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Long-term TSLA Investment Strategy

Discussion in 'TSLA Investor Discussions' started by RobotGrease, Jul 9, 2014.

  1. RobotGrease

    RobotGrease Member

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    Fellow TSLA investors: I am seeking help in my long-term TSLA investment strategy. I think my situation is similar to many others and therefore the help would be somewhat universal. (Yes, I have attempted reading the options threads but find them overwhelming, not to mention that I am looking for a more focused discussion.)

    Background:
    Like many members on TMC, I have been investing in TSLA for a few years now, since December 2011 if I recall correctly. Accordingly, I have had the good fortune of making some dramatic returns. Until now, I have only held shares, never any options. I have always been intimidated by options and basically content with just buying shares. I would like to make some drastic changes to this approach to investing in TSLA and I am seeking help from all those option pros on here.

    The challenge:
    I would like to make a investment/bet in the long-term success of Tesla Motors. I would like to minimize the amount of capital tided up in the investment (hence options). As with any investment, I would like to minimize risk and maximize potential return. I would like an investment option that I could "set it and forget it", more or less, for the next several years. I am thinking that Tesla's next greatest success will come shortly after the release of Gen 3, realistically (read Elon-time) at least around 3 years from now. I do not have a specific price target in mind for the stock at that point. If pressed, I would say I think >$500/share is a fairly safe assumption if things generally go to plan.

    So, what should we do? We being those people who want a relatively aggressive "set it and forget it" investment approach with minimal capital needed and roughly 3yr timeline. I understand my objectives are not 100% clear and that some of this is fairly subjective. Feel free to ask questions concerning factors I am neglecting.

    For arguement's sake, we can afford spending $10,000.
    What to buy?
    In laymen's terms, what does it mean?
    What would be the cost of the investment? ($10,000?)
    What is the potential return?
    What is the potential downside?
    What is the range of potential outcomes?
    Can anything be done with the investment in the interim?
    What other factors to consider or be aware of?


    Thank you all in advance!

    Robot
     
  2. Chickenlittle

    Chickenlittle Active Member

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    #2 Chickenlittle, Jul 9, 2014
    Last edited: Jul 9, 2014
    minimal capital, good return everyone's dream. Short term options don't sound like your cup of tea with inexperience. You could try an intermediate type of investment to get more leverage without the higher risk of options. Deep in the money leaps. Jan 2016 strike with price target around 110. They will have almost no time premium, the price would be around the current price target minus 110. You would get one contract which would "control 100 shares. The price will move with the price of the stock but you will have twice the return than if you had just purchased the stock. Good luck

    you can adjust your risk leverage by going with a higher strike price to get 3 or 4 fold leverage but it will cost a little premium
     
  3. RobotGrease

    RobotGrease Member

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    Thanks Chicken. I guess "minimal capital" is irrelevant as I have set that amount at $10,000. Yes, lowest risk, highest return is basic to all investments.

    Also, as I said, I am looking for a set it and forget it type of investment with a time line of about 3 years. Essentially, I don't want to be concerning myself with TSLA's daily/monthly performance. Jan 16 is only 1.5yrs right? I'm not sure if your suggestion of jan 16 leaps are what I am looking for, but I would appreciate more and more-detailed info, as alluded to by the list of questions in the original post.

    Also, wouldn't a strike of $110 be bearish (half of today's price)? Clearly I am missing something...

    I am looking to not only know what to do but what are all the factors to consider, meaning "why".
     
  4. pz1975

    pz1975 Member

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    $110 is not bearish because you are buying a call. ie. Your investment goes up when TSLA goes up. You are just paying more up front than, for example, an at-the-money call of $225. The difference is that your return will be less than the $225 call if TSLA goes up, but your capital preservation will be better if TSLA goes down.

    Jan16 LEAPS are as far out as you can get right now. The strategy would be to roll them out about 6 months before they expire to Jan2017 LEAPS trying to time the roll out at a local high to maximize gain. Then keep rolling them out like that as long as you want or cash them in when you want.
     
  5. dalalsid

    dalalsid Member

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    I'm just figuring options out but here is how it would go:

    you buy the 110 call for 110 (assuming a price of 220)
    in jan 2016 if Tesla goes to 440, your call will be worth 330 (so triple the money, as opposed to double)
    if tesla goes to 110, your call will be worth 0 (so 100% loss as opposed to 50%)

    so thats a bullish strategy.
     
  6. RobotGrease

    RobotGrease Member

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    Thanks! So what are your options with the Leap at that time in either scenario? (stock is below $110 or above $440 in January 16, can you extend your timeline?)
     
  7. DaveT

    DaveT Searcher of green pastures

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    Robert, it's tough to give specifics cause I don't know your tax situation. Will this be in a taxable account? At what rate are you taxed on long-term capital gains tax? Do you have state taxes?

    Also will you keep some stock or are you looking for something more risky/reward?

    And is the total amount you're looking to invest an amount you're okay with losing, or not?
     
  8. Chickenlittle

    Chickenlittle Active Member

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    Your choices would be
    1. Selling call and taking profit or buying another call up to 2 years away
    2. Exercising the option by buying the stock with 110 per share
    no options go out 3 yrs. you should buy stock if that is your interest. There is some protection with the option. If stock drops significantly you will paradoxically gain some time value. If tesla goes bk (never can tell) you would be limiting your loss to 10k rather than the 20k if you had bought the stock
     
  9. RobotGrease

    RobotGrease Member

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    I'm in California and we can assume my tax bracket is 25% federal, 9.3% state. Yes, taxable account.

    I probably won't keep any significant stock, want to reduce current layout almost 100% and just put about $10k into this long term play.

    Yes, I'm willing to lose the $10k.

    I basically want a strategy that optimizes returns on the belief, as I believe we share, that Tesla will continue to execute reasonably to plan, at least through 2020. Again, if a black swan event occurs or something completely unforeseen and misaligned with there historic performance occurs, I would be ok with losing the $10k.

    Make sense? I figured this is an attitude shared by others here... no?
     
  10. dalalsid

    dalalsid Member

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    Stock is at or below 110, you've lost your money. In other cases, you can extend your timeline by selling your options and buying more future dated options of a similar nature or keep the profits/loss or execute and buy the stock.
     
  11. DaveT

    DaveT Searcher of green pastures

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    I think your basic choices are the following:

    1. Keep holding common stock.

    2. Keep holding common stock and buy more stock on margin.

    3. Sell your stock and buy long dated in-the-money options.

    4. Sell your stock and buy long dated out-of-money options.

    5. Sell your stock and buy convertible notes (notes from May 2013 offering or notes from March 2014 offering.

    For #5, you'll need more than $10k for this as you'll need to talk with your broker.

    You'll have to work out various scenarios on a spreadsheet and include your taxes to identify what your real risk/reward. I can't say how important it is do this but it seems like a lot of people skip this over.

    Each person has different expectations of what TSLA will be at and different odds of it being at various prices in 3 years, and that changes the equation dramatically.

    Best thing to do is to work out your scenarios on a spreadsheet and post them here to make sure you're not missing anything.

    Lots of people might choose LEAPs over stock on margin to increase leverage but it all depends on the spreadsheet. You might be surprised. LEAPs might not be worth it since you'll be paying taxes twice (once to sell your stock now and once when you sell your LEAPs). Options also can expire worthless if your strike price isn't met. But with stock on margin you can receive a margin call and there's the cost of interest (although there are brokerages that charge low margin interest of 4%).

    Again probably the best thing people here can do is to double check the spreadsheet/scenarios you're making so that the numbers are correct. And in the end you'll be the one deciding in how much risk to take on based on your projections.
     
  12. RobotGrease

    RobotGrease Member

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    If the stock is at or below 110, could you buy the shares outright or roll them into another leap?

    So it would reason to believe that the lower the strike, the safer you are from outright losing? (ie. I think its less likely it will be at 55 then 110 at that point in time)

    How do premiums play into all of this?

    If anyone would be so kind, I'd love to see some examples of various Leaps and associated costs along with any other factors to consider.

    - - - Updated - - -

    Thanks Dave. Good call on double taxes, didn't consider that, although in any case I am looking to sell my shares soon to have the cash on hand. Unless of course there is a better way to do this and avoid outright selling and paying taxes?

    Not sure how I would even approach creating such a spreadsheet. I'm good with excel, but have no clue what to enter. Do you or anyone else here already have such a spreadsheet that I could use to manipulate for my situation?
     
  13. Auzie

    Auzie Tree Hugger Member

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    Just a caution on double taxes, there is no double tax paid if you convert from stock to leaps. Not that I recommend that, I have not converted single share yet.

    Tax is paid on profits only, so whether profit comes from selling leaps or stock does not matter. For tax reasons, it only matters how much profit is made, and for capital gains, in what period of time. It is good to pay a lot of tax (it feels really bad), but look at the upside, more tax means more profits.

    Some shrewd investors have a strategy of renewing their portfolio in regular intervals, like selling all holdings every year, paying tax and buying the same or different holdings again. That method ensures capturing profits and tax minimization, as tax is spread over multiple years rather than payed in a single year.
     
  14. RobotGrease

    RobotGrease Member

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    So this does exist? How does one convert shares into leaps?

    - - - Updated - - -

    I think you're mistaken. realizing gains and paying taxes is maximizing there effect, lowering the principle investment by the taxes paid....
    Also, such selling and then re-buying the same assets in a short time span (don't remember how long) as you described would be considered a "wash sale".... death and taxes my friend
     
  15. clmason

    clmason Member

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    There are no call options with a 3 year horizon so you can't set it and forget it.

    You could buy deep in the money Jan'16 calls and roll them out as each successive long term call becomes available.

    However, even if you do buy a Call option you can't forget it altogether because you have to sell it eventually. If you let it expire in the money most brokerages will execute the call on your behalf (thereby making you purchase the stock). Someone correct me if I am wrong, this is how it worked for me.
     
  16. RobotGrease

    RobotGrease Member

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    Thanks, the 2 year max has been pointed out. Sounds like the best option is to roll them before expiration.

    Yes, I understand I can only "set it and forget it" until the expiration date. The point is that I dont want to be worrying about all the action between now and then. That's what calender reminders are for...

    So, after the discussion so far, Leaps are the obvious method for me. I dont want to buy on margin and risk margin calls, defeats the purpose.

    So lets say I buy the jan 2016 leaps with strike at 110 today, with the stock at 223.

    I understand that I lose everything if its under 110 at Jan 2016. Can I avoid this in advance if I see, lets say a few months before hand, that the stock is currently or will likely be under 110?

    Is there any difference if the stock is below or above 223 at the expiration date, assuming its at least above 110? So lets say 200 vs 400 at expiration?
     
  17. ADP

    ADP Member

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    Another thing to consider is the optimal strike price. Here is the profit structure (I realize I'm using fraction number of calls for the illustration) based on various strike prices. So if you were really bullish, your optimal position is selecting a strike price of $320 to $330.

    Strike Priceask price of call# calls
    Stock PriceProfit
    110118.0084.75
    44027,966
    24039.40253.81
    44050,761
    25035.50281.69
    44053,521
    26032.90303.95
    44054,711
    27030.20331.13
    44056,291
    28027.70361.01
    44057,762
    29025.30395.26
    44059,289
    30023.00434.78
    44060,870
    31021.25470.59
    44061,176
    32019.45514.14
    44061,697
    33017.80561.80
    44061,798
    34016.30613.50
    44061,350
    35014.95668.90
    44060,201
    36013.70729.93
    44058,394
    37012.55796.81
    44055,777
    38011.55865.80
    44051,948
    39010.60943.40
    44047,170
    4009.101,098.90
    44043,956
     
  18. DaveT

    DaveT Searcher of green pastures

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    Can you clarify - is your purpose to get cash out but to try to keep a position in TSLA with less money (with similar reward as your previous stock position but higher risk)? Or is it to leverage more to gain more risk/reward?
     
  19. RobotGrease

    RobotGrease Member

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    #19 RobotGrease, Jul 9, 2014
    Last edited: Jul 9, 2014
    Both...? I want to reduce my exposure, increasing my available cash. I also want to take a position of higher possible return. Basically, instead of having let's say $50k in shares, I'd like to spend $10k on leaps and have the same or greater potential return since I'm confident of Tesla's success over the long term. Make sense?

    In other words, if TSLA goes to $440 by 2016:
    $50k shares limits me to $50k profit and holds up my original $50k for those 2 years.
    $10k in leaps could limit (or extend) losses to the entire $10k I'm willing to lose and increase potential return several fold, right?
     
  20. DaveT

    DaveT Searcher of green pastures

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    Hmmm, doesn't make much sense to me. By reducing exposure (selling your $50k stock and paying LT capital gains and state tax), you'll then be forced to put into very risky positions (OTM LEAPs) where you'll be lucky to make as much as you could have if you just held your stock. Since by spending only $10k, you'll need a 5x leverage over your current $50k stock position and to get that much leverage you'll need to go OTM LEAPs with a lot of risk. Why not just keep your stock? Or sell a little bit of it and gamble on some long-dated options?
     

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