Fund a big percent of your M3 purchase by buying Tesla Stock

[JeffK]

I'm still confused so......obviously "to answer the question"....I ain't looking to short a stock.

That's good, I'm trying to think of a better real world analogy...

Imagine borrowing your neighbor's car, you sell it on craigslist, but you can't get the cash until you return the car to your neighbor.

Then after some time you find the exact same car but for a lot less money, you buy that one and return the lower priced identical car to your neighbor. You then get to keep any money that was left over.

or an easier example that doesn't involve other people but a very similar concept:
You buy a product, then next week it goes on sale. You go to the store and get a refund for the difference. Now imagine doing that with other people's stuff and you just get to keep the money.

 

[Red Sage]

That's good, I'm trying to think of a better real world analogy...

Imagine borrowing your neighbor's car, you sell it on craigslist, but you can't get the cash until you return the car to your neighbor.

Then after some time you find the exact same car but for a lot less money, you buy that one and return the lower priced identical car to your neighbor. You then get to keep any money that was left over.

or an easier example that doesn't involve other people but a very similar concept:
You buy a product, then next week it goes on sale. You go to the store and get a refund for the difference. Now imagine doing that with other people's stuff and you just get to keep the money.

Very good analogy. But, as I understood it...? Those who bet against a stock may do so with no 'collateral' at all. And they will have a specific time limit for the bet they place. If shares are at a higher price point than they expected, or predicted, they'll need to beg, borrow, and steal shares to get them 'in their name' to avoid penalties. Some who have no intention of selling shares will allow people to 'borrow' them as a cover for their shorting exercise. Worst possible case for the $#0r+ is that no one will sell, no one will lend their shares, and the price goes up, and stays up, at and beyond the deadline, but they still have to pay the Exchange for the quantity of shares wagered at the full amount, plus penalties, without actually buying the shares at all. Check out the movie 'Trading Places' (1983) for a superb example of how someone can be ruined that way.

 

[jonnyg]

 

[3Victoria]

One has to have sufficient money in one's margin account to cover any losses, and if the losses mount, one has to cover those, or the brokerage will use any of one's resources to do that.

 

[raysspl]

A true valiant suggestion, I can dig it

 

[MitchJi]

An Important Note:
I am posting my opinions with some information about purchasing TSLA Jan19 LEAPS's options to fund an M3 purchase, with the intention it will help others reach their own conclusions. You are responsible for the result of your investment decisions, so please think for yourself.

That said if you are saving money to buy a M3, and you are very confident that Tesla will be producing them in quantity by September 2018 (almost a full year later than their goal) buying a few Jan19 LEAPS's now is probably an excellent idea. I've posted some charts below that show the potential profits. You can see that the potential profits from just a few LEAPS's could easily pay for most of your M3. Of course you need to weigh that against the possibility that you could lose a substantial portion of your investment.

LEAPS's buying decisions should depend mainly understanding the SP, not on an in-depth understanding of options:

IMO the main consideration for buying TSLA Jan19 LEAPS's should have very little to do with understanding options. Mainly you need to be extremely confident that at least 1-10 month's (6-10 is better) before the January 2019 expiration date that the SP will increase enough that you will make a substantial profit. I believe that now is an excellent time for the following reason. If this belief turns out to be correct you should definitely buy some LEAPS's:
I strongly believe that by November 2017-September 2018 Tesla will be profitably producing M3's at a rate of at least 7k per week. When that happens I believe that the SP will rise to at least $300.

Statements by Elon Musk about Production

Then you look at velocity. What is a reasonable expectation for the exit velocity for the vehicle coming out of the factory. You might think that some of the most advanced car factories in the world are very good at making cars and they are maybe making a car every 25 seconds – that sounds fast, but actually, if you say the length of the car plus some buffer space is approximately 5 meters so it’s taking 25 seconds to move 5 meters....

“We’ve realized that the true problem, the true difficulty, and where the greatest potential is, is building the machine that makes the machine. In other words, building the factory. And really thinking of the factory like a product, not a hodgepodge of things where the machines are bought from a catalog....

The CEO said that he recently – in the last 2 or 3 months – came to the realization that the potential for improvement is at least a factor of 10 greater in manufacturing vehicles than in the actual vehicle engineering.

“I think probably a lot of people will not believe us about this, but I’m absolutely confident that this can be accomplished. We’re basically designing our factory the way you’d design an advanced computer....

He also said that internally they are calling the M3 production line the alien dreadnaught. He compared alien dreadnaught with the fastest conventional automotive production lines which produce one car every 25 seconds. He said the initial version of the line will be alien dreadnaught V0.5 and that V3.0 will be five to ten times faster than 25 seconds per car. If I believed that using V0.5 they are only able to produce one car every 30 seconds which is 20% slower than the fastest conventional lines, I believe that when the market realizes that cars are coming off the assembly line at a rate of two per minute that the SP will rise enough to make a reasonably conservative LEAPS's purchase (buy with ths SP up to about $230, strike price up to about $250) profitable on that alone.

I also believe that 20 seconds per car which is 20% fasterYou can see that the potential profits from just a few LEAPS's could easily pay for most of your M3. Of course you need to weigh that against the possibility that you could You can see that the potential profits from just a few LEAPS's could easily pay for most of your M3. Of course you need to weigh that against the possibility that you could is much more likely. The M3 is engineered to be easy to manufacture and EV's are much simpler than ICE cars.

I am going to copy and paste this excellent, very conservative strategy by Papafox on purchasing LEAPS, in the next post in this thread. It's too long to include in my post, but it the information it contains is so good that I decided to mention it near the top of this post.
TSLA Trading Strategies

Someone asked how I trade options, and here it is. My technique doesn't provide huge returns, but it seldom loses money either.

Buy now or wait?:
IMO the remaining question is when to buy (if you believe that my M3 production projections are correct), which boils down to what are odds that if you wait there will be an opportunity to buy Jan19 LEAPS' for substantially less than you can buy them for now (the date you are reading this). As I write this on December 26, 2016 the SP is $213.30.

IMO now is an excellent time to buy J19 LEAPS [posted when the SP was about $190], if you believe that we are either at or close to the bottom. Obviously if you think that the SP is likely to drop to $140-$175 it's better to wait.

I bought some J19's for $19.50 each when the SP was $183. The J19 strike price of $240 I bought on Nov 14 for about $19.50 ($1,950 per contract), when the SP was $183 are worth $31.90 ($3,190 per contract) today (a 64% gain) Dec 24 with an SP of $213.30 (a 16% gain). This demonstrates that options don't need to be in the money to in-the-money to make a huge profit for the buyer. And If the SP rises to $300 by mid sep 2018 I'd make at least $4,500 per option.

If I believed that it was extremely likely that the SP will drop again to below ~$195 I might wait. I don't personally believe that is likely enough to risk losing what I consider to be the sure thing of the rise from $213 to over $300.

OTOH if the SP rises to exactly $240 in J19 and I hold it until expiration I would lose 100% of my investment! (Which is one reason that I would never hold LEAPS's until the expiration date. It's an extremely bad idea.) So the main thing when buying expensive options is being extremely confident that at some point before they expire the SP will be high enough that they are profitable. This also means that buying LEAPS's when the SP is low is very very important. In other words understanding TSLA's SP is the crucial thing to understand when buying LEAPS's, understanding all of the variables involved in trading options is not.

I would never even consider holding LEAPS to expiration. If you do that you're making your long term gains subject to short term SP fluctuations. It's also better to roll LEAPS about 8-12 months prior to expiration because the time decay accelerates as the option gets closer to expiration.

If you don't hold them until expiration you definitely want to sell them, rather than exercise them, because if you exercise them you will get nothing for the remaining time value.

One thing that holding them until expiration definitely accomplishes is to run the remaining time value down to zero. You can see the effect of that on any of the charts below, by following any horizontal line the effect of waiting until the the remaining time value down to zero (aka waiting until expiration to sell or exercise the option).

Option Buying Information Sufficient IMO to Buy LEAPS's:
Start by reading pages 1-16,18-19,57-61,49-53 in this booklet (sections) on buying calls and puts. Understanding "intrinsic value" vs "time value" which is important and more are covered:
http://www.optionsclearing.com/components/docs/riskstoc.pdf

When you buy and sell options be absolutely sure that you are "Buying to Open" (buy) and "Selling to Close" (sell)! Not "Selling to Open" or Buying to Close!

Understanding Delta might also be useful:
Greeks (finance) - Wikipedia

Delta measures the rate of change of the theoretical option value with respect to changes in the underlying asset's price.

For a vanilla option, delta will be a number between 0.0 and 1.0 for a long call...depending on price, a call option behaves as if one owns 1 share of the underlying stock (if deep in the money), or owns nothing (if far out of the money for 0.0), or something in between.

These numbers are commonly presented as a percentage of the total number of shares represented by the option contract(s). This is convenient because the option will (instantaneously) behave like the number of shares indicated by the delta. For example, if an American call option has a delta of 0.25 (=25%), each option will gain or lose value just like 25 shares of XYZ as the price changes for small price movements. The sign and percentage are often dropped – the sign is implicit in the option type (negative for put, positive for call) and the percentage is understood.

Which strike price to buy:
The main decision (if you are confident that the SP will rise) is which strike price to buy.
You pay for two things when buying options time value, and a lower strike price which also gains you more time for the option to make a profit at a given level.

Lower strike prices equals less risk, due to the fact that a lower SP is required to make a profit and allows more time for that to happen (essentially another way of gaining more time value).

And it also buys you a higher Delta. A higher Delta is a two edged sword. When the SP rises the option value will rise faster, but if the SP decreases the option value will sink faster.

I decided to buy J19 240's. I feel good about the $240's, $200-$220's would be safer though. But please decide for yourself. The main tool that I use to do that is the:
http://www.optionsprofitcalculator.com/calculator/long-call.html

Below is a chart for J19 $240's, priced at $19.50, that I used to make my decision. The way I use these charts is to pick a date or dates that I prefer to sell by. A for the J19 LEAPS I used the end of March (Q1) when I'd prefer to roll them, and my personal "worst case" date July-August 2018. I used July-August 2018 because even though I'm highly confident that the M3 will start volume by the end of 2017 I don't want to risk a major amount of money on that, so at the end of March I would make a small profit if the SP is $224 and in July-August 2018 I would make a small profit if the SP is $236. I believe that those are very conservative numbers. That's almost a full year after Tesla's goal. I believe that that the SP will exceed those numbers based solely on MS-MX production and TE production, without any contribution from the M3.
View attachment 207859
I believe that an SP of $350-$450 is more likely by July-August 2018 than $236 (if it's at $350=~$9k profit per contract).

Here are two charts for J19 $240's, priced run with todays (Dec 23, 2016) SP of $213.80, priced at $33.53 ($350=~$7.8k profit per contract), and J19 $350's (yikes!) priced at $10.20 ($350=~$2.2k profit per contract):
Check the difference between the $240's priced at $19.50 and those priced at $33.53.
View attachment 207860 View attachment 207861

You can also see that the chart for the $350's has a much steeper slope (much less time for the option to make a profit at a given level.)

Making the actual purchase:
Repeating:
When you buy and sell options be absolutely sure that you are "Buying to Open" (buy) and "Selling to Close" (sell)! Not "Selling to Open" or Buying to Close!

For increased liquidity I normally buy options with a relatively high "open interest". It's sometimes useful to check the open interest on the option chain for the previous year.

When buying option I start by placing gradually increasing limit orders, close to the bid price, at about five-fifteen minute intervals until one is accepted. It might not be worth the time if you are buying weeklies with a small spread. But for buying high priced LEAPS's this can save you hundreds of dollars per option. The J19 options that I bought for $19.50 had a bid/ask of 18-22.50. The program I use to buy options fills in the asking p;rice as the default. That's a $200 per contract difference! Of course when selling them I do the opposite, placing gradually decreasing limit orders, close to the ask price.

You can also place a low order before the open to take advantage of a possible opening dip. Or place a low order and leave it for a while. Because the Tesla SP frequently fluctuates by quite a bit it's possible to save or lose a substantial amount with these strategies. When trying these strategies I check the five day and one day Tesla charts.

Repeating an Important Note:
I am posting my opinions with some information about purchasing TSLA LEAPS's options to fund an M3 purchase, with the intention it will help others reach their own conclusions. You are responsible for the result of your investment decisions, so please think for yourself.

 

[MitchJi]

As promised:

Someone asked how I trade options, and here it is. My technique doesn't provide huge returns, but it seldom loses money either.

I move a fair amount of my money into deep in the money calls (Jan18 100s, for example) when the stock price is fairly low and then when the price goes up and we get near a peak I sell the calls over some time and use the money to buy shares of TSLA. Sometimes when I'm pretty sure we're going to go back down a bit, I don't buy as much stock and hold some cash. I get about 2 to 1 leverage over stock by buying deep in the money calls for a future year, but by deleveraging by selling the calls and buying shares as the stock price approaches what may be a peak, I reduce my exposure to falling stock prices and in so doing I can make money on the ups and downs, even if we end up at the same point on each peak. The main advantages of such a conservative trading style is that 1) I'm usually "all in" and don't miss unexpected runs up, and 2) I'm very well positioned for rolling my leaps forward if Tesla isn't doing well. For example, if you owned Jan17 100 calls, you could sell these for about $118.50 apiece today, and the cost to buy Jan18 100 calls right now is about $121 apiece. The difference in price between Jan17s and Jan18s is only about $2.50, and so I would by now have added a little money and rolled my Jan17 100s into Jan18 100s. If we have a surprise and selling the Jan18 100s does not look good in 2016 or 2017, I can always sell them and roll them into Jan19 100s for very little money.

Actually, I seldom need to add money to roll deep ITM leaps from one year to the next because I use rising or falling share prices to do that. Often we get caught in a cycle where TSLA is heading up or heading down. When it is heading up, I will use some of my liquidity to buy 2 Jan18 leaps and then when my Jan17s reach the same value as what I bought the Jan18s for, I sell the Jan17s. It's even better when TSLA stock price is heading down, because I sell 2 of the Jan17 leaps and then wait for the price of the same Jan 18s to be reached and then buy 2 of them. If I think the stock price will continue down I sell 2 more Jan17s and hang loose until I can buy Jan18s for the same price.

Trading most options is an easy way to lose money if you are not careful, or if the stock price hands you a surprise. If you are considering options for the first time, here are a few terms you need to know.
Strike Price: The underlying value of an option. If you bought a Jan 18 100 call option ($100 is the strike price) and on the morning of the date in Jan of 2018 when the option expires the stock is trading at $250, that option has a theoretical value of $150 when it is "exercised" ($250 - $100 = $150. Note: most traders don't exercise options with a market maker. They sell the option instead at market price.
Expiration Date: Some options are good for only a week, some for over a year. The expiration date is the last date that the option can be exercised. Obviously, options with later expiration dates are going to have a higher market value. When we call an option a Jan 18, we really mean it has an expiration date in January, 2018.After the expiration date, your option becomes worthless, even if it had value the day before expiration.
Market Value: This is the price that the option is currently trading at (approx. $121 in our example)
Time Value: This is the difference between Strike Price+market value of the option and the current market value of the stock. In our example, $100 + $121 = $221. TSLA stock is trading for $218. Therefore, TIme value = $3. Another way of looking at time value is that this is the amount the stock would have to rise in price in order for you to break even exercising it on the final day of the contract. So, TSLA would have to go up $3 between now and Jan 18 for you to break even on this trade (commissions not considered).
Let's take another example. Right now TSLA Jan18s with a strike price of 200 trade at about $52. If we add strike price to market value we get $200 + $52 = $252. With the stock currently trading at $218, we would need to see TSLA rise to $200 + $52 = $252 by January of 218 for you to break even selling the stock on the final day of the contract. The time value would be the difference between the $252 and $218, so you would have a whopping time value of $34. You can see there's lots more leverage buying an option that is close to the trading price, but you need to either see it go up in value fairly quickly or you need to see lots of appreciation if you want to make money selling the option close to its expiration date. The time value of an option decreases with time and is close to $0 on the final day of trading before expiration.
A Call Option: When you buy one option, you are actually buying the right to trade the equivalent of 100 shares. Thus, a single option with a market price of $121 sells for $12,100 plus your usual brokerage commissions. If TSLA goes up $1 during the day, your Jan18s call option would increase in value close to $1 x 100 = $100. On the other hand, your 200 strike price call option would appreciate less than $100 because some of the rise has been absorbed by time value.
Personally, I suggest if you've never traded options before that you start very small and buy a conservative option such as a Jan 18 100 strike. Keep most of your money in stocks as you slowly learn about the good and bad of options. The good: you get more leverage and can make more profit from the same investment if things go well. The bad: you can lose your entire investment in the option if things go poorly. For example, if TSLA falls below $200 in value, your $200 strike price option (if you opted to buy that one) would have very little value as expiration date approached. Thus, they're less forgiving than stock, and they have a time limit, which stock does not have.
Buying or selling an option: There are far fewer options traded than shares of stock. Some days, not a single TSLA Jan18 100 trades. Take a look at the bid and ask prices of an option. You might see sellers asking $123.95 for Jan 18 100 and buyers offering $119 for those options. The price you buy at will be somewhere in between. Midway sometimes works, but you might be paying too much if there are 80 options offered at $123.95 and only 4 buyers bidding $119. In such a case, I'd try to buy at a little more than $119, but not midway between the two numbers. It's a frustrating experience at first, because if you bid $119.50 you might see some buyers upping their bids to $119.50, too. It takes practice and sometimes patience to buy an option for the right price, and sometimes you have to walk away if the sellers are not budging from asking prices that are just too high.

Anyway, for those of you asking how I trade options, that's it in a nutshell.

 

[MitchJi]

My opinion - End of March 2017 Update:
I believe that most of the SP Surge before the Tencent purchase (bottom of post) was due to Elon's M3 tweets on March 24 (not the downselling) and that the completion of the cap raise boosted that impact substantially:
Elon Musk is trying to get Tesla Model 3 reservation holders to buy the Model S

He shared a few new details about the Model 3 and its rollout, but I feel like the main point that transpired from the Tweetstorm is that Musk is trying to down-sell the Model 3 and push the Model S instead.

Elon Musk releases video of the first Model 3 release candidate drive
Elon Musk has released the very first images of the very first Tesla Model 3 release candidate. As we reported last week, Tesla started production of release candidate Model 3 vehicles, which are cars made almost entirely on production machines in order to test both the production process and the vehicles themselves.

As part of ‘Tweetstorm’ today, Musk shared a short low-resolution video of the Model 3. At first glance, there are no visible changes other than the fact that we can see the cameras for the Autopilot sensor suite. We can see the camera in the Tesla badge on the front fender and in the pillar on the side. Maybe there are some slight adjustments to the front fascia and headlights, but again, the video is very low-res and it’s hard to tell.

Here’s the video in question:
Elon Musk on Twitter

I believe that most of the rise is due to investor enthusiasm from seeing the video (in spite of Elon talking down the M3),and feeling (justified or not) that the M3 will be approximately on time. IMO that means that when the factory starts producing 5k-10k M3's per week an SP of AT LEAST $350 is a slam dunk.
Tesla Model 3’s wheelbase allows for a battery pack up to 75 kWh, says Elon Musk
I am also personally encouraged that the Model 3 will not be available with all-wheel-drive dual motors at launch. Because I'm going to wait for the AWD option. ELON said that he thinks it will be in time to qualify for the tax credit, and even if it isn't I'm extremely confident that by the time it happens, the SP will rise enough to MORE than pay for the difference.

Two Notes:
I am extremely confident that the SP will be much higher than today by the time in 2018 when we can buy an AWD M3. But my confidence is very low that between now and then that it won't drop substantially.

I am holding 30 J19 LEAPS Options, so that a $1 dollar increase in the share price the value of our options increase by ~$2,400.


The Tencent purchase triggered most of the SP rise from about $268 to about $277.
Chinese internet giant Tencent buys 5% of Tesla

Elon Musk is not done with his Tweetstorm today on his way to Cape Canaveral in Florida for SpaceX’s upcoming launch. After confirming that the Tesla Model 3 will not be available with all-wheel-drive dual motors at launch

Tencent, Asia’s second highest valued tech firm, has bought a five percent share in Tesla. According to a filing, the Chinese firm scooped up 8,167,544 shares for around $1.7 billion to become one of Tesla’s largest shareholders.

The news itself sent Tesla’s share price up three percent in pre-market trading. The purchase was arranged on March 17, and those now-Tencent-owned shares are worth around $2.2 billion at current market value.

Tencent is a prolific investor. It holds equity in Snap, this year’s hot tech IPO, among others following an early investment. While that interest in messaging makes sense since Tencent’s operates China’s dominant chat app — WeChat — it isn’t immediately clear whether the Tesla investment has strategic undertones. An alliance with Tencent could significantly boost Tesla’s efforts in China, which is already impressive. Chinese sales accounted for 15 percent of Tesla’s $7 billion revenue last year.

Tencent Purchases 5% Stake In Tesla

The China-based Internet giant Tencent Holdings has purchased a 5% stake in Tesla, making it one of the top investors in the electric vehicle pioneer.

The firm reportedly paid around $1.8 billion for the 5% stake (8,167,544 shares). The stock shares were bought through the open market and also through Tesla’s stock offering last month, going by regulatory filings.

An email sent by Tencent to Bloomberg read: “Elon Musk is the archetype for entrepreneurship, combining vision, ambition, and execution. Tesla is a global pioneer at the forefront of new technologies including electric vehicles, assisted driving, shared vehicles, digitizing real-world information, sustainable energy generation and scalable energy storage.”

For those unfamiliar with the company, it would be fair to say that the firm is amongst the three largest tech companies in China — the others being Alibaba and Baidu (which itself is certainly focused on self-driving EVs).

Interesting news — yet another bit of news contradicting the opinions of short sellers on Seeking Alpha.

 

[Red Sage]