Following the Tesla Model 3 event we looked to fade the recent strength in the stock with an out of the money put calendar. This was a “sell the news” trade with the thought that a lot of the event was already priced into the stock with its recent run from $140. Clearly investors feel differently and are continuing to buy the stock on a breakout above what was a downward sloping trend line. This is clearly a “story stock” cycle as even lower than expected sales and deliveries released the other day only caused a brief blip in the buying:
So our calendar is at risk of getting away from us. To recap, here was 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
With the stock now 265 the April puts are worthless and the June puts have been cut in half. So we have a big decision to make here. We could take the entire trade off for the roughly 50% loss or we can try to roll the short end of the calendar to buy some time for a reversal. The good news is June expiration is a long time, the bad news is that 210 strike is looking farther and farther out of the money amidst the continuation of this rally.
Regular readers know that we generally like to use a 50% premium stop on long premium directional trades, and it feels like this trade is getting there fast, driving home the notion that we are just flat out wrong. I guess in hindsight we had no clue how hellbent CEO Elon Musk was on squeezing the 32% short interest in the stock with what has seemed like a continual barrage of media and tweets since the Model 3 unveil, here is my favorite:
@Brianmrtz probably unwise
— Elon Musk (@elonmusk) April 5, 2016
Ok so what do to? Take our losses and move on.
Update – TSLA ($267) Sell to close April / June 210 Put Calendar at $5.80 for a $4.20 loss
Rationale: This is suddenly a story stock again and seems like it’s gonna squeeze until it can’t squeeze no more. Our strike quickly became out of reach and so we’ll revisit once the rally stalls.