Considering Our Options – $TSLA Put Calendar

by CC January 6, 2016 1:18 pm • Commentary• Trade Ideas

On November 20th we wrote about Tesla (TSLA). As always we tried to differentiate between what we think about the company, its products, ambitions and its founder (we’re fans) and what we think about the stock (we think any missteps in execution by the company and the stock could get slaughtered). We looked to position ourselves for a pullback in the stock out to March but wanted to make sure we covered premium risk, so we placed a calendar put spread. Here was the original:

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

Nearly a month after that on Dec 15th, with the stock unchanged from our entry, we rolled the short Dec31st call to January and further reduced our premium risk. Here was that updated position:

Action: Bought to Close 1 TSLA ($220) Dec31st 200 put for 1.70

Action: Sold to open 1 Jan 200 put at 4.30

New position: Long TSLA ($220) Jan/March 200 put calendar for 6.40 (currently worth 7.90)

Now with the stock just a few dollars lower ($217) this calendar is worth about 9.50. That’s one of the great things about a calendar spread. Even if the stock goes nowhere, its’ possible to make money. The reason is you can take advantage of the faster decay of the front month options that you are short while you can sometimes take advantage of the implied vol in your back month options increasing. And that’s exactly what’s happened here. March implied vol is higher than where we originally entered this trade.

But with the Jan calls we’re short only worth about 1.20 their decay is no longer providing a great deal of protection and this position is looking simply like a a long March put more each day. Albeit a profitable one, with a lot more potential

So we don’t necessarily have a decision to make because the stock is heading lower, and that’s good. But a sharp reversal in the stock would quickly change things as our short Jan puts are only 13 deltas and can only do so much to offset losses in our long March puts if that were to occur.

So we want to be careful here. We could just roll the calendar (short strike) again to February. The Feb 200 puts are about 8 dollars. What that roll would do is actually create a Feb/March 200 put calendar for a credit. That means we are guaranteed to make 40-50c with the potential to make a lot more. The problem with that roll is with earnings falling in February expiration it’s essentially a lotto ticket that the stock would somehow end up right at $200 on expiration. If that did happen we’d make a lot of money but you’d have to wait through the event and hope you didn’t see a massive move higher or lower. That’s moderately bearish to target 200, but our original idea was to try to finance a bearish position that could take advantage of a breakdown in the stock below 200.

So the other option (besides doing nothing) is to just close the Jan put and roll it to March to create a vertical. Right now the March 175s are about 4.40. That means if we bought to close the Jan 200s at 1.20 and sold the March 175s to open at 4.40 we’d have the March 200/175 put spread on for 3.20 (current 6.40 cost – 3.20 gained on roll). That’s a nice position to have, 3.20 with the possibility to make up to 21.80 if TSLA was at or below 175 on March expiration. That compares to the 6.30 that you would have to pay for that same spread right now mark to market.

But we’re going to be a little greedy here. TSLA isn’t acting well, and any breakdown lower than here could quickly see the stock towards 200. If we did see the market or TSLA more specifically find its footing we’d quickly turn around and make one of the adjustments discussed above, likely the cheap March vertical option. But the greedy part is that if the stock was lower than here over the next week or so we could actually book profits on a roll and be left with a bearish position in March for a credit. That would be ideal and we’ll update either way based on what the stock does next.