Go private options strategies

[TrendTrader007]

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.

you are right and your point is valid. it is just that i had no time to think when i made my trade last Wednseday 8-7-18. i had a total of less than 30 minutes to liquidate all my 897 OTM J 19s as well as DITM J 2020 calls and only 6 minutes before $TSLA was halted to reposition in J19 DITMs. i was under intense time pressure and in a state of panic so i did what seemed to be the safest thing like J 19s
i must say that now that i have luxury of time i will stand by my trade since i have 23 weeks before J19s expire enough for a move of any significant magnitude to develop and liquidity in J19 calls is adequate

 

[sundaymorning]

Why would anyone pay more than $420 for a share?

Research Gene Munster, one of the best analyst out there. Most people on this forum think $420 is undervaluing tslap.

 

[Fact Checking]

$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)

I disagree not because I'm deluded, but because I think you are probably wrong.

I think you are seriously underestimating the possible market action triggering in reaction to the conversion of publicly traded TSLA shares to private TSLAP shares:

• Shareholders who believe the deal will happen are going to wait until price reaches $420, because the deal gives them a minimum guaranteed price of $420
• Shareholders who do not believe a deal will exist or succeed and who value TSLA less than $420 will sell under $420
• This gives Elon and Tesla plenty of time to improve the deal and the conversion process, to allow the large majority of shareholders to own private shares.
• During this time - weeks and months - the "quality" of the shareholder pool will improve: more and more shareholders are accumulated who think that Tesla is worth more than $420 as a private company.
• Absent sharp rises up shorts will accumulate too: they are convinced the stock is worth $0-$300 and are trading accordingly.
• Some shorts might even share your opinion that the price won't rise beyond $420 significantly, and incorrectly treat it as a hedge against their position.
• This shorting activity creates even more new shares via short-dilution, with more and more longs who have bought at higher price levels with much higher profit targets than $420.
• Meanwhile Q3 deliveries and maybe Q3 results are announced - which even shorts expect to be good. This would rise future price expectations even more.
• I.e. price could quite naturally reach $420 levels and fluctuate there, before a deal is announced.
• This will start a very dangerous phase for shorts: shareholders who don't want to or cannot own private shares are going to sell, just as you described. But this happens while shorts are still significantly present.
• Shareholder pool gets switched: those who want out are paid not by Elon's deal, but by investors who want in.
• When the deal is finally announced, shorts must exit, but the "easy" pool of weak longs is long gone:
• What remains are shareholders with 5-10 year time-frames, $500-$10,000 price targets, plus speculators who want to sell to shorts last. It will also be clear to everyone how many shorts are left.
• That's the perfect setup for a strong short squeeze: shorts forced to buy, longs with no rush to sell.

I.e. I believe you are underestimating the time factor: you are trying to map the short squeeze to today's composition of shareholders and you are also assuming an imperfect "conversion process" that would force out many existing shareholders.

Both are dangerous assumptions IMO.

 

[Kenshi]

I’m a TSLA long and willing to let my TSLA stocks to go private. However, this pending privatization also poses interesting options trading strategies for longs. I would loved to hear some feedbacks on following idea:

Figure out a price point X where you feel comfortable to own more TSLA if somehow the privatization fell apart, then

Sell Jan 20 puts at X
And use the proceeds to buy
Buy Aug 19 DITM calls

Let’s say I’m willing to own 300 more shares of TSLA at $265. Based on Friday’s (8/10) last trades, I can sell 1 Jan 20 265 Put at $38 and buy 3 Aug 19 300 Call at $92.

The following scenarios can happen by Jan 20:

* The deal goes through at $420. Gains:
38*3 + 120 - 92 = $142*100 .
* Short squeeze or higher bid causes stock to reach $420 + Y. Gain: ($142+Y) * 100 .
* Privatization does not happen, stock price goes down but stays above $265. gains: 38*3-92 = $22*100
* Privatization does not happen, stock price goes down and below $265. I keep $2200 and buy 300 shares of TSLA at $265.

 

[ongba]

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.

Fantastic Post! What are your thoughts for March and June 2019 options? I'm concerned about the timing as Elon has always delivered on his promises but they have often times been delayed so I want to err on the side of more time. I currently have Jan 20 350 calls bought at $95 so will lose $25 on these if the final price is set at $420. Was strongly considering selling Jan 20 420 calls against these for around $37 on friday so would create a 350-420 bull call spread with about $12 in profit and use the $37 from the sold calls to buy more calls, targeting march or june 2019, but haven't pulled the trigger yet as I wanted more time to weigh my options. Any better suggestions would be greatly appreciated!

 

[bdy0627]

Fantastic Post! What are your thoughts for March and June 2019 options? I'm concerned about the timing as Elon has always delivered on his promises but they have often times been delayed so I want to err on the side of more time. I currently have Jan 20 350 calls bought at $95 so will lose $25 on these if the final price is set at $420. Was strongly considering selling Jan 20 420 calls against these for around $37 on friday so would create a 350-420 bull call spread with about $12 in profit and use the $37 from the sold calls to buy more calls, targeting march or june 2019, but haven't pulled the trigger yet as I wanted more time to weigh my options. Any better suggestions would be greatly appreciated!

Your potential gain assuming the stock goes to $420 by expiration is approximately 2x the stock for a MAR 2019 $350 and equal to the stock for a JUN 2019 $350. This buyout could take over 6 months, so there is more risk with J19s if you plan to hold them close to expiration. If you are planning to hold these through the shareholder vote then consider a percentage of J19s and MAR 19s. I don't think it's worth doing the JUN 19s. If we haven't had the shareholder vote by March of 2019 then the buyout is probably not happening. It's not going to take that long to get to the vote.

MAR 2019 $350
Premium: $52.4
Intrinsic Value: $7,000
Gain near expiration with stock near $420: 34% (roughly double the stock gain)

JUN 2019 $350
Premium: $58.8
Intrinsic Value: $7,000
Gain near expiration with stock near $420: 19% (roughly the same as the stock)

 

[mongo]

With today's further dip, it seems like the 2019 time frame DITM put options are a good deal, break even at ~340 (240 strike). If the $420 happens, that is $8k per option vs ~$3,500 equivalent stock appreciation. Even short term, at $352, the options return more.

Am I deluding myself (or mathing wrong)?

 

[Ulmo]

Last night, when I was looking into options, I calculated gain for $300 strike calls with August 16, 2019 expiry was 54.34%.

Then I calculated gain for buying shares to cover and then selling put contracts at $420 strike for August 16, 2019 expiry for a gain of 60.6%.

Did I calculate that correctly? I looked at the cost to get into the position, and then the value when they expire. I also know trading to close the positions is often easier to get out of before a share transformation event (like the Solar City merger or going private) and sometimes even easier than expiry, and to me, both of those above trades seemed likely to have that advantage, but no disadvantage if it went across the transformation, the way I understand options and going private if holding shares and/or money isn't a problem going into the private company.

Today is different. Today I am worried that Elon is going through a Kanye crises, and that took Kanye a year and a half to get out of. This could prolong the going private plan, so I would want to push it out further to the January 17, 2020 options, something that's made all the easier since the stock price is so much lower today than yesterday, so much more profit.

Advantage of call options is catching some "short covering" spikes above $420, but that would require watching the stock price live every minute between now and when they go private (could be a year).

P.S., I would have entered the above trade 75% selling puts and 25% buying calls yesterday if I had any money left. This dip is giving other people opportunities for which I was characteristically unwise enough to not have dry powder available. Today is an even better opportunity by far, but with more awareness of some of the risks, which make the calculation less certain; if Elon capitulates to those trying to bring him and Tesla down, that means he will waver, falter, and fall, and Tesla along with it, by failing to go private.

 

[emupilot]

TSLA is now down 10% from where it was before Elon tweeted about the plan to go private, so essentially the market thinks the odds of it happening are zero. I had been looking for ways to profit on the uncertainty of whether or not Tesla will go private, but it seems like the straightforward thing to do now that the stock has dropped is just to buy medium term ( 6-12 months from expiration) calls well below $420 strikes. Either Tesla builds lots of Model 3 and is profitable this quarter (as is happening / is likely) and the stock goes up on the merits, or the buyout goes through and the stock goes up to $420. Is there something I am missing? Why are the institutional investors not jumping on today's price?

 

[BrianZ]

There is a theory by Fact Checking that there is a moratorium on buying shares among the big institutional investors as they negotiate the buyout plan. A moratorium seems to be the only fair way to bring everyone to the table to negotiate without a rush buy of the shares, which is not good for investors at this point in game.

Right now, it is in everyone's interest to keep the stock price low. Tesla wants the stock price low in order to make the $420 offer look more attractive. The investors want the stock price low so they have more time to quietly accumulate the stock. Shorts obviously want to drive the stock price lower.

I would say there is more room for the SP to fall. Given that negotiations and due diligence is going to take some time, at least weeks, if not 1-2 months, the stock price should continue to be depressed for the short term. I know as retail investor's we are anxious to see a bump in stock price, but if you think about it, there is very little incentive for Tesla and big investors to jack up the stock price. I'd say stay on the sidelines and watch some more, and of course, continue to think of strategies!

 

[bdy0627]

TSLA is now down 10% from where it was before Elon tweeted about the plan to go private, so essentially the market thinks the odds of it happening are zero. I had been looking for ways to profit on the uncertainty of whether or not Tesla will go private, but it seems like the straightforward thing to do now that the stock has dropped is just to buy medium term ( 6-12 months from expiration) calls well below $420 strikes. Either Tesla builds lots of Model 3 and is profitable this quarter (as is happening / is likely) and the stock goes up on the merits, or the buyout goes through and the stock goes up to $420. Is there something I am missing? Why are the institutional investors not jumping on today's price?

I think this is an excellent way to profit from this FUD, but do keep in mind that option premiums are very high right now. Unless you think there will be a pretty sudden huge reversal climb, you may be better off waiting a bit. If TSLA chops around for a few days near the bottom of the dip, premiums should drop. Also, it's best not to do your trade in 1 move because of the volatility. Decide what you will do and then break it up in several trades over at least a few days.

 

[emupilot]

There is a theory by Fact Checking that there is a moratorium on buying shares among the big institutional investors as they negotiate the buyout plan. A moratorium seems to be the only fair way to bring everyone to the table to negotiate without a rush buy of the shares, which is not good for investors at this point in game.

Right now, it is in everyone's interest to keep the stock price low. Tesla wants the stock price low in order to make the $420 offer look more attractive. The investors want the stock price low so they have more time to quietly accumulate the stock. Shorts obviously want to drive the stock price lower.

I would say there is more room for the SP to fall. Given that negotiations and due diligence is going to take some time, at least weeks, if not 1-2 months, the stock price should continue to be depressed for the short term. I know as retail investor's we are anxious to see a bump in stock price, but if you think about it, there is very little incentive for Tesla and big investors to jack up the stock price. I'd say stay on the sidelines and watch some more, and of course, continue to think of strategies!

If Fact Checking's theory is correct, the vast majority of TSLA shares (80% or more?) would be off the table at the moment between institutional owners and executives. That theory makes sense as those party to the negotiations have inside information. That makes the stock extremely vulnerable to manipulation either by shorts or by people trying to induce a short squeeze.

 

[emupilot]

I think this is an excellent way to profit from this FUD, but do keep in mind that option premiums are very high right now. Unless you think there will be a pretty sudden huge reversal climb, you may be better off waiting a bit. If TSLA chops around for a few days near the bottom of the dip, premiums should drop. Also, it's best not to do your trade in 1 move because of the volatility. Decide what you will do and then break it up in several trades over at least a few days.

I'm a believer in buying gradually on the way down. I figure January or later calls should be good to ride out any short term craziness and have strong possibility of upside results.

 

[bdy0627]

I'm a believer in buying gradually on the way down. I figure January or later calls should be good to ride out any short term craziness and have strong possibility of upside results.

This is pretty much how I approach it as well. I do buy some monthlies too, but I try to keep those a small percentage since they are higher risk. I try to wait to add until we have dropped about 14%, and then I add at least as much with each additional 4% drop. I try to make sure I have enough dry powder to do this all the way through a 38% drop. I sell shares and other stocks on the deeper dips to free up the cash. If you go back through all of the price action from 2012, this has worked very well. The main caveat is that paper losses on deeper dips can be unsettling, and this would be brutal at the start of a bear market.

 

[RobertFF]

Musk owns more than 50% of SpaceX and controls almost 80% of the vote. What if he can merge it with Tesla as a method to go private with or without other outside investors? I would think many would jump at the chance to own part of a Tesla/SpaceX company.