Name That Trade – $TSLA: Electric Boogaloo

by Dan June 29, 2015 3:27 pm • Commentary

Regular readers know we are huge fans of Tesla’s Model S, their CEO Elon Musk and his vision to transform the way human’s transport themselves and store & consume energy.  But as traders we find the recent sentiment shift, and the current technical set up to be compelling for a defined risk bearish trade, but not yet.

Lets start with the 3 year chart, is that recent bounce from below $200 setting up to be the right shoulder of a textbook head and shoulders top formation??

TSLA 3yr chart from Bloomberg
TSLA 3yr chart from Bloomberg

If that is the case, in the near term we would be inclined to play for a pullback to $220/225, the January/February high that it blew through in late April, with an obvious long term target of $200 on company specific news and/or a broad market decline.

It is our view that the stock already incorporates a lot of good news including; the Q4 release of the Model X, excitement around the recently announced Powerwall and the Gigafactory.

Its our view that the stock’s 45% gains from the late March lows does not incorporate how TSLA plans to pay for all of this expansion, manage production of multiple cars and products, the potential for lower for longer energy prices, weak emerging market demand (China), while CEO Musk deals with troubles at SpaceX and is the chairman of Solar City’s Board.  Again, we hope he can do it all, green cars, green electricity and get us to space, but the likelihood is not great and the TSLA’s stock price, faced with no shortage of potential headwinds for its founder and CEO, seems priced to perfection, while options prices look just plain complacent.

The one year chart below of 30 day at the money implied vol (blue) vs 30 day realized vol (white, how much the stock has been moving) shows both coming off 52 week lows:

from Bloomberg
from Bloomberg

Therefore we think it makes sense to buy some vol for a potential pullback while we have a chance.  But the stock did a nice job showing relative strength today to many high valuation stocks, and held $260 all day.  We would like to play for a meaningful break of $260, but would like to put this trade on after seeing what sort of bounce the stock has.  Here is the trade we would put on here, but we are gonna wait another day or so:

Hypothetical Trade – Buy the TSLA ($262.35) Sept 250/200 put spread for $10.50

– Buy 1 Sept 250 put for 12.60

– Sell 1 Sept 200 put at 2.10

Breakevens on August expiration:

Losses of up to 10.50 above 239.50 with a total loss above 250.

– Gains of up to 39.50 below 239.50 with max gain at 200 or below.

Rationale – Earnings fall in early August and this trade captures that event and then some. But even before then the technicals on the chart could mean a quick drop towards our long put strike if it fails to hold here. If the stock does hold and go higher from here we’ll look to keep the losses to a 50% cap as the trade would basically be a lottery ticket at that point.

We are also expecting a capital raise at some point this year, which the company says won’t be dilutive to existing shareholders, we are just not sure how that can be accomplished.