Tesla (TSLA) – Car Tune Network

by Dan September 22, 2016 12:40 pm • Trade Ideas

We seem to be in the midst of a bubble in financial and tech media coverage of autonomous and electric cars. It makes sense when you consider the last great personal technology innovation, mobile devices, has seen its growth decelerate and innovation curve plateau a bit. Everyone has a mobile phone, and most have cars. That means tech journalists that make their nut on clicks are busy looking for the next great clickable thing. While we waited for the battle for our living rooms to explode into an all out war between the likes of Apple, Amazon, Microsoft, Netflix, Sony, Sonos etc., the tech powers that be have merely dripped a few devices out to the connected home idea (Amazon Echo, Google Nest) and side-pocketed into the Internet of Things (you’re out of milk!).  But here’s the thing, cars are just cooler than thermostats, refrigerators and TVs.

Yesterday, the Financial Times reported that Apple is considering making an investment (or outright buying) McLaren (they have denied) in a effort to rejigger their recently shaken up auto ambitions:

Apple has approached McLaren Technology Group, the British supercar engineer and Formula One team owner, about a potential acquisition, in the clearest sign yet that the iPhone maker is seeking to transform the automotive industry.

The California technology group, which has been working on a self-driving electric vehicle for more than two years, is considering a full takeover of McLaren or a strategic investment, according to three people briefed on the negotiations who said talks started several months ago.

Uber’s launch of a test of an autonomous fleet in Pittsburgh has sparked a flame war, with rival Lyft claiming that most of their rides will be autonomous in 5 years.  I’ll take the over on that, but we are moving in that direction eventually.

And you can’t talk about autonomous cars without talking about electric vehicles. Until recently, Tesla (TSLA) dominated both those headlines with troubles with their “autopilot”, and their 375,000 pre-orders in the Spring for their mass market Model 3 electric car that they say will come in at $35,000 in 2018.

This week General Motors, who has some experience producing large quantities of cars, stated they will beat the Model 3 to market and, per CNBC:

The new Chevrolet Bolt will start at $37,495. After tax credits are taken into account, the price could be as little as $30,000. That’s in keeping with where GM CEO Mary Barry said the car would be priced when it was introduced as a concept.

Tesla’s propensity to miss its own delivery date means it could even miss potential expiring tax credits. If that’s the case, GM could establish an early lead in the mass market category.

I am obviously only scratching the surface on the raging competition we’re likely to see in a transitioning auto industry. Ride sharing companies like Uber & Lyft openly promise to put massive pressure the entire concept of car ownership. Mass market electric vehicles promise to disrupt gas powered autos and the entire infrastructure fueling those cars. And autonomous cars and buses will eventually have us questioning human drivers entirely. We’re very early into this disruptive cycle, and the hype is probably way ahead of reality at the moment, but all of this will eventually happen in some way shape or form.

What got me thinking about all this was some unusual call activity in TSLA. It appears to be bullish, but you can never really tell, because it could be a buy stop on a short position. When TSLA was trading $203.85 just before 11am a trader sold to close 10,000 Oct 235 calls at 56 cents and bought to open 10,000 of the Oct 220 calls for $2.01. These calls break-even at $222.01, or up 9% from the trading level in one month.

Frankly, given the negative news of late about TSLA’s autopilot (despite today’s software update), the skepticism about their proposed acquisition of SolarCity (SCTY), their continued need to raise capital to fund Model 3 development and competitive news from GM (& potentially Apple) I am shocked the stock is still above $200. It is at a really precarious technical spot:

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

$220 looks like technical resistance and would be an ideal level to take profits or lay-out a short. Sentiment is poor, the news-flow has been bad. But there’s also the possibility of one headline, like them calling off their proposed takeover of SCTY, that could cause a short squeeze higher. Much of the negative news is known for the time being. Their Q3 earnings call in early Nov is worth keeping on the radar.

So what’s the trade?  

Gun to my head now and I look to target $200 on the downside with the catalyst being their Q3 earnings the week of Nov 1st.  With the stock at $205, I might consider buying a put calendar, selling 1 of the Sept 30th (next Friday) 200 puts at $2.50 and buying one of the Nov 4th weekly 200 puts for $11, resulting in a net debit of $8.50. That is the max risk. The ideal scenario would be that the stock sits just above $200 till next Friday, the short put expires worthless and then I would look to either sell a shorted dated put of same strike and again create a calendar, or possibly sell a downside put in Nov creating a vertical put spread.

For now, the stock acts ok in the face of bad news, so I am gonna wait on this, but wanted to put the idea on everyone’s radar.