$TSLA Q4 Earnings Preview with Stock Alternative

by Dan February 10, 2016 2:13 pm • Commentary• Trade Ideas

Event: Tesla (TSLA) reports Q4 results tonight after the close.  The options market is implying about a 15% one day move which is rich to the 4 qtr avg of about 7% and the long the average since its 2010 IPO of about 11.5%.  Heading into TSLA’s Q3 print on November 3rd (that day the stock closed at $208, $60 or 29% higher than current levels) the implied move was only 8%.  Now with the stock at 2 year lows, down 50% from its all time highs in 2014, investors seem a less complacent and possibly a little scared options prices reflect that.

Price Action / Technicals: Shares of TSLA are down 38% year to date, and down about 50% from its 52 week highs, at 52 week lows.  For those looking for a definition of a crash in stock market terms, this is it.

For the better part of the last 2 years, $180 had served as very staunch technical support, which will obviously now be massive resistance since its recent breakdown. The stock seems destined to match the 2year low at $136.60:

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

Taking a longer term view, since the company’s 2010 IPO, the recent breakdown below the uptrend that had been in place since mid 2013 is quite disturbing, as there is no meaningful technical support until the late 2013 low near $115, and an air-pocket below that to double digits:

TSLA siince 2010 ipo from Bloomberg
TSLA since 2010 ipo from Bloomberg

Sentiment: Wall Street analysts remain fairly mixed on TSLA shares with 9 Buy ratings, 8 Holds and 6 Sells, with an average 12 month price target of $262, 77% above where the stock is currently trading. Short interest is at about 31% of the float, or about 30 million shares, very near the 29 million shares, or 22% of outstanding shares held by founder and CEO Elon Musk.

Volatility Snapshot:  30 day at the money implied vol (the price of options, blue line below) has blown out of late to levels not seen since just prior to the stock’s parabolic run in mud 2013:

TSLA 30 day at the money implied vol since 2010 ipo from Bloomberg
TSLA 30 day at the money implied vol since 2010 ipo from Bloomberg

My View: On January 3rd, TSLA announced that they had delivered 17,400 cars in Q4, a total of 50,580 for 2015, which was slightly disappointing as only 507 of the 17,400 were the highly anticipated Model X suv.  That press release was one heck of a way to start of the year. After closing on Dec 31st, 2015 at $240, the stock gapped lower on Jan 4th, the first day of trading in 2016, and since has not spent a second in the black on it’s way straight down:

TSLA 6 month chart from Bloomberg
TSLA 6 month chart from Bloomberg

The TSLA story is a tough one to get ones arms around from an investment standpoint given the fact that they have only sold 84,000 cars in the last two years and burned $500 million in cash doing so.  Prior to crude oil’s crash, electric vehicles, and visionaries like Elon Musk were about as sexy as it gets. Now maybe not so much in a market environment where mundane thinks like valuation and cash burn are in focus again for money losing companies.

Regular readers know I have a little man crush on Musk, and want TSLA to be successful, but from an investment standpoint I’ve been skeptical for a long time. (we recently closed a bearish position for a nice profit) The TSLA story is really about broadening out from luxury electric cars like the Model S, D & X, and moving towards volume production of their planned mass market Model 3 that Musk promises may cost as little as $35,000 (with tax rebates) and the proliferation of stationary storage.  For all of this to happen TSLA needs to complete the build out of their multi-billion battery factory. A factory the company will need to fund through continued debt issuance and/or dilutive equity issuance. Their ability to pull it all off has yet to be seen.

So What’s the Trade?  

Bearish: if the company lowers 2016 delivery estimates, and margins are weak, then there is little valuation or technical support and the stock will likely rest that late 2013 low identified above.  To be very honest its hard to lay out any long premium bearish trade with the stock down so much. Could the stock have a sort of puke that LNKD had last week? Maybe, but not likely, and playing for the big one like that is not generally a good strategy. If you wanted to make a defined risk bearish bet, on an event that you have no idea what the outcome will be, it usually makes sense to merely decide how much money you are willing to lose and buy (in this case) a put or a put spread.  You do not want to be long a put butterfly or ratio put spread if playing for the big one!

Bullish: If the company reports margins for Q4 that are in line with expectations, and basically BS’s 2016 guidance, the stock would clearly see a short squeeze, which I suspect would be viewed somewhat skeptically as the company is notorious for over-promising and under-delivering.

If I were inclined to play for a bounce back towards the $180 breakdown level from earlier this month, I might consider a near the money call butterfly to help offset the sky high options prices and the massive decay after the results:

TSLA ($148) Buy March 150 / 180 / 210 Call Butterfly for $7.50
  • Buy 1 March 150 call for $14
  • Sell 2 March 180 calls at $4.25 each or $5 total
  • Buy 1 March 210 call for $1.50

Break-Even on March Expiration:

Profits: gains of up to $22.50 between $157.50 and $202.50, with max gain of $22.50 at 180

Losses: up to $7.50 between $150 and $157.50  & between $202.50 and $210, max loss of $7.50 below $150 and above $210


Cautiously Bullish, targeting the next event:  The real event for long term investors will be the March 29th unveiling of the Model 3.  This could get investors fired up after what could be a sloppy report.  It could make sense to help finance longer dated calls that would catch the launch event by selling shorter dated ones with sky high Implied Volatility.

TSLA ($148) Buy Feb 12th weekly / June 180 Call Calendar for $8.50
  • Sell to open 1 Feb 12th weekly 180 call at 1.50
  • Buy to open 1 June 180 call for $10

Break-Even on Feb 12th weekly expiration:

Profits: Max gain at $180, at $85 or higher the weekly call expires worthless and you own the June 180 call for $8.50. If the stock were to come in closer to the 180 strike then the change in delta and the short Feb put should off set expected post earnings vol crush.

Losses: Any move Lower or a massive move higher (way through the 180 strike) means this trade is a loser, but the most that can be lost is what is paid for ($8.50).

Would look to spread and turn into a vertical call spread if the stock were to move closer to the 180 call strike. Might also consider turning into a calendar again.

Caveat: this is a good bit of premium, about 5.5% of the stock price.  So if the direction is wrong then you are long a way out of the money call.

If this is your view, to play for Model 3 launch, it prob makes sense to wait until after earnings.