New Trade TSLA: Does This Car Have Reverse Gear?

by Dan August 28, 2013 3:37 pm • Commentary

We have written a lot about TSLA this year as the stock has captured the imagination of investors, and car enthusiasts, while also grabbing a ton of headlines in a stock market rally that has been powered by few of the usual suspects.  Year to date we have had 2 profitable long biased trades in the name, first when the stock was just above $41 back in early April (New Trade $TSLA – Electric Slide) and then again 6 weeks later, after the stock had more than doubled when the stock was just above $91 (New Trade $TSLA: The Volatility Has Been Electric For Options Traders).

We have avoided all urges to attempt short structures as the sentiment around the stock has been too powerful, and given the high concentration of ownership among the top holders (top 10 holders own ~65% of the shares outstanding), short interest at 25% of the float and the CEO and Founder having purchased $100 million worth of stock on a secondary in May when the stock was around $93, all amounts to a NO TOUCH for us.

But maybe just maybe the news flow has approaches as good as it gets in the near term.  Let’s not forget that the stock’s year to date gains of nearly 400% adequately reflect good news.  Trying to pick tops in mania stocks is stupid. Trying to find a low risk way to do so with defined risk at or near a point that could be an inflection point in the stock, or in the broad market is exactly what options traders try to do.

We are gonna take a stab it here, after months of watching in AWE, we think one little bit of sentiment shift could have the stock drain some of the FAST momentum money out of the name and take the stock back to technical support.

The year to date chart below shows the $120 break-out level, which happens to be just below the 50 day moving average at about $130, also the gap level from Q2 earnings.  I want to target that support level, while risking a little to possibly make a lot if the stock were to get back below $140 in the next couple months.

TSLA YTD chart from Bloomberg
TSLA YTD chart from Bloomberg

In trying to set up a short biased trade we wanted to look to spend the least amount of money as possible. Because of the high volatility in the name, puts and put spreads are damn expensive from this point of view. As are closer to or in the money flies. Because of that we looked for an out of the money fly where we risked a little bit of money for possible a nice reward. We’re either going to be completely right or completely wrong in the notion that the stock could reverse soon. With that in mind, we wanted to do a low premium, home run, speculative bet:

TRADE: TSLA ($167) Bought OCT 150/130/110 Put Fly for 3.00

-Bought 1 Oct 150 Put for 8.80

-Sold 2 Oct 130 Puts at 3.50 each or 7.00

-Bought 1 Oct 110 Puts for 1.20

Break-Even on Oct Expiration:

Profits: btwn 147 and 113 make up to 17, max gain of 17 at 130.

Losses: up to 3.00 btwn 147 and 150, and btwn 113 and 110, with max loss of 3.00 below 110 and above 150.