Earnings Updates – SPOT, TSLA

by CC May 3, 2018 11:15 am • Trade Updates

Yesterday we previewed two earnings events for widely talked about stocks, Tesla, and Spotify. We didn’t have a strong conviction either way in either stock, but we detailed directional trade ideas for those that did. With both stocks lower following their release and conference calls I wanted to check back in on the trade ideas we detailed. First, in SPOT:

Bearish Trade Idea:

SPOT ($169) Buy May 165 / 150 / 135 put butterfly for $3

Rationale: This trade idea risks less than 2% of the stock price to make a near-term bearish bet that is profitable on a very wide range to the downside in the next two weeks. The butterfly trade structure helps offset what is unusually high options premiums.


Bullish Trade Idea:

SPOT ($169.) Buy May 172.50 / 200 call spread for 6.50

Rationale: This trade idea risks a little less than 4% of the stock price to make a near-term bullish bet that stock continues to make new highs in the coming weeks. Risking 4% to maybe make 12.5% seems like a fair bet at best, but I guess its all a matter or conviction.

With the stock lower by $16, or over 9%, and now trading $154 the call spread is basically worthless, trading at about .80 after the move. But that was sort of the point of risking 4% with what could be asymmetrical risk to the downside. Losing on a directional call spread into an event is not good, but 4% is less bad than 9% in the stock. As far as trade management nothing can really be done unless you think the selling is a bit overdone and the stock could reverse. In that case selling the May 172.50 call and looking for a trade to target a move back towards 170 farther out could make sense. The June 155/170/185 call fly is about 2.50 right now, so that would only be adding about 1.70 in risk for the chance to make the loss back into June if the stock were to bounce.

Moving to the bearish trade, the May 165/150/135 was a nice way to play for this move, it’s now worth a little over $6 versus the original $3 at risk. But with a little patience it could be worth alot more. Right now it’s intrinsically worth about $11, and expiration will approach fast and that will gain in value as long as the stock is in this area. The only risk to this trade is a sharp bounce higher so a stop at $159 makes sense. Any close on May expiration below that (as long as it’s above $141) will mean more profits. A bounce above that level and those profits are at risk. Patience will pay off if the stock stays within that range and it could be worth up to $15 if the stock is near 150 at expiration.

Now to TSLA, the conference call was a bit bizarre with Elon Musk ignoring a couple of questions from Wall Street analysts (calling them boring) before moving on to questions from Youtube. Elon has shown a weird trolling streak the past few months when it comes to Tesla stock and it remains to be seen how much more investors, especially institutional will put up with it. They clearly weren’t thrilled about last night’s example.

Here were the two trade ideas we detailed:

Bullish Trade Idea:

TSLA ($304) Buy June 315 – 350 Call Spread for $10

Bearish Trade Idea:

TSLA ($305) Buy July 300 – 250 Put Spread $15

With the stock down about 7%, trading near $279, the June 315/350 call spread is worth about 4.70 versus the $10 originally at risk. As far as trade management it probably makes sense to close this for a loss and look to see how this plays out and how low the stock goes before taking another bullish position.

On the bearish trade, the July put spread is now worth about $20 versus the initial $15 at risk. $20 is about what the trade is worth intrinsically so this is more a matter of conviction level with expiration so far out still. It could make sense to roll the long strike lower at some point for those looking to reduce overall risk. Selling the 300 put and buying the 275 put doesn’t book any of the current profits but it does reduce risk by $12 and leaves a potential to make up to $22 if the stock goes below $250 in July. The risk that would remain on the entire position is just $3, with the opportunity $22.