In late November (read here) we laid out a near term bearish case for shares of Tesla after what was a fairly newsy period for the company:
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.
The trade that we put on targeted a break of $200 in the near year, but we wanted to finance owning longer dated puts at that strike by selling shorter dated ones. Here was the original trade from Nov 20th:
*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
As we got close to the expiration of the short strike in mid December (read here), with the stock in a similar spot to when we put the trade on in Nov, with options prices higher, we had an opportunity to roll the short strike, and further reduce our longer dated put premium, and thus our risk. Here was the roll from Dec 15th:
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 down 14% on the year, and nearing our strike with four days to Jan expiration, when our short strike expires, we are now going to roll the calendar into a vertical put spread:
Action: Buy to close 1 TSLA ($206) Jan 15th 200 put for 2.50
Action: Sell to open 1 TSLA ($206) March 175 put at 6.40
Executed the roll for $3.90 Credit
New Position: TSLA ($206) Long March 200 / 175 put spread for $2.50 (the previous cost of the put calendar less the credit of today’s roll).
New Break-Even on March Expiration:
Profits: gains of up to 23.50 below 197.50 with max gain at or below 275
Losses: of up to 2.50 above $200
Rationale: this calendar has worked exactly as one would want and now we’re left with a shot out to March that TSLA breaks down here for next to no risk with a 9 to 1 payout possible. By executing this roll now with the stock approaching $200 we’ve reduced our premium risk to just 2.50 and established a bearish position even if the stock drops below $200. The risk with staying with the position as a 200 strike calendar is that if the stock drops below 200 it becomes long delta. Now we have a cheap put spread (at a more than $6 discount to what it is trading mark to market) in March with very little risk and a very nice potential reward if the stock breaks down from $200.