Short-Term TSLA Price Movements - 2016

[Johan]

I'm not sellling below 1k, just FYI...

Evidence that every "strong long" becomes weak at one point or another.

And really - what would be the point of riding a short squeeze all the way up to $600 (random number) and then down again to $300?

 

[Ryo]

Somewhat OT...

Stephen Gandel (the author of that Fortune article that prompted the blog response from Tesla) did a AMA on reddit.

Hey, I am Stephen Gandel, a senior editor at Fortune, and have been writing about Tesla and Elon Musk's stock sales recently. AMA!

I suspect he regrets doing an AMA now. I found this quite satisfying to read.

 

[SW2Fiddler]

Evidence that every "strong long" becomes weak at one point or another.

And really - what would be the point of riding a short squeeze all the way up to $600 (random number) and then down again to $300?

Not everyone has the freedom to reverse positions at will... "Code Of Ethics" Restrictions arising from employment at a financial institution, for example.

"But this is the Short Term Movements thread!" Well, it's the best place to hang out, much like the kitchen at a party - where I find the best conversation even though I ain't technically cooking.

 

[VanE]

I was looking to the option chain of SCTY this morning and I had an idea that probably has some flaw in it, but I can't find it. The problem is that normally you can have a high risk investment that has upside and downside, or you can have a low risk investment with a low downside but also a limited upside, but can never have the best of both worlds. But this idea seems to have a maximum loss of $1050,00 and a maximum upside of $7950,00.

You can sell a $24,00 Jan 2017 put for SCTY for $8,15 and buy a $21,00 Jan 2017 put for SCTY for $5,50. This means that you have a maximum loss of $3,00, but you already have gained $2,65. So your maximum loss is $0,35 (or 13,2% of your maximum gain).

If the deal goes through, Tesla Motors will buy SolarCity for 0,122 to 0,131 TSLA shares per SCTY share. If it goes through with the worst ratio this means that TSLA can fall to $24,00/0,122 = $196,72 and you still have the maximum gain of $2,65. It needs to fall to ($24,00-$2,65)/0,122 = $175,00 before you make a loss.

Because you sell the puts for $8,15, buy them for $5,50 and you need to have $3,00 as margin you only need to put down $0,35 for margin per put. So you could buy and sell 30 contracts and only need to put down $1050,00 for margin, and have a maximum gain of $2,65*3000 = $7950,00.

So IF you believe that the chances that...
A: The SCTY deal goes through
B: TSLA will be above $175,00 in mid Januari

...will be more than 13,2%, this should be a good deal. Or not?!


I am quite confused at the moment, but if I haven't made a logical misstep this could be quite a good opportunity for those who think that the deal will go through and TSLA won't plummet in the next two quarters.

 

[Oil4AsphaultOnly]

I was looking to the option chain of SCTY this morning and I had an idea that probably has some flaw in it, but I can't find it. The problem is that normally you can have a high risk investment that has upside and downside, or you can have a low risk investment with a low downside but also a limited upside, but can never have the best of both worlds. But this idea seems to have a maximum loss of $1050,00 and a maximum upside of $7950,00.

You can sell a $24,00 Jan 2017 put for SCTY for $8,15 and buy a $21,00 Jan 2017 put for SCTY for $5,50. This means that you have a maximum loss of $3,00, but you already have gained $2,65. So your maximum loss is $0,35 (or 13,2% of your maximum gain).

If the deal goes through, Tesla Motors will buy SolarCity for 0,122 to 0,131 TSLA shares per SCTY share. If it goes through with the worst ratio this means that TSLA can fall to $24,00/0,122 = $196,72 and you still have the maximum gain of $2,65. It needs to fall to ($24,00-$2,65)/0,122 = $175,00 before you make a loss.

Because you sell the puts for $8,15, buy them for $5,50 and you need to have $3,00 as margin you only need to put down $0,35 for margin per put. So you could buy and sell 30 contracts and only need to put down $1050,00 for margin, and have a maximum gain of $2,65*3000 = $7950,00.

So IF you believe that the chances that...
A: The SCTY deal goes through
B: TSLA will be above $175,00 in mid Januari

...will be more than 13,2%, this should be a good deal. Or not?!


I am quite confused at the moment, but if I haven't made a logical misstep this could be quite a good opportunity for those who think that the deal will go through and TSLA won't plummet in the next two quarters.

Not saying that I have this clear either, but if the deal doesn't go through and SCTY is at $22-23, then wouldn't you be on the hook for the $24 put, while your $21 would end up worthless? At 30 contracts, you would need to buy ~$66k - $69k worth of SCTY shares?

But here in the states, there's an additional risk. With puts, the put seller is at risk of having those options exercised at any time, so the downside protection isn't actually there. In that scenario, you'd exercise the $21 puts you hold (selling for $63k) yielding a net loss of $3k - $6k.

 

[MitchJi]

I am quite confused at the moment, but if I haven't made a logical misstep this could be quite a good opportunity for those who think that the deal will go through and TSLA won't plummet in the next two quarters.

Maybe it's a mistake (might be too late), but I'm waiting for the terms of the deal to be finalized before I even think about trying to arbitrage the deal.

I'd also lean towards positioning myself to take advantage of the potential squeeze. More upside with maybe less downside risk. $400 strike price J17 calls are currently at $0.55 each !

Less maximum loss and much higher potential gain. If the SP goes to only $300 with $400 calls that would be a huge gain.

Edit Addition:
I used the option profit calculator for a $400 strike and if the SP gets to $300 by the end of October you'd be smiling. Over $230 profit for under a dollar investment!

You can try it here:
calculator

 

[VanE]

Not saying that I have this clear either, but if the deal doesn't go through and SCTY is at $22-23, then wouldn't you be on the hook for the $24 put, while your $21 would end up worthless? At 30 contracts, you would need to buy ~$66k - $69k worth of SCTY shares?

But here in the states, there's an additional risk. With puts, the put seller is at risk of having those options exercised at any time, so the downside protection isn't actually there. In that scenario, you'd exercise the $21 puts you hold (selling for $63k) yielding a net loss of $3k - $6k.

No, the buyer of the $24,00 put can sell their shares to me, but I can resell those for $21,00. So the maximum loss is 3000*($3,00-(8,15-5,5)) = 3000*(3-2,65) = $1050,00.

It is indeed an extra risk that the buyer of the put can exercise it at any time, so whenever it goes below the $175,00 between now and Januari you can lose money, but the maximum amount of money you lose is $1050,00 (if you exercise your $21,00 puts at the same time as the buyer of the $24,00).

 

[CALGARYARSENAL]

Brian Kelly of Fast Money says Tesla is his jackpot stock. Story is there is a decarbonization of the electric grid in USA and Tesla is at the centre of it........

Jackpot stocks

 

[VanE]

Maybe it's a mistake (might be too late), but I'm waiting for the terms of the deal to be finalized before I even think about trying to arbitrage the deal.

I'd also lean towards positioning myself to take advantage of the potential squeeze. More upside with maybe less downside risk. $400 strike price J17 calls are currently at $0.55 each !

I am indeed also waiting for the deal to become clearer before I will risk it, but if you want to use the uncertainty of the deal as leverage you've to buy before the vote, because when the vote is done TSLA and SCTY will move in exact lockstep. I think I will buy in after they formally proposed the deal and it looks good to me without any 'weird factors' that might end up destroying the deal (I don't think those will be in the proposal because since they announced it it became in both their own interests to go through with it). In the mean time I'm hoping that the Gigafactory party will give us some more information on the current phase of manufacturing the new cells and provide a boost to the mid $200's.

 

[MitchJi]

No, the buyer of the $24,00 put can sell their shares to me, but I can resell those for $21,00. So the maximum loss is 3000*($3,00-(8,15-5,5)) = 3000*(3-2,65) = $1050,00.

It is indeed an extra risk that the buyer of the put can exercise it at any time, so whenever it goes below the $175,00 between now and Januari you can lose money, but the maximum amount of money you lose is $1050,00 (if you exercise your $21,00 puts at the same time as the buyer of the $24,00).

I don't think it works exactly that way. I think what happens is that when people exercise their puts (normally they sell to close) put holders are randomly selected to cover the sales or supply shares.

In other words it's not accurate to say the buyer of the put.

 

[VanE]

I don't think it works exactly that way. I think what happens is that when people exercise their puts (normally sell to close, put holders are randomly selected to cover the sales.

But when you get 'randomly selected' to cover those sales aren't you able to just exercise your $21,00 put?

 

[sub]

It seems it wouldn't be in the best interest of the large institutional share holders to cause a short squeeze and scare off future high shirt interest in a cash cow like TSLA.

Has anyone looked at the longer term short interest % of a stock like VW before and after the big squeeze?

 

[MitchJi]

It seems it wouldn't be in the best interest of the large institutional share holders to cause a short squeeze and scare off future high shirt interest in a cash cow like TSLA.

I agree,, except that when the institution holds a ton of Tesla stock they want to vote in their long term best interests.

 

[geneclean55]

I agree,, except that when the institution holds a ton of Tesla stock they want to vote in their long term best interests.

I agree. If 18 months from now Tesla is churning out large numbers of M3, then short interest in the stock will naturally decline. Maybe the big institutions are less interested in the shorts cash cow compared to a few years ago when Tesla didn't have 400K M3 reservations and the overall situation was more tenuous.

 

[ggr]

But when you get 'randomly selected' to cover those sales aren't you able to just exercise your $21,00 put?

Short answer: yes.

Longer answer. If the SCTY price is above $24, the put won't be exercised; better for them to just sell the stock on the open market.
Between $21 and $24: you might be assigned the exercise, but then you'd turn around and sell the stock on the open market for more than $21.
Below $21, yes, exercise your own put.

The only catch here is that you probably need to be paying attention, so don't take a vacation in Antarctica for the next few months. I don't know of any easy way to set up a trade that would automatically protect you. But then you're just holding some SCTY stock paying margin interest, still not all that bad.

 

[MitchJi]

I'd also lean towards positioning myself to take advantage of the potential squeeze. More upside with maybe less downside risk.

For example $400 strike price J17 calls are currently at $0.55 each ! Less maximum loss and much higher potential gain. If the SP goes to only $300 with $400 calls that would be a huge gain. I used the option profit calculator for a $400 strike and if the SP gets to $300 by the end of October you'd be smiling. Over $230 profit for under a dollar investment! Wrong! Over $230 profit from a $55 investment.

You can try it here:
calculator

 

[geneclean55]

Somewhat OT...

Stephen Gandel (the author of that Fortune article that prompted the blog response from Tesla) did a AMA on reddit.

Hey, I am Stephen Gandel, a senior editor at Fortune, and have been writing about Tesla and Elon Musk's stock sales recently. AMA!

I suspect he regrets doing an AMA now. I found this quite satisfying to read.

Elon is amused.

Elon Musk on Twitter

 

[pGo]

What is puzzling is that Jan 17 $24 calls go for $2.3 and puts go for $8.2. this disparity means market thinks the deal won't go through and that the stock would collapse. If one can bet that the deal will go through, scty puts is a good idea to sell.

 

[neroden]

I don't think it works exactly that way. I think what happens is that when people exercise their puts (normally they sell to close) put holders are randomly selected to cover the sales or supply shares.

Sort of backwards -- you're still thinking of calls. Every put holder who exercises has the right to "put" their stock. Put holders are randomly selected to *receive* shares. This doesn't matter, though, because typically they're either all exercised or all not exercised, depending on whether they're in the money or out of the money. (Which is the same as with calls.)

In other words it's not accurate to say the buyer of the put.

Yes. However, typically, if the put is significantly in the money at expiration, *all* of the puts still outstanding late in the afternoon on that day will be exercised. Why? Because the only way to reduce open interest is for someone who originally wrote puts to buy them back. Even though most people who hold puts sell to close, it's just passing the parcel; the next recipient has to exercise or watch it expire. On the expiration date, the original put writer gains the most from the puts expiring worthless, and so will not buy them back if they're out of the money. If they're in the money, the put writer will only buy them back for less than the intrinsic value, and what incentive does the seller have to sell for less than the intrinsic value? (The writer may also gamble on a stupid put holder failing to exercise an in-the-money put.) Further, some of the writers of put options actually wanted to acquire the stock.

 

[neroden]

What is puzzling is that Jan 17 $24 calls go for $2.3 and puts go for $8.2. this disparity means market thinks the deal won't go through and that the stock would collapse. If one can bet that the deal will go through, scty puts is a good idea to sell.

It's quite an impressive disparity, isn't it? I've been sticking with my simple sales of out-of-the-money puts but I might have to do some more complicated arbitrage.