MorningWord 2/16/17: Will Tesla (TSLA) Run Out of Juice?

by Dan February 16, 2017 9:28 am • Morning Word

On Tuesday morning, my Fast Money friend Tim Seymour asked me what put spreads I liked short dated in Tesla (TSLA) to play for a quick pullback to maybe $260ish (when the stock was trading $284). My sarcastic response, which is the norm to most of Tim’s questions to me (on and off air) was “why bother?” The stock has come this far, how could it not at least kiss its all time high from 2014 at $291.42 and then just for shits and giggles ring the bell at the nice round number of $300, which would nearly be equal to $50 billion in market capitalization:

TSLA since 2010 IPO from Bloomberg

While the stock’s 60% gains since early December appear to be absolutely mental it’s not unusual in this stock. A quick gander at the above chart shows has had at least one 50% rally a year since 2013. But all culminated with an at least 30% drop. I guess this has just been a run of the mill run for shares of TSLA.  While I see what Tim sees at $260, the fairly epic breakout level came in mid January at $240, which could be a healthy near term target, about a 15% re-tracement from Tuesday’s 52 week high:

TSLA 1yr chart from Bloomberg

Your guess is as good as mine as to whether or not it makes new highs despite a lack of fundamental news, and Wall Street and investor sentiment that remains mixed with 8 Buy ratings, 10 Holds and 6 Sells with an average 12 month price target by those analysts down at $231, while short interest barely budges at 28% of the float, despite the stock’s meteoric rise of late.

While short dated options prices appear reasonable, with 30 day at the money implied volatility (blue line below) at 41%, well below its 52 week highs of 65% last February, they are creeping up, and the spread between implied and realized volatility (how much the stock has been moving, white line below) is nearing a fairly wide spread with realized vol approaching 52 week lows:

Bloomberg

This means that those looking to make directional bets with long premium strategies in TSLA might get the direction right, but if they whiff on the timing, or the magnitude of the move, it might prove to be a very costly endeavor.

The next identifiable catalyst for TSLA is fQ4 earnings next week on Feb 22nd after the close. The options market is implying about a 6.5% move in either direction by next Friday’s close, most of that implied for earnings, which is rich to the 3.25% average one day post earnings move over the last 4 quarters, and the 10% average since going public in 2010.  With the stock’s close just below $280, the Feb 24th 280 straddle (the call premium + the put premium) went out offered at about $19, if you bought that and thus the implied movement between now and next Friday’s close you would need a rally above $299, or below $261 to make money, or about 6.5% in either direction.  You see the how the break-even levels line up right??

We will be sure to take a closer look prior to earnings, but directional trades that sell next week options to finance the purchase of longer dated ones are likely the way to play.  Stay tuned.