Shares of Tesla (TSLA) have had a good couple of weeks, up about 15% since making new lows for the year and seemingly making a double bottom:
Regular readers know we are big fans CEO Elon Musk’s vision to transform the automobile industry. And the actual autos that his company has produced live up to the hype from a performance standpoint. But the stock’s 30% decline from the all time highs made last September likely reflects growing concern among investors that TSLA could be relegated to a niche player of luxury electric cars if they are unable to make an early splash in the mass market segment. A segment that is sure to see no shortage of competition from Detroit and Japan.
I am not going to make a valuation argument, it didn’t matter when the stock was making new highs everyday in 2013 and the first half of 2014, and the decline in multiples as the stock has made new lows almost every month since September has not increased investor interest. Management, specifically CEO Musk has been very active in his promotion of new products or corporate announcements, and until recently it has not been that helpful for the stock, merely creating hype and giving investors the opportunity to sell into short term strength.
In the last few weeks, Musk has been very promotional, starting with this Tweet on March 30th when the stock was $183:
Major new Tesla product line — not a car — will be unveiled at our Hawthorne Design Studio on Thurs 8pm, April 30
— Elon Musk (@elonmusk) March 30, 2015
Last week, while the markets were closed for Good Friday, the company released the following press release:
The stock has bounced off of 11 month lows. But regular readers also know that we are pre-disposed at this point to sell rallies in the stock because the long term chart is a textbook Triangle of Death. And from a trading perspective, despite high short interest and poor sentiment., the fundamental set up still points to playing for a breakdown in my opinion.
There are a couple identifiable events. First is the April 30th product announcement that we think will very likely be something we already know about, like a home battery. And then there will be the May 7th Q1 earnings results.
Despite the stocks rise in the last couple weeks, options prices have increased into these events. But interestingly, 30 day at the money implied volatility is not yet above where it has been prior to the last 4 quarterly reports, signalling less fear. There has been a downward trend in earnings cycle implied vol for a while now:
[caption id="attachment_52631" align="aligncenter" width="600"]
TSLA 1yr chart of 30 day at the money IV from Bloomberg[/caption]
We think there is potential for the April 30th product announcement to disappoint, and despite already knowing the car deliveries for the quarter (which were better than expected) we don’t know what the margins were and we have no sense for guidance.
My ideal entry on the short side would be a few % points higher, closer to $215, but gun to my head right here at $208.50, this is the trade that I would do for short exposure with defined risk:
Hypothetical Trade:
TSLA ($209) Buy to Open May 8th weekly 205/180/155 Put Butterfly for $5
-Buy to open 1 May 8th weekly 205 put for 10.30
-Sell to open 2 May 8th weekly 180 puts at 3 for a total of 6
-Buy to open 1 May 8th weekly 155 put for .70 to open
Break-Even on May 8th weekly expiration:
Profits: between 200 and 160 make up to 20, max gain of 20 at 180
Losses: between 200 and 205 lose up to 5 & between 155 and 160 lose up to 5, max loss of 5 below 155 and above 205
Rationale: Outright shorts of the stock seem like a bad risk reward given the short interest and what could have marked a low in sentiment. Given the elevated levels of implied vol, trade strategies like Butterflies make a lot of sense. Targeting 180 also looks like the level where the stock should find near term support, while the trade structure offers the potential for profits in the event the stock overshoots to the downside. Lastly, risking less than 3% to possibly make up to 9% seems like an attractive risk reward.
We are going to see where the stock looks like it is running out of gas and put on a similar trade, possibly adjusting the strikes slightly.