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:
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.