Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

[Fact Checking]

Can you please elaborate this in layman's because what you wrote is way too technical for us noobs.

So I could be wrong about this, but if Tesla is able to recognize income from these options as "Other Income", that goes straight into GAAP income at 100% margins. If they get Q4 GAAP income beyond around ~$970m then 2019 will be profitable as a year and February S&P 500 inclusion is possibly secured...

One counter-argument is that if Tesla did this, then the investment bank who underwrote those calls and warrants would sure know about it, and the TSLA share price would have catapulted up starting around end of December, when Tesla potentially sold the calls for around $200 when the TSLA price hit $400. Wait a minute ...

Warning: Not advice, I might be wrong, and even if I'm right, Tesla might have good reasons not to do any of this.

 

[Artful Dodger]

So, some lousy shorts can write headlines that move the stock 5B. I'll never be worth that much, maybe I can take one for the team. By the time I'm outta jail TSLA would be in the thousands!

Tesla and SpaceX mining division bringing cobalt meteoroid home.

Elon and the Boring co. unveil underground Gigafactory 5 as completion nears.

Tesla to acquire AAPL at 340/share.

Musk and Buffet now following each other on twitter.
Obviously none of the above is true to my knowledge, all in jest.


The hilarious part is most of these could be plausible in the future with Elon's enterprises working together. Maybe not likely but plausible.

Wait what? Musk following Buffett on Twitter?!

Oh... you mean Jimmy Buffet.

Cheers!

 

[JohnnyEnglish]

And yet 'analysts' recently revised their estimate for WAYMO to a more 'reasonable' $105B (slightly more than all of VWAG):

"Morgan Stanley slashed its estimate of how much Alphabet Inc.’s Waymo driverless car business is worth, saying the technology is taking longer to develop than previously expected.

"Waymo is worth about US$105 billion, Morgan Stanley analyst Brian Nowak said in a note to clients. That’s down from the US$175 billion valuation he pegged the unit at just a year ago."​

Waymo valuation slashed on autonomous vehicle tech delays - BNN Bloomberg

No, analysts clearly can do an estimate, they just don't want to. Ask yourself that question. Why won't they do it?

Once FSD has been released it should be possible to track the progress Tesla is making towards the level of functionality/reliability that is necessary for autonomous taxis. The closer that Tesla gets the lower Waymo's valuation will drop. Tesla have now delivered 750k cars with the potential to run FSD and will rise to between 1.25-1.5M by the end of this year. The window of opportunity for Waymo to get a product that is ready for widespread deployment and then build the autonomous taxis to provide significant coverage is getting shorter. Once Tesla get FSD to the level needed for Tesla Network their speed to deploy should be much faster than would be possible for Waymo as the potential fleet is already in place.

 

[Mike Smith]

Price reduced, or am I imagining?

Model Y price change?

I think in China the MIC Model 3 price was set artificially high to avoid osbourning Freemont model 3's, then lowered just before deliveries started. Perhaps they did the same with Model Y to avoid osbourning Model 3 sales. If this is true then maybe it means they're about to start delivering Model Ys..

 

[Electroman]

When did you order? I believe there were changes after the initial reveal. Around the time Pearl White became the default color? However after that FSD went up by $1k, so be careful clicking around.

I first ordered on the day of the reveal - during the reveal in March - and the final charges including delivery but excluding taxes was $53,500 as my screen shot shows. Now I updated the configuration to the same spec today and it says $51,000

It is insane that I paid for $55k for Model 3 similar config but with cheaper blue paint. Model Y starts cheaper, or if you include the $7500 fed tax credit I received it is only $3500 more expensive.

 

[Carl Raymond]

Clearly, as investors, we are better off with Tesla's guidance than Adam Jonas.

No apostrophe after Jonas?

No argument here, either way.

 

[JBRR]

(Cc: @ReflexFunds, @The Accountant, @EVNow, @KarenRei and @Doggydogworld.)

So let me attempt to quantify the value of Tesla's 60,000 contracts large $309-$606 bull spread. The hedging transaction Tesla entered into is:

• buy 60,000x 2024/May calls at $309,
• sell 60,000x 2024/May calls at $607.

If we take yesterday's closing price of $510 and the 2021 March 19 LEAPs at $310 which are trading for $225, we can calibrate the rough Black-Scholes options pricing parameters:

https://goodcalculators.com/black-scholes-calculator/

Spot Price: $510
Strike Price: $310
Time to expiration: 425 days
volatility: 49%
risk-free interest rate: 2%​

Which gives $224.9 in the calculator - close enough.

Now we can estimate the market value of the 60,000 May 1 2024 calls at $309 that Tesla owns: time to expiration increases to 1,565 days, which gives a per share option value of $289, and a market value of $1.74b of the lower leg of this bull spread.

Even if we reduce IV a bit, this is still insanely high, and that's just one of Tesla's three bull spreads.

Am I missing anything? Has Elon managed to hide the short squeeze of the century in plain sight?

I have been wondering about this on several occasions too.
Did we not discuss this subject on the forum 10-12 months back?

I think the correct way to think about it is:
They sold convertible notes with strikes of 309.83.
That equals selling calls at 309.83 in terms of dilution.

They then bought 309.83$ calls to hedge dilution in case stock increased over that strike price.
And they sold warrants to reduce the 220m$ ish cost they paid for the 309.83$ calls.
Those warrants are essentially the sale of call options.

The warrants sold in the previous 2 offerings are described here on page s61 and s62.
I have trouble finding the strike of the warrants sold for the 2024 converts but the 2021's have a strike of 650.

The 2021 notes will result in dilution for shareholders at 650$.

424B5

Issuance of Warrants in Connection with 2019 Notes and 2021 Notes

In connection with the offering of our 0.25% Convertible Senior Notes due 2019, or the 2019 Notes, and the 1.25% Convertible Senior Notes due 2021, or the 2021 Notes, and our entry into certain convertible note hedge transactions, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 2.6 million shares of our common stock at a price of $512.66 for the 2019 Notes and a total of approximately 3.8 million shares of our common stock at a price of $560.64 per share for 2021 Notes. Taken together, the purchase of the convertible note hedges and the sale of warrants were intended to reduce potential dilution and/or offset potential cash payments upon the conversion of these notes and to effectively increase the overall conversion price of such notes from $359.87 to $512.66 per share in the case of warrants relating to 2019 Notes and from $359.87 to $560.64 in the case of warrants relating to 2021 Notes.

Issuance of Warrants in Connection with 2022 Notes

In connection with the offering of our 2.375% Convertible Senior Notes due 2022, or the 2022 Notes, and our entry into certain convertible note hedge transactions, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 3.0 million shares of our common stock at a price of $655.00. Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to reduce potential dilution and/or offset potential cash payments upon the conversion of these notes and to effectively increase the overall conversion price of such notes from $327.50 to $655.00 per share.

 

[JBRR]

I have been wondering about this on several occasions too.
Did we not discuss this subject on the forum 10-12 months back?

I think the correct way to think about it is:
They sold convertible notes with strikes of 309.83.
That equals selling calls at 309.83 in terms of dilution.

They then bought 309.83$ calls to hedge dilution in case stock increased over that strike price.
And they sold warrants to reduce the 220m$ ish cost they paid for the 309.83$ calls.
Those warrants are essentially the sale of call options.

The warrants sold in the previous 2 offerings are described here on page s61 and s62.
I have trouble finding the strike of the warrants sold for the 2024 converts but the 2021's have a strike of 650.

The 2021 notes will result in dilution for shareholders at 650$.

424B5

Issuance of Warrants in Connection with 2019 Notes and 2021 Notes

In connection with the offering of our 0.25% Convertible Senior Notes due 2019, or the 2019 Notes, and the 1.25% Convertible Senior Notes due 2021, or the 2021 Notes, and our entry into certain convertible note hedge transactions, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 2.6 million shares of our common stock at a price of $512.66 for the 2019 Notes and a total of approximately 3.8 million shares of our common stock at a price of $560.64 per share for 2021 Notes. Taken together, the purchase of the convertible note hedges and the sale of warrants were intended to reduce potential dilution and/or offset potential cash payments upon the conversion of these notes and to effectively increase the overall conversion price of such notes from $359.87 to $512.66 per share in the case of warrants relating to 2019 Notes and from $359.87 to $560.64 in the case of warrants relating to 2021 Notes.

Issuance of Warrants in Connection with 2022 Notes

In connection with the offering of our 2.375% Convertible Senior Notes due 2022, or the 2022 Notes, and our entry into certain convertible note hedge transactions, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 3.0 million shares of our common stock at a price of $655.00. Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to reduce potential dilution and/or offset potential cash payments upon the conversion of these notes and to effectively increase the overall conversion price of such notes from $327.50 to $655.00 per share.

I found the supplementary prospectus:

SEC Filing | Tesla, Inc.

The warrants sold are described at page 59:
"Concurrently with entering into the convertible note hedge transactions, we also entered into warrant transactions with the hedge counterparties relating to the same number of shares of our common stock, with a strike price of $607.50, subject to customary anti-dilution adjustments."

So tl;dr:
Tesla sold 309$ strike convertibles.
They bought 309$ call options to avoid dilution in case stock price increased higher than the 309$ strike sold in the convertibles.
They sold 607.50$ warrants to reduce the cost of buying the call options, effectively moving the treshold of dilution from the 2024 2% convertible bonds from 309$ to 607.50$.

Meaning: There's no financial gain for Tesla between 309$ and 607.50$. The 'gain' is that shareholders avoid dilution by having sold convertible debt notes at a strike price that is way lower than current stock price.

 

[steve3]

Now if I hold these shares until 01/17/2021 I will have a long term capital gain.

Not being pedantic here, just looking to help you avoid an unwanted surprise...best to understand that long term capital gains holding period requires MORE than a year. IOW if you sell any of these shares on 1/17/21 any gain would be taxed at short term rates. And this remains true even though this is a leap year with 366 days. In your example, selling on 1/18/21 or after would qualify as long term.

 

[Artful Dodger]

It's work, for one thing. More importantly Wall Street thrives on churn so buy and hold accounts are not really welcomed. Then there's always the conspiracies (which aren't all someone's paranoia).

Even the riff-raff will put in the effort.

https://seekingalpha.com/article/4200867-estimate-of-waymos-intrinsic-value

 

[RobStark]

The motivation was that Buffet has (had?) a large stake in BYD motors, a potential Tesla competitor).

 

[kbM3]

Doubt BH is buying TSLA at this point..But...He did not 'like' AAPL, until he did.

Paraphrasing: A friend, who’s a fan of Warren, told me that Buffet has stated he doesn’t like to invest in tech stocks because he doesn’t understand them. When asked about Apple, he stated he now views them as more of a utility company, because of their captive customer base.

Just my recollection. I did Google it and could not find the quote however.

He’s also stated you should not invest in things you don’t understand. Many TSLA shorts are a great example of having a fairly good understanding of finance, balance sheets, steady state companies, but no comprehension of the insane power of hi-tech and hi-growth stocks. They should never short, (nor invest in) such companies.

 

[Fact Checking]

I found the supplementary prospectus:

SEC Filing | Tesla, Inc.

The warrants sold are described at page 59:
"Concurrently with entering into the convertible note hedge transactions, we also entered into warrant transactions with the hedge counterparties relating to the same number of shares of our common stock, with a strike price of $607.50, subject to customary anti-dilution adjustments."

So tl;dr:
Tesla sold 309$ strike convertibles.
They bought 309$ call options to avoid dilution in case stock price increased higher than the 309$ strike sold in the convertibles.
They sold 607.50$ warrants to reduce the cost of buying the call options, effectively moving the treshold of dilution from the 2024 2% convertible bonds from 309$ to 607.50$.

Meaning: There's no financial gain for Tesla between 309$ and 607.50$. The 'gain' is that shareholders avoid dilution by having sold convertible debt notes at a strike price that is way lower than current stock price.

In the cash space the $309-$607 bull call spread pays out nicely in cash, limited to $1,788m - which is the nature of bull spreads in exchange of lower transaction costs:

Bull spread - Wikipedia

Issuing 6 million new shares has no cash cost to Tesla.

In the shareholder value space the bull call spread reduces dilution by up to $298 per share - countering the direct dilution effect of 6 million shares up to a degree.

But my point: Tesla could decide to sell the bull spread before expiry, at the cost of more dilution - for a significant cash income. To shareholders as a whole it doesn't change enterprise value.

 

[dgodfrey]

As an inexperienced options trader, I'd like to confirm for others that what I expected to happen to my DITM call that expired yesterday, did happen.

I got an alert from ETrade at 7:04 AM EST today that my $285 call was exercised. I now have another 100 shares dated 01/17/2020, and $28,500 less cash. The "price paid" is $299.xx per share which includes the price I paid for the call ($14.xx) back in May 2019.

Now if I hold these shares until 01/17/2021 I will have a long term capital gain.

If I had closed the call yesterday I would have had a short term capital gain of $21,xxx.

I find this example extremely helpful as I bought my first option this past week. I have enough TSLA to cover any margin but no where near enough cash to exercise the option, especially at the strike price. If by chance you were like me and did not have the liquidity, what exactly happens at expiry? Some have mentioned that it depends on your broker but I too have Etrade so thought you may know.
I believe FC explained it upstream as did Karen but it was over my head. I may take another look at those.

If the call option is ITM, can I just sell it at any time and the gains would be whatever the difference between the strike and the SP plus the premium which in your example above is ~$510 SP-$300 x 100=$21k.
Can I sell the option at any time that it shows a profit before expiry?
How is that profit calculated?
To this point, is it only profitable when the SP exceeds the strike price?
I noticed that it initially showed a profit in my account as the SP increased (but was well below the strike price) but it didn't seem to align exactly with the SP movement. Is that the time theta that is calculated since it's based on SP at some time in the future?
Am I still taxed if I buy shares with the profits?
Is there a way to convert the profit into shares immediately to avoid short term capital gains?

 

[JustMe]

Off Topic ridiculous frivolity

I engaged with TeslaQ Gustavo (why?! lol) on twitter and he brought up “millions in stolen copper”

here is our silly exchange: Scott on Twitter

 

[Artful Dodger]

Am I missing anything? Has Elon managed to hide the short squeeze of the century in plain sight?

Thanks for doing this. Outstanding work. Super-important topic getting zero attention here in 'Main'.

I'm no accountant, but does Tesla even need to excercise these options to claim their book value? Now that might not be reportable as 'other income' but surely its in the 'assets' column somewhere?

Could I please ask you to do a summary calculation of all Tesla's derivatives positions at present value? Is this enough to retire Tesla's debt?

How much has this PV changed since Tuesday's high SP of ~$545? IE: what effect does 'leverage' have on the value of these derivatives going forward?

Say we touch $612 (one Bull's tgt price) shortly after the 2019Q4 earnings call. How many contracts does Tesla need to execute to retire its debt completely.

If nothing else, I think that takes care of the Moody's Rating. Upgrade secured.

Of course, S&P 500 inclusion occurs soon thereafter. But how many Calls does Tesla have left to add force to the big squeeze? Does Tesla also have enough assets derivative to buy back all the shares they sold in May 2019, thus eliminating any dilution and further restricting the size of the float for short covering?

What are the possible strategies for 'rolling forward', given that the ceiling of the 'Bull Spread' will likely soon be exceeded?

Whew! (thought weekends were supposed to be boring!) TIA for your thoughts.

Cheers!

 

[Artful Dodger]

IOW if you sell any of these shares on 1/17/21 ...

... is a Sunday.

 

[JBRR]

In the cash space the $309-$607 bull call spread pays out nicely in cash, limited to $1,788m - which is the nature of bull spreads in exchange of lower transaction costs:

Bull spread - Wikipedia

View attachment 501833​

Issuing 6 million new shares has no cash cost to Tesla.

In the shareholder value space the bull call spread reduces dilution by up to $298 per share - countering the direct dilution effect of 6 million shares up to a degree.

But my point: Tesla could decide to sell the bull spread before expiry, at the cost of more dilution - for a significant cash income. To shareholders as a whole it doesn't change enterprise value.

I would be a kind of forced dilution to pull money(dilution) from the future into the present for cash yes.

 

[Artful Dodger]

But my point: Tesla could decide to sell the bull spread before expiry, at the cost of more dilution - for a significant cash income. To shareholders as a whole it doesn't change enterprise value.

... or, Tesla could have used some of the $2.4B net cash they received from the equity offer in May 2019 to buy more derivatives. Any such purchase wouldn't be listed on the SEC documents regarding the share issue.

At the time, Elon said something like 'we might just keep the cash'. Perhaps Zach whispered in his ear there's some place else we could PUT it. CALL me hopeful.

"A nod, you know, is as good as a wink to a blind horse."

Cheers!

 

[hobbes]

(Cc: @ReflexFunds, @The Accountant, @EVNow, @KarenRei and @Doggydogworld.)

So let me attempt to quantify the value of Tesla's 60,000 contracts large $309-$606 bull spread. The hedging transaction Tesla entered into is:

• buy 60,000x 2024/May calls at $309,
• sell 60,000x 2024/May calls at $607.

If we take yesterday's closing price of $510 and the 2021 March 19 LEAPs at $310 which are trading for $225, we can calibrate the rough Black-Scholes options pricing parameters:

https://goodcalculators.com/black-scholes-calculator/

Spot Price: $510
Strike Price: $310
Time to expiration: 425 days
volatility: 49%
risk-free interest rate: 2%​

Which gives $224.9 in the calculator - close enough.

Now we can estimate the market value of the 60,000 May 1 2024 calls at $309 that Tesla owns: time to expiration increases to 1,565 days, which gives a per share option value of $289, and a market value of $1.74b of the lower leg of this bull spread.

Even if we reduce IV a bit, this is still insanely high, and that's just one of Tesla's three bull spreads.

Am I missing anything? Has Elon managed to hide the short squeeze of the century in plain sight?

Must admit I can´t add much of value here, but Elon tweeting about a meteor hitting reminds me of him tweeting about a tsunami a while ago... This all sounds too good to be true, proably just a coincidence. Elon Musk on Twitter