Event: Tesla (TSLA) reports Q3 results tonight after the close. The options market is implying about a 6% one day post earnings move, which is essentially in line with their 4 qtr average one day post earnings move of 6% and well below the 10.7% average one day move since its June 2010 IPO (13.3 million shares were sold at $17).
One reason for the low implied move might have to do with the fact the company pre-announced Q3 car deliveries on October 2nd that were slightly above prior guidance, removing some potential uncertainty.
Price Action / Technicals: Since the stock’s nearly 5% post delivery announcement pop on Oct 3rd, the stock has given back all of those gains, and is now down 16.5% on the year, and down 25% from its 52 week highs made in April. The one year chart reflects what I refereed to last week as a newsy year, ranging from:
issues with their autopilot in their Model S & X, push-out of completion and cost over-runs of their battery gigafactory. They also introduced their mass market Model 3 with pre-orders equaling nearly 400,000 but that’s not likely to ship until 2018. The pre-orders were significant because that was essentially a $400 million zero interest loan in the form of customer deposits. They then announced their $2.6 billion bid (bailout) for SolarCity (SCTY) all amidst renewed investor concern about how to fund CEO Elon Musk’s ambitions as cash burn has become a big investor focus, giving way to the increased likelihood of dilutive capital raises, the last coming in mid May when the company sold 10.7 million shares at $215, with the overhang of more to come (Musk has gone back and forth on this).
Wow that was a mouthful. The stock’s 2016 range of $140 on the downside in February to nearly $270 in early April, reflects the volatility in execution of on such ambitious plans, but also reflects changing investor faith in their balance sheet.
From the 52 week highs, the stock is in a well defined downtrend, making a series of lower lows, but has found some support in and around $200:
Taking a view from the stock’s 2010 IPO, it becomes fairly clear how important $200 support is dating back to 2013. The air-pocket below goes all the way down to nearly $145, the 2016 low:
My view into the print:
Obviously there is a lot of bad news in the stock at current levels. Path to profitability, cash burn, capital raises and color on SolarCity buyout will dominate the QnA on the call. But investors’ focus needs to be the company’s execution on making cars, color on demand for $100,000 electric cars and realistic progress on their proposed mass market $35,000 Model 3 (not expected to ship until at least late 2017, or in any volume until 2018). Musk likes all the moving parts as it’s hard for critics to lock in on any one issue. But this is a company everyone projects grand visions of the future when the stock is screaming higher, and realizes it’s still a car company when the stock is going down.
Unless delivery guidance is well below expectations, or we see further delays and cost over-runs with their battery gigafactory or no announcement for capital raise, the stock probably bounces. The reason? The stock has 25% short interest and it is already down some recently.
That said, any further negative surprises and the stock is on its way back to $150. It’s unlikely we see too many positive product surprises until we get closer to Model 3 deliveries next year. The company, and in particular its founder may seem all over the place with grand visions of what the world will look like in 10 years, but for investors, it’s all about the Model 3. The company needs to nail a mass market car or it simply stays an interesting story in the luxury car space.
So What’s the Trade?
Buy the TSLA (202.75) Oct28th weekly 200 puts for 4.75
Rationale – If guidance is terrible it’s unlikely longs are going to be able to defend the 200 level and below that is a big air pocket where the only buyers may be those already short covering for a profit.
Buy the TSLA (202.75) December 200/225/250 call fly for 6.00
- Buy 1 Dec 200 call for 13
- Sell 2 Dec 225 calls at 4 (8.00 total)
- Buy 1 Dec 250 call for 1
Rationale – This trade is like buying stock for 206 but with a max loss of 6.00 if the stock goes lower. On the upside it targets 225 and has a max profit of $19 if the stock closes at 225 on December expiration. The implied move on earnings is over $12 so this risks about half of that. Of course there’s risk higher if the stock squeezes above 225 because profits trail off above that level and it can actually lose money above $244, so for those worried about that kind of move a simple call spread in Dec like the 205/235 call spread may make more sense, but at $8 it’s obviously more overall risk with a worse break-even at 213.