Trade Idea $TSLA: Electric Slide?

by Dan November 20, 2015 2:57 pm • Commentary

Let me start by saying in the long run, I suspect it will be a costly strategy trying to make money betting against Elon Musk.  But, Musk had a fairly noisy year in the three companies he is a large shareholder of, SpaceX (private), SolarCity (SCTY) and Tesla (TSLA).  SpaceX saw one of its rockets explode on a mission for NASA to re-stock the international space station back in late June, SCTY has seen its share price get cut in half from its 52 week highs, down 45% on the year, and now TSLA, down 2% on the year, after at one point being up nearly 30% in late July.

Tesla at the moment has its hands full with some massive initiatives. If they were to pay off they could change the way humans power their lives. Musk’s vision of the future has TSLA broadening out from luxury electric cars like the Model S, D & X, and quickly moving towards volume production of their planned mass market Model 3 that they promise will cost less than $45,000 and the proliferation of stationary storage, a product which they announced this year, the Powerwall home battery.  For the long term vision to be realized TSLA will need to complete the build out of their multi-billion dollar battery factory, which this so called “giga-factory” will need to be funded on top of partner’s like Panasonic’s contribution, tax breaks and through further debt issuance and/or dilutive equity issuance.

Today the stock is down a bit on news of a recall of Model S’s due to a faulty seat-belt, this probably sounds worse than it is if it is really about a seat-belt.  But in the last couple months the company has guided down near term car deliveries while guiding up future deliveries, Consumer Reports stated that a version of the TSLA Model S scored higher than any other car ever in their tests, but then shortly later pulled their recommendation due to poor reliability, the news-flow feels like a continual push-out.  Most importantly, while growth investors have crowded into stories like Amazon and Netflix, they seem far more skeptical when considering TSLA.  This bifurcation suggests in the near term we will likely see lower lows, with the potential of a serious gap on unexpected bad news.

Taking a quick look at the two year chart, it highlights just how important the $200 support level is, with a very reasonable near term target of the prior low near $180.  If the company were to once again push out deliveries in the new year, I suspect the stock could re-test $150:

TSLA 2yr chart from Bloomberg
TSLA 2yr chart from Bloomber

Despite the stock’s poor performance, it pressing TSLA’s weakness appears to be a more attractive trade than trying to pick a bottom.  I want to finance the purchase of longer dated puts by selling short dated ones. (see alternative trade at the very bottom for those who may not be interested in threading the needle with a calendar):

*TRADE: TSLA ($220) Buy Dec 31st / March 200 Put spread for $9

-Sell to open 1 Dec 31st 200 put at $4.50

-Buy to open 1 March 200 put for $13.50

Break-Even on Dec 31st Expiration:

-Max gain on Dec 31st expiration at $200, max risk of $9 with large moves above current levels, or below $200.

-the ideal scenario is that the stock grinds a bit lower towards $200, the Dec 31st 200 put expires worthless, and the short leg offsets decay in March, while the stock’s movement towards the strike adds deltas to the position.

-On Dec 31st expiration I will look to turn into a vertical spread by selling a lower strike put in March expiration.

Rationale:  Forget valuation, it doesn’t interest me in a stock like this, but financing long premium directional trades in a high vol name like TSLA makes sense.

BUT, for those who want to keep it simple, and want to own the $200 strike put with some time for a bearish thesis to play out, then you may want to simply buy a vertical put spread:  

Alternative Trade:  TSLA ($219.50) Buy March 200/150 Put Spread for $10.50

-Buy 1 March 200 put for $13.50

-Sell 1 March 150 put at $3

Break-Even on March Expiration:

Profits: between 189.50 and 150 of up to 39.50, with max gain of 39.50 at 150 or lower.

Losses: of up to 10.50 between 189.50 and 200, with max loss of 10.50 above 200.