Trade Update – $TSLA: Closing May Put Spread In Front of Earnings

by Dan May 6, 2015 2:05 pm • Commentary

Last Thursday we made a near term bearish play that Tesla’s (TSLA) recent gains, north of 25% from late March, adequately reflected investor enthusiasm about the stationary battery announcement that was teased by CEO Elon Musk on March 30th, and the pre-release of Q1 car deliveries a few days later (read full post below).

On Friday, following the battery announcement, the stock did sell off on the news, but has since rebounded, and is slightly above where we put the trade on, rendering our trade a small loser heading into tonight’s binary earnings event. The options market is implying about an 8% one day move, which is rich to the 4 qtr avg of about 6.25%.

To refresh, here was the trade from April 30th:

TRADE: TSLA ($229) buy to Open May regular 225 / 185 put spread for $8.50

-Bought 1 May 225 put for 9.50

-Sold 1 May 185 put at 1.00

With the stock at $230 ($1 above where we put the spread on) the trade is now worth $7, or a loss of $1.50. At this point the break-even on the downside of this trade is at $216.5, down about 6.5%, which is below the implied move, but inline with the 4 qtr avg.

So here is the thing, regular readers know how we feel about long premium, short dated directional trades into events, we don’t love them. You need to get a lot of things right, foremost direction and magnitude of the move. It’s a fairly low probability of getting the home run trade with a great probability of a least a small loss.

One of the reasons for the put spread last week was the fact that there were two events, the battery announcement and then the earnings. The hope that a sell the news reaction Friday, we give us some room to play with heading into this weeks earnings. But what has happened is that whatever premium was in this week’s options for last week’s events have come in with implied vol and decay, and now with the stock basically unchanged we have a small loss.

At this point we feel like we don’t have on the right trade and frankly the risk is too great and we are going to cut our losses despite what we feel is a strong potential for the stock to retrace a good bit of its recent gains on guidance that is below expectations.

ACTION: Sell to Close TSLA ($229) May 225/185 Put Spread at $7 for a 1.50 loss.




Original Post April 30th, 2015: New Trade – $TSLA: Alternating Currents

Tonight Tesla (TSLA) will introduce their home battery (Business Insider had a great preview of the event here). The stock has had a heck of a run in the last month since CEO Elon Musk’s tweet about the event on March 30th, up 25%:

And then a week later just to really apply the screws to shorts, on Good Friday, TSLA released the following press release:


So in the next week we have two events, tonight’s highly anticipated but well telegraphed product announcement, and next week’s Q1 earnings report where we already know one of the most important pieces of info of the report.

It is my sense that the stock’s April strength reflects the positives of what is expected, but massively discounts the cost to producing their batteries, the potential for disruption to car battery production and the margins on the 10,300 cars delivered in a quarter that saw horrible sales from Detroit and a massive rebound in oil prices.

I suspect investors sell the news in TSLA. Here is how I am playing for a pull back: [

TRADE: TSLA ($229) buy to Open May regular 225 / 185 put spread for $8.50

-Bought 1 May 225 put for 9.50

-Sold 1 May 185 put at 1.00

Break-Even on May Expiration:

Profits: between 216.50 and 185, make up to $31.50, max gain at or below 185

Losses: of up to 8.50 between 216.50 and 225 or above. Max loss of 8.50 at or above 225 which is about 3.7% of the underlying stock price.

Rationale: The stock has run 26% into this event after it bounced off of massive technical support at $180 and seems to be discounting a lot of good news. I think both events in the coming week have the potential to disappoint, I like targeting the $200 to $180 range for the coming weeks.