Our first trade of the year was a bearish trade in Tesla (TSLA) on Jan 2nd (read here). The stock had been on our radar due to its technical set up, but we wanted to wait for an entry on a move back to the downtrend that had been in place since the all time highs in September. We got a bit lucky with negative news from CEO Elon Musk on Jan 12th when he stated that sales in China “declined significantly” in the fourth quarter (read here), and the stock declined 10% in a straight line.
We closed our trade for a profit, and since then have watched the stock once again rally back to the downtrend line in front of next week’s earnings event:
I suspect that Musk’s comments about Chinese sales, and a switch in production from the Model S to the new Model D in the quarter could have caused further delivery delays. I would also add that the company has raised a lot of capital since its June 2010 IPO, doing capital raises in every year with secondary share offerings in 2011, 2012, 2013 and issuing $2 billion in convertible debt last February:
[caption id="attachment_50612" align="aligncenter" width="465"]
IPO and Secondary Offerings Per Bloomberg[/caption]
I suspect in front of the build out of the company’s “gigafactory” that analyst expect to cost billions, the company will once again tap the capital markets to raise cash. Obviously I have no idea on timing, but this could be an overhang for the shares at a time where the bloom seems to be off the rose a bit, as competition is coming online (recent ad storm from BMW on i3 and i8) and lower end cars recently announced from Detroit.
But aside from valuation, fundamentals and potential for capital raise, the technical set up looks like a very good entry for a short biased trade into next week’s potentially volatile event. The options market is implying about a 7.5% one day move which is basically inline with the 4qtr avg, and shy of its average move since its 2010 ipo of 12%.
No interest in going to deep on this one, I really like the story, love the product and think Musk is likely the next coming of Steve Jobs, but in the near term, the knee jerk move in mid Jan, and the subsequent bounce with oil over the last week presents a nice entry for a defined risk trade.
BUT HERE IS THE THING, GIVEN THE STRENGTH IN JAN AUTO SALES, I MAY WANT TO GIVE THIS TRADE A FEW MORE DAYS OF CONSIDERATION. THE STOCK IS UP TODAY AS CRUDE IS DOWN 8%, AND WHILE IT MAKES LITTLE SENSE WHY A LUXURY ELECTRIC CAR MAKER WOULD TRADE WITH CRUDE, IT HAS, UNTIL TODAY. SO GONNA GIVE THIS IDEA A LITTLE TIME TO GERMINATE.
HYPOTHETICAL TRADE: TSLA ($218.60) Buy Feb 205/180 Put Spread for $4
-Buy to open 1 Feb 205 put for 5.10
-Sell to open 1 Feb 180 put at 1.10
Break-Even on Feb expiration:
Profits: gains between 201 and 180 of up to 21, max gain of 21 below 180
Losses: losses of up to 4 between 201 and 205, max loss of 4, or about 2% of the underlying stock price of the stock is 205 or above.
Rationale: We chose an out of the money put spread as the stock has shown the potential to move and inclination that the stock comes in with oil prior to the earnings event.
STAY TUNED, WILL LOOK AGAIN EARLY NEXT WEEK.