Considering Our Options – Tesla ($TSLA) powering down

by CC October 12, 2015 3:54 pm • Commentary

A few weeks ago we entered a bearish trade in Tesla (TSLA) for a number of reasons. One of the mains reasons is that  Tesla is a story stock, and we felt the story beginning to change as we approached the unveiling of the Model X. To summarize, Tesla already makes amazing cars. What they have yet to prove is that they can make amazing cars that can be affordable and mass produced. Here’s a bit from the original post:

Obviously I’m not the first person to doubt that TSLA can build an affordable car. I hope they can. I’m rooting for them. But all I care about here is the stock. And the entire bull thesis on this stock is they can make an affordable car. So far all they’ve proven is that they can incrementally build more expensive cars. The cars are amazing. But so are Ferraris.

On September 29th Tesla held an event at its Fremont California factory unveiling the finalized Model X. The stock is down about $30 since the event (while the broader market is higher) and it’s down about $50 from early September. It’s even had a hard time catching a bid with the recent rebound in oil prices. So something seems wrong, at least for now.  Here’s what founder Elon Musk tweeted shortly after the Fremont event:

This was in response to criticisms. People are waiting for the People’s Tesla (™?) while they continue to make more expensive Tesla’s that are likely to be bought in large part by people that already own Teslas. From a public relations standpoint the Model 3 can’t come soon enough. And any further delays or setbacks are not good for this stock.

So to our trade. Let’s recap:

Trade – Buy the TSLA ($247) Dec 230/180 put spread for $13
  • Buy 1 Dec 230 put for 18
  • Sell 1 Dec 180 put at 5

It’s December expiration, so we have time, but this is a volatile stock and we need to make sure we don’t miss any short term opportunities. Right now the trade is worth about 19.50. $220 was decent support and so far the stock does not look like it’s holding. Ideally for our trade we’d quickly see a move towards $200 but that’s not guarnateed so we need to have a strategy here. With the stock at 217 the trade is only worth $13 intrinsically. That means time is not on its side if the stock doesn’t continue lower. However, it has massive profit potential ($37) if it does continue lower. One idea is to roll the lower strike higher. By buying to close the 180 put and selling to open the 200 put we could reduce some of our risk. That roll takes about 5 dollars of risk off the table but reduces the maximum potential of the trade down to $23. But if you’re not in this for a homerun that roll makes a lot of sense.

For those more after the homerun, the second option is to start a rolling stop on the trade. Stay in the game but on the first sign of a reversal, close the trade for a profit. That’s sort of the position we currently find ourselves in. If the stock were to reverse hard back over $220 we may have no choice but to take the profits we currently have. But we’d like to stay in the position for as long as we can. So we’ll keep a stop on the trade in case it reverses. And perhaps at some point lower in the stock we’d look to roll the downside put or simply take part of the trade off. If we saw a move towards 200 in the near future we may even take the entire trade off. We’ll update on the site when we make any moves.