$TSLA 3 Point Line

by Dan April 1, 2016 1:18 pm • Commentary• Trade Updates

Earlier I had some thoughts on Tesla’s unveiling of their mass market electric vehicle expected to ship in late 2017 ¯\_(ツ)_/¯ (see below).  I wanted to follow up with a trade idea not too different then the last time we traded the stock in the site back in November (here).

Shares of TSLA opened up this morning nearly $18, or almost 8%, but has since given back most of those gains with the stock up only 2.35% as I write at $235.  After what was a 40% decline on the year at its Feb 9th lows, shares of TSLA have since rebounded 75%, having recently broken the downtrend from the all time highs made las July:

TSLA 1yr chart from Bloomberg
TSLA 1yr chart from Bloomberg

In light of the stock’s 32% short interest, and 22.4% ownership of CEO Musk, volatility on days like today are understandable, but the reversal and the lack of near term catalysts could set up for disappointment when the company reports their Q1 results in the first week of May.

Short dated options prices remain elevated, with 30 day at the money implied vol at 51% vs 30 day realized vol (how much the underlying is moving) at only 38%:

TSLA 30 day atm IV (blue) vs 30 day realized vol (white) from Bloomberg
TSLA 30 day atm IV (blue) vs 30 day realized vol (white) from Bloomberg

This could present an opportunity to sell short dated options to finance the purchase of longer dated ones that target an event like earnings and beyond.

It’s my view that a ‘sell the news’ failure after last night’s event, and this morning’s open after an epic run since February could set up for a move back to $200 or so in the coming months.

So what’s the trade? 

*TRADE: TSLA ($235) Buy April 15th / June 17th 210 Put spread for $10
  • Sell to open 1 April15th  210 put at $2.50
  • Buy to open 1 June17th 210 put for $12.50

Break-Even on April 15th Expiration:

-Max gain on April 15th expiration at $200, max risk of $10 with large moves above current levels, or below $210.

-the ideal scenario is that the stock grinds a bit lower towards $210, the April 15th 210 put expires worthless, and the short leg offsets decay in June, while the stock’s movement towards the strike adds deltas to the position.

-On April 15th expiration I will look to turn into a vertical spread by selling a lower strike put in June expiration.

Rationale – Calendar spreads look dollar cheap to position for a pullback after this massive run higher. The June calls are about 52 vol which is high historically but  considering they capture earnings, they should have a bid under them. If April expires worthless we will then have some options as to how to roll the short side of the spread and further reduce premium. The obvious risk to the trade is if TSLA takes out this morning’s highs so that will be our stop on the upside.

Oh and the correlation to oil that I mentioned earlier, on a few occasions over the last year, when TSLA’s stock worked higher as oil turned, TSLA’s price soon took a dive:

From Bloomberg



MorningWord 4/1/16: 3 Is The Magic Number? – $TSLA 11:04 am EDT – April 1, 2016 By Dan

In case you missed it last night, Tesla’s (TSLA) CEO Elon Musk  unveiled their highly anticipated mass market electric vehicle. The Tesla Model 3 will start at $35,000 (before government subsidies) and will be available to ship in late 2017 (this is squishy as the company is notorious for missing such self-imposed deadlines). Watch highlights of last night’s live event from Tech Insider here and from The Verge here.  Musk has stolen a fairly important page out of the Steve Jobs playbook as it relates to creating hype around new products, and much like Jobs he has been delivering on the product front, albeit at a astronomically higher price point on substantially less units.

The Tesla hype machine is in full effect, with the company and the press happy to show off the pent up demand for the Model 3:

At 180,000 pre-orders and growing ($1,000 deposit required) investors and analysts alike can start to envision how a mass market ev offering will more than double last year’s sales of $5.3 billion to an expected $11 billion in 2017.  While that sort of revenue growth is impressive for a car company, it’s important to note that if they are to achieve these sales estimates, it will be less than one month of sales for Ford (F) and General Motors (GM) who posted $140 billion and $152 billion in annual sales in 2015.

On both and Adjusted and GAAP basis, TSLA’s eps losses ballooned to negative $2.30 and $6.93 respectively in 2015, but expected to show a $1.16 gain adjusted in 2016 and $3.03 in 2017 (76 cent loss GAAP in 2016 and $1 gain in 2017).  From 2014 to 2015, TSLA’s cash position went from $1.9 billion to $1.2 billion, cash burn could become a big issue with all the development balls they have in the air.

With the enthusiasm around last night’s unveiling, TSLA’s shares are back to unchanged on the year near $240, after being down nearly $100, or 40% on February 9th. That’s impressive.  But here is the thing, now we sit and wait for what is likely a early 2018 delivery of the Model 3.  Investors have a clear sense for what needs to happen between now and then, continue to grow on the high end with their Model S, D and X, continue to make progress on stationary storage with their Powerwall and most importantly, complete their Gigagactory to supply batteries for all of this as well as fulfilling Musk’s dream of transforming the power-grid. All lofty and noble goals, except for the fact that lower for longer oil might throw a little monkey wrench into their mass market aspirations in the near term. The $35,000 Model X is billed as mass market, and it’s essentially in line with the average cost of a new car in the United States last year.  Two dollar gas at the pump may not effect the buying habits of higher end ev buyers like the Model X and S, but it may mean lower end buyers are a bit more cautious about jumping into the EV fray if the 3’s price quickly ramps higher on add-ons. Remember, a lot of the math someone does when buying a hybrid is to figure out how long it will take to pay off the extra money that it cost compared to an internal combustion of the same model. When oil is lower, that time-frame is longer, when oil is high, that timeframe shrinks. That hasn’t been an issue on TSLA’s 100k cars, those buyers could care less if gas was 1.80 a gallon or 3.80 a gallon. But it will matter on a mass market car. Sales of the Model 3 (beyond the fanbois that instantly dropped the 1k to be on the waiting list) will ultimately hinge on direct comparisons to other cars in its price range. Elon Musk’s take on this is just to build a much better car than a Prius, Leaf or Volt. And he seems on the verge of doing that. But with add-ons, if the Model 3 is suddenly in the 40k+ range and gas prices stay low, the comparisons start to creep outside existing EVs and Hybrid small sedans, and you start competing with the likes of BMW and Audi mid sized luxury SUVs. That difference in size vs price is important to a lot of 2 car families.

The chart below of TSLA vs Crude Oil futures has obviously been high correlated over the last year, until the recent divergence into last night’s event, this could present an opportunity on the short side for TSLA, especially if Crude were to continue to retrace some recent strength back to the low $30s:

TSLA vs Crude Oil 1yr chart from Bloomberg
TSLA vs Crude Oil 1yr chart from Bloomberg

A move back to $200 could be in the cards in the coming months with the stock devoid of news, and most importantly if oil peaked below its 200 day moving average (yellow below), its 3rd counter-tend failure at its momentum indicator in the last year:

Crude 1yr chart from Bloomberg
Crude 1yr chart from Bloomberg

Stay tuned for trade ideas.