$TSLA – Solar Storm 

by Dan June 29, 2016 1:19 pm • Commentary• Trade Ideas

Shares of Tesla (TSLA) have had a fairly volatile year, at its lows in February down 40%, at its highs in April up 90% from those prior lows. So far this year, investors concerns have ranged from valuation, liquidity and execution, which depending upon how the wind is blowing is pitted against euphoria regarding the promise of a $35,000 mass market electric vehicle, scaled production of their Model X SUV, proliferation of stationary storage devices, aka their Powerwall, and the completion and ramp of their battery “gigafactory”.  

What some bulls will tell you is that they are investing in Elon Musk, as they had done in other tech visionaries like Steve Jobs, Jeff Bezos and Mark Zuckerberg. But the notion of giving Musk enough rope to hang himself with might have hit a snag with last week’s announcement that TSLA planned to buy SolarCity (SCTY) the solar panel company that Musk is the Chairman and largest shareholder of, and whose cousin is the Founder and CEO.  TSLA shareholders weren’t excited for multiple reasons, none more important than the perception that Musk was using TSLA’s currency to throw money-losing SCTY a lifeline, the obvious questions about corporate governance and naturally the strategic importance of such a move.

The day after the announcement, TSLA had its largest one day opening decline since August 24th, 2015, and its biggest volume day in nearly 3 years, wiping out $3 billion in market cap, very close to the proposed purchase price (including debt) TSLA offered for SCTY. TSLA has rallied back about 10% from Monday’s lows, in an apparent attempt to fill in the SCTY bid induced gap.  I’m not sure if you see what I see, what $220, very near the stock’s 200 day moving average looks like a pretty attractive short trade entry for those who think that a company will be devoid of positive headlines for the foreseeable future (with the Model 3 headlines behind) and the potential for further concern about the SCTY bid:

[caption id="attachment_64702" align="aligncenter" width="600"]TSLA ytd chart from Bloomberg TSLA ytd chart from Bloomberg[/caption]


I want to target a breakdown back below $200, using August expiration to isolate the company’s Q2 earnings results.  I want to look to finance August puts by selling short dated puts of the same strike.

So what’s the trade?

*Trade: TSLA ($209) Buy July 8th weekly / Aug 200 put calendar for $11

-Sell to open 1 July 8th 200 put at 3

-Buy to open 1 Aug 200 put for 14

Break-even on July 8th weekly expiration:

An ideal situation is a close at or near 200 in the near term (on July 8th) and then further weakness after. But the trade can be profitable in numerous ways as long as a sharp love higher or a big gap lower doesn’t happen in the next (holiday shortened) week and a half.

Rationale: TSLA’s story is slightly damaged after the SCTY announcement. With a long time between now and any real light at the end of the Model 3 tunnel, rallies can be sold into with defined risk.