Tesla (TSLA) Range Anxiety

by Dan June 7, 2017 11:08 am • Trade Ideas

On CNBC’s Fast Money we discussed Tesla’s (TSLA) shareholder meeting, the stocks year to date gains of 65% and what catalysts investors were expecting from the company to maintain the stock’s upward momentum. Frankly, I don’t have much to add. As I have stated recently, TSLA has replaced Apple and Amazon as the shiniest thing in financial markets. I suspect that uniquely positive sentiment has much to do with the stock’s outsized gains than anything new from the company lately. I think it is safe to assume there has never been a stock that has seen its value rise to nearly $60 billion as quickly as TSLA has since its June 2010 IPO at $17 (or about $225 million). While past performance is not indicative of future returns, I would guess that for the stock to meaningfully correct in the near term it would take a sharp broad market correction and/or a massive execution hiccup on their upcoming mass-market Model 3. But, it is important to note that since the stock began its epic parabolic run in 2013, it has had five peak to trough declines of at least 30%, some as large as 50%:

Bloomberg

Your guess is as good as mine from where the next 30% plus correction comes. But it certainly will come. And it’s not too bearish to assume that correction is likely to come soon when you consider the stock has doubled since its mid-November 52 week lows:

Bloomberg

Short-dated options prices have picked up a bit lately with 30 day at the money implied volatility at 36% (blue below), nearly equal to 30 day realized volatility (how much the stock has been moving, white below), signalling that options prices are cheap for those looking to make directional bets in the name with defined risk:

Bloomberg

The next identifiable catalyst for the stock will be Q2 earnings which should fall in the last week of July or the first week in August. Longs might consider short-term protection targeting its post Q1 earnings gap back towards $300, which might also prove to be a reasonable near-term correction target for those looking to play for a correction.

So what’s the trade?

Hedge/Bearish

TSLA ($359) Buy the June 30th 325 / Aug 350 Diagonal Put Calendar for $20

-Sell to open 1 June 30th 325 put at $2.75

-Buy to open 1 Aug 350 put for $22.75

Breakevens on June 30th and August expirations – Before June 30th, if the stock goes higher this trade/hedge becomes a loser as it’s pretty aggressive short deltas. If the stock goes lower it will do well as the Aug puts gain much more in value than the June puts do. After June 30th expiration, it’s simply an August put and will likely be spread.

Rationale – This is essentially an Aug at the money put, but with the sale of the lower strike in June 30th expiration we’re establishing a method to chip away on the overall premium spent for protection. The idea here is to continue to roll the short put as it expires worthless.