Is anyone here looking at mispricing in options land that provides better risk / reward than in the stock market?
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Go private options strategies
- Thread starter generalenthu
- Start date
This depends on what you think will happen if the deal doesn't come to pass, but you can buy J'19 / J '20 diagonals (370/400 for example) for a credit ~13 and if the deals closes you should be able to close it for 30 dollar credit. If the deal doesnt happen, it should go back to ~28 dollar credit, where it was before the deal was announced.
So 43 on the upside and 15 on the downside.
You can hedge these by shorting 375/400 October (pre earnings) verticals with 9 on the upside (if the deal breaks) and 16 on the downside if the deal goes thru.
I didn't bother with the hedge, but the economics are really nice. That's because the Jan 20 leaps are not truly reflecting the chances of the deal consummating.
So 43 on the upside and 15 on the downside.
You can hedge these by shorting 375/400 October (pre earnings) verticals with 9 on the upside (if the deal breaks) and 16 on the downside if the deal goes thru.
I didn't bother with the hedge, but the economics are really nice. That's because the Jan 20 leaps are not truly reflecting the chances of the deal consummating.
bdy0627
Active Member
Don't you worry about time value plummeting on the longer term LEAPs if it becomes evident that the deal is likely to pass within the next 6 months? My thought is that it is safer to focus on calls expiring about 2-3 months out to avoid that issue.
That's exactly the point. Sell jan 20 leaps against jan 19 leaps. For a lot of premium. That's basically the trade. You can buy 370 call jan '19 and sell 400 call jan '20 and make 13 bucks, but that premium has been collapsing since this AM.
That should go from 13 to - 30. A 43 point move when tsla is delisted. As I write this, it's closer to 10
bdy0627
Active Member
I'm approaching this a little bit differently in that I don't have an interest in capping the upside. There is the potential for explosive gains for any calls if the stock heads well north of $420. Even a small squeeze to $500ish would mean huge profits on calls. The uncertainties are whether the deal happens and when it happens. We can make intelligent guesses for both of those uncertainties as well as ensuring if it doesn't go through, or it goes through much later than expected, that we still come out ok.
I'm going off of the premise that call options are going to approach intrinsic value as uncertainty regarding the buyout is reduced. This would also mean the stock would trade pretty close to $420, perhaps 5% or so below, so let's say $400. We don't know how long it will take to increase the certainty this buyout will happen, but based upon Dell as well as the SolarCity buyout, it seems likely that the stock will trade close to the buyout price within 4 months and possibly much sooner. Once a deal is put together and announced, there would still be the uncertainty of the shareholder vote, but knowing Elon, there probably won't be that much uncertainty about the outcome. Therefore, once a deal is announced, I would consider the uncertainty to be very low. I think announcement of an accepted offer dependent only upon shareholder vote is likely to happen within 2 months. This is because I think Tesla will want the shareholder vote to happen ideally before Q3 ER in early November. I think the vote will happen by the end of October or no later than December. I think the deal will be announced at least 6 weeks before the shareholder vote. This would mean that we would know the details of the deal somewhere between early September and early November. After that time, I think the stock will trade at $400+. Also after that time, stock options beyond J19 LEAPs or March at the latest, will lose their time value.
Here are some calls I have looked at. Keep in mind that if the stock runs up fast well before expiration of the calls, they will be much more profitable, but these are worst case valuations assuming the stock trades near $420 by expiration of the call. As you would expect, you are rewarded with a higher profit with the nearer dated calls due to the time risk. If the deal fails, the stock will likely drop, perhaps to $300ish, temporarily. Due to financials improving dramatically by Q4 ER, the best approach would likely be to roll out the options to March OTM.
SEP21 $360
Premium: $21.7
Intrinsic Value: $60
Gain near expiration with stock around $420: 176%
Pretty high risk due to expiration in about 6 weeks.
OCT $360
Premium: $26.7
Intrinsic Value: $60
Gain near expiration with stock around $420: 125%
Moderate risk since these expire in about 10 weeks.
NOV $350
Premium: $39.0
Intrinsic Value: $70
Gain near expiration with stock around $420: 79%
Lower risk since you have about 14 weeks before these expire.
DEC $370
Premium: $31.0
Intrinsic Value: $50
Gain near expiration with stock around $420: 61%
Even lower risk with 18 weeks to expiration.
J19 $350
Premium: $46.0
Intrinsic Value: $70
Gain near expiration with stock around $420: 52%
Lowest risk given about 22 weeks to expiration.
I'm going off of the premise that call options are going to approach intrinsic value as uncertainty regarding the buyout is reduced. This would also mean the stock would trade pretty close to $420, perhaps 5% or so below, so let's say $400. We don't know how long it will take to increase the certainty this buyout will happen, but based upon Dell as well as the SolarCity buyout, it seems likely that the stock will trade close to the buyout price within 4 months and possibly much sooner. Once a deal is put together and announced, there would still be the uncertainty of the shareholder vote, but knowing Elon, there probably won't be that much uncertainty about the outcome. Therefore, once a deal is announced, I would consider the uncertainty to be very low. I think announcement of an accepted offer dependent only upon shareholder vote is likely to happen within 2 months. This is because I think Tesla will want the shareholder vote to happen ideally before Q3 ER in early November. I think the vote will happen by the end of October or no later than December. I think the deal will be announced at least 6 weeks before the shareholder vote. This would mean that we would know the details of the deal somewhere between early September and early November. After that time, I think the stock will trade at $400+. Also after that time, stock options beyond J19 LEAPs or March at the latest, will lose their time value.
Here are some calls I have looked at. Keep in mind that if the stock runs up fast well before expiration of the calls, they will be much more profitable, but these are worst case valuations assuming the stock trades near $420 by expiration of the call. As you would expect, you are rewarded with a higher profit with the nearer dated calls due to the time risk. If the deal fails, the stock will likely drop, perhaps to $300ish, temporarily. Due to financials improving dramatically by Q4 ER, the best approach would likely be to roll out the options to March OTM.
SEP21 $360
Premium: $21.7
Intrinsic Value: $60
Gain near expiration with stock around $420: 176%
Pretty high risk due to expiration in about 6 weeks.
OCT $360
Premium: $26.7
Intrinsic Value: $60
Gain near expiration with stock around $420: 125%
Moderate risk since these expire in about 10 weeks.
NOV $350
Premium: $39.0
Intrinsic Value: $70
Gain near expiration with stock around $420: 79%
Lower risk since you have about 14 weeks before these expire.
DEC $370
Premium: $31.0
Intrinsic Value: $50
Gain near expiration with stock around $420: 61%
Even lower risk with 18 weeks to expiration.
J19 $350
Premium: $46.0
Intrinsic Value: $70
Gain near expiration with stock around $420: 52%
Lowest risk given about 22 weeks to expiration.
bdy0627
Active Member
I like the idea of having a percentage of each of these call options to benefit if the stock runs up sooner and be protected if it takes longer.
TrendTrader007
Active Member
well here is what i am thinking, right or wrong:
$420 is the worst case scenario over say next 5 to 6 months so we got Elon put
buying $TSLA DITM J 19 calls say $300 or $250 or shares at current price is a no brainer due to above
the million $question is when to sell and convert calls into shares
at this point i would not mess with OTM calls or anything beyond J19 or earlier than that, is too risky
if a VW like short squeeze develops then i will be selling everything into the spike and stay in cash until the SP drops back over the next month or so back to $420 or $430 or $450 level whichever is the ultimate buyout price
i think $420 is way too low and you need to see a shrink if you sell out at $420 level
the trick is not to overstay your welcome if and when VW style $tsla squeeze happens
bdy0627
Active Member
Why not go with some NOV & DEC ATM calls? Sure, it's possible TSLA may not go up by that point, but very likely it will climb. If it doesn't then roll out. This is only to capture assumed stock movement to $420 over the next several months. In a short squeeze, any of the calls will, particularly the shorter dated ones, will do incredibly well. I think in a squeeze, liquidity of the longer dated calls could be an issue vs monthlies, but I don't know as I have not invested through one before.
If a squeeze does happen, anything that is said now will be completely useless advice.
Damn Fidelity and the stupid limit on sell price! I would set my sell at 2000 but can't so I guess I will just have to sit in front of the computer for the next 6 months!
$425.
(Go on, pile on the disagrees. You're kidding yourself though if you think 20% of the stock is going to cause a squeeze when large numbers of people have to liquidate and large numbers will choose to, when people who want the stock can buy it much cheaper now, and when nobody is going to wait around to vote their stock and then have to sell it around at $420 when they could sell it to covering shorts for "anything higher than $420", so long as they undercut everyone else)
The capital market situation is unprecedented. The ecosystem of companies (auto, space, energy) involved is unprecedented. Nobody knows.
If Musk really wants to make the world a better place and bulldoze shorts, he will himself write the rules of the game that's just about to unfold.
The $420 price is likely a joke and the actual number will be higher.
edit: If the stock is trading below $380 in the am, we are adding a significant amount of TSLA to our position.
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Most investors will want to hold into a private Tesla. More still will want in once it becomes clear it's definitely happening. Also the investors who will fund the private move have likely been buying up and won't sell.
I wouldn't sell under $1000
Causalien
Prime 8 ball Oracle
D
This is like the biggest stress test of all brokerages. It's fun to read about.
So far the ones that performed well under this schadenfruede for me are TD and IB
This is like the biggest stress test of all brokerages. It's fun to read about.
So far the ones that performed well under this schadenfruede for me are TD and IB
Schwab passes this test. I just set limit orders to sell my shares at $4200.
I'm not expecting these orders to fill lmao
Fact Checking
Well-Known Member
The main focus of my post was the squeeze itself, didn't want to characterize the pre squeeze period, because it was contentious and complex:
- there was a billion dollars lawsuit about how Porsche got into their large derivatives position (call options),
- it's unclear whether this was hedged by their counterparty (a bank normally would), causing a rise in the share price,
- the days before the squeeze were volatile: Daimler AG had a ~50% drop within 10 days, which could have been NY hedge funds shorting VW and Daimler massively,
- in the end NY hedge funds lost about 20 billion dollars in the squeeze, according to one article.
Do you have a timeline about the preparatory moves to the VW short squeeze?
Krugerrand
Meow
1 cent higher than my sell limit should do nicely.
But seriously, none of us can answer that. Put your sell limit at what works for you (as long as it’s a penny higher than mine).
There is one more angle you forgot to consider. I will have to sell most of my shares, but I WILL NOT sell to shorts for 425 or anything below 500. I'd rather take 420 on the day of de-listing! Yes, that's right, I do not care about $5-10 per share, that much is worth to me watching the shorts squirm a bit more!
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