$TSLA – Hedge and Stock Alt

by CC May 4, 2016 2:09 pm • Commentary

Earlier, Dan previewed Tesla’s Q1 earnings due after the bell. Now we want to look at a couple of strategies in the options that may make sense for those long the stock or thinking about making a directional bet. Before we do that, earnings isn’t the only news hitting the tape today for the company. Let’s check in on some news in TSLA since we wrote that post that has the stock down intra-day. First there was the announcement that 2 executives from production and manufacturing are leaving Tesla. Then shortly after, famed short seller Jim Chanos revealed that he is short TSLA and its brother from another mother Solar City (SCTY) at the Sohn conference.

So let’s check back in with the stock because with those two news stories it is down 4% on the day and now below its converged 50 and 200 day moving averages:

Screen Shot 2016-05-04 at 11.41.12 AM
6 month TSLA from LiveVol Pro

As Dan mentioned the next support level on the downside seems to be 220, and below that like 200. That area is where we should look for protection for longs, we’re gonna keep it simple here:


Vs 100 shares of TSLA ($222) Buy to open the May6th weekly 200 puts for 2.00

Rationale – This is less than 1% of the stock for unlimited protection below 198. Considering the stock just went from 140 to 260, it makes sense to hedge a long in case Chanos is right and this thing round trips that move. It’s unlikely that it all happens at once (if it ever does) but to be able to protect for less than 1% of the underlying makes for a cheap way to not be too worried about what happens on this earnings release.


Stock Alternative / Replacement:

In lieu of 100 shares of TSLA ($222) Buy the May 225/255 call spread for $8

  • Buy 1 May 225 call for 10.50
  • Sell 1 May 255 call at 2.50

Rationale – This trade has a break-even at 232 and a max gain of 22 at 255 or above in the stock. $255 is where the stock consolidated before its weakness into the print and it is outside the implied move to the upside. So it’s unlikely that there is a regret of selling that 255 strike. On the downside this trade works much better than long stock as it can only lose 8 vs unlimited in the stock. The $8 spent is about 3.5% of the underlying as compared to the implied move which is closer to 10%.