Tesla (TSLA) Update, Hedge and Bullish Alternative

by Dan August 3, 2016 1:33 pm • Trade Ideas

Earlier, Dan previewed Tesla (TSLA) Q2 earnings due after the bell. As Dan said the options market is implying about a $14 move in either direction. That’s a little less than the recent average and even more so less than the historical average. That doesn’t seem like much of a move at all especially when you consider the larger moves that the stock has made following some of those initial earnings moves. Sometimes those have resulted in massive follow-throughs, and sometimes reversals off the initial move. But either way, this is a stock that can move $50 in short periods of time. Check out the 2 year chart to see what I’m talking about (earnings marked with blue E):

Screen Shot 2016-08-03 at 10.45.41 AM
2 year chart TSLA from LiveVol pro

So even if the earnings move itself is averaging just 7.5% over the past 4 quarters, that’s only part of the story on an extremely volatile stock.

As Dan mentioned we have positioned for a move back towards $200 and below with what was originally a Put calendar. Here was the original trade from June 29th:

*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

Now with the stock at 227 this trade isn’t set up well. The July 8th puts have expired worthless and the Aug 200 puts are pretty far out of the money and worth just under $2. So we allowed the trade to become a lotto ticket. Which is undisciplined (and something we warn about constantly but don’t always follow our own advice). But it is what it is and there’s not much to do about it now other than root for a move down towards 200 on earnings and any follow through in the next 2 weeks where we could have a chance to get out of the trade at a better level.

As far as new trade ideas I want to look at a couple scenarios. As I mentioned, holding this stock long term is not for the feint of heart as you have to withstand massive moves lower that could make you wish you owned GM or something more boring. What’s good about implied vol not being that high into this event is that hedging against a long stock position is pretty fair right now.

Hedge vs 100 shares of TSLA ($227) Buy the September 210/170 put spread for 7.00

  • Buy 1 Sept 210 put for 8.50
  • Sell 1 Sept 170 put at 1.50

Rationale – For about 3% of the stock price, this trade protects stock on any decline below 203 down to 170. It has a maximum hedge value of $33 if the stock is at or below 170 on Sept expiration. That’s nearly 15% in potential losses that can be avoided for just 3%. In a stock like this that seems like money well spent, especially considering it doesn’t just protect against the event itself but also the next month and a half after.


Bullish: Buy the TSLA ($227) Aug5th Weekly/ September 245 call calendar for 3.50

  • Sell 1 Aug5th weekly 245 put at 1.00
  • Buy 1 September 245 call for 4.50

Rationale – If TSLA is to take a run at its highs, it’s unlikely it happens on the earnings event itslelf. This trade uses the implied move which puts the stock just above 240 this week to sell a call and finance owning the same strike later on in September. The most that can be lost on this trade even if everything goes wrong on earnings (either the stock is down, or it’s up massively through the 245 strike) is just 3.50, or about 1.5% or the underlying. That’s significantly less than the implied move of about $14, and yet the trade allows for unlimited gains above the break-even of 248.50 after this week’s expiration. If the stock does move higher in line with the implied move the weekly calls can be rolled to something higher in Sept, creating a very cheap vertical. If the stock goes lower, this trade will experience mark to market losses but it has time for the stock to reverse in the next month and a half.