In a previous post I gave my thoughts on crude oil (here) and the recent 45% rally over the last month. The bounce in the commodity has eased investor’s concern in credit, currency and equity markets. As for equities, the obvious beneficiaries have been highly levered oil companies. But I wanted to talk about an entirely different proxy. Tesla (TSLA) shares have ripped 47% since February 9th, almost identically tracking the performance of crude oil. And look at the correlation between the two over the last year:
I would assume someone willing to pay $100,000 for an electric car doesn’t care too much about how much it costs to fill up the tank on their other cars. So higher crude oil prices for a company that sold 50,580 cars last year shouldn’t effect sales, right? But on March 31st the company is scheduled to debut (won’t drive off the lot until mid 2017 at the earliest) their mass market Model 3. TSLA CEO Elon Musk has said it will cost less than $35,000 with incentives. That buyer will be swayed by the annual cost to fill up their tank on whatever car the Model 3 is replacing in the driveway.
The recent volatility in TSLA shares (this year alone down 40% at one point, now down 14%) suggest investors have their finger on the trigger for any signs of mis-execution after the recent launch of the Model X (their SUV), the upcoming launch of their stationary storage product and the mass market Model 3. All of this, of course, hinges on a successful completion of their battery factory in the Nevada dessert, dubbed the Giga-Factory. Not to mention CEO Musk has been spending a lot of time on his more ambitious project, SpaceX who is in the business of commercial flights to space, and ultimately colonizing Mars. And there were rumors last week that he was interested in taking SolarCity (SCTY), of which he is the chairman and largest shareholder of, private. The guy has his hands full. I am rooting for him on all fronts, as we discussed last week on CNBC’s Fast Money (2 minutes 30 seconds in) I think Musk is gonna be doing his thing for a very long time, but jeez:
All that said, for those who are inclined to fade the recent oil move, and don’t trade futures, and don’t love the action in oil ETF & ETNs, TSLA may be one of the most correlated stocks to the price of crude.
The chart of TSLA from the start of 2015 is fairly interesting, there is an obvious downtrend which is below its 200 day moving average at about $230:
Yeah that’s another 5- 10% away depending on your target, Ill prob lean more towards $225 😉
Short dated options prices are through the roof, with 30 day at the money implied vol at 61%. That is down from the early February high of 91% but historically it’s still quite high. And if the stock were to consolidate around $200, options prices would come in even more, up to 40% lower:
There are a lot of things that lead me to believe that at the very least TSLA’s gains are becoming exhausted. This event at the end of the month could be a sell the news situation. Crude oil is obviously the wild card given the stock’s recent correlation, but at the every least vol sales look attractive.
If I were inclined to make a defined risk short biased trade I might also look to do so with a short premium options structure.
So what’s the Trade?
We are not ready to stick our toe in the water yet on the short side, we would love to see above $220. At that point I might consider selling a call spread as opposed to buying a put or a put spread. Here’s how that would look:
TSLA – Sell April 220/230 Call Spread
- Sell to open 1 April 220 call
- Buy to open 1 April 230 call
Right now this call spread could be sold at about 3.20. Which means you would be risking 6.80 to make 3.20. But up near $220 in the stock this call spread is much closer to being able to be sold at $5. At that point the risk reward to of selling a call spread at a fairly decent level of vol makes sense as opposed to buying an out of the money put or put spread.
We might also consider a put calendar like we did late last year into the new year when the stock was $220 that worked very well (read here).