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

[Fact Checking]

Convertible bonds:
Most convertible bonds will be held by funds who will delta hedge their exposure to Tesla equity. At current prices this would require selling 8.7 million Tesla shares short. So this is a large chunk of the 30 million Tesla short interest. These are held by different investors to the options open interest so can not be netted out.

Fantastic write-up, but I'd like to quibble with this part.

Convertible bonds have reduced yields, in exchange for the conversion option: above $250 or $360 (depending on which bond we are talking about) they can be converted into TSLA stock. I.e. above their conversion price they have 1:1 equity returns, dollar for dollar.

With that in mind it makes little sense to "hedge" anything IMHO: the unlimited equity upside, while having a 100% face value payment guarantee if the stock price is too low is the whole point of convertible bonds.

Some funds might use the convertibles to short against the box, or to take profits once the equity returns are satisfactory, but I believe the typical Tesla convertible bond holder is more like George Soros (who never shorts manufacturing companies) or Chamath Palihapitiya (Facebook angel investor and former derivatives trader and software developer - he has a colorful CV) - who in this CNBC interview explains why he invested in Tesla's convertible bonds.

Most of the convertible bonds are still below the conversion price - so I think only a minority of them are shorted against.

 

[Artful Dodger]

Do you have a link to this market so I may also stalk it?

FRA: TL0 - Google Search

 

[heltok]

Do you have a link to this market so I may also stalk it?

https://www.google.se/search?q=tsla+frankfurt

 

[LN1_Casey]

Ok but I bet Tesla licenses their FSD software to VW

No way.

Intellectual property is something that Tesla has fought to keep to themselves from the get go. I can definitely see them selling parts to VW, and maybe battery tech, but not their AI.

 

[Tslynk67]

Interesting tidbit: the plot of land was once eyed by BMW for a new factory.

This is an aerial shot of the industrial area. It looks like the plot in front is the only one big enough to house a Gigafactory.


View attachment 476326

They only have to get rid of - how symbolic - the gas station in the middle of it.

View attachment 476328

And not so muddy either!

 

[wheelwhright]

Thoughts on financing for GF4 from a local....

I am certain that they got a deal through the "Investionsbank des Landes Brandenburg" (ILB, Business promotion bank in the federal state of Brandenburg). The ILB tries to incentivize innovation to move to the state and I know a number of SME's getting funding from them for new machinery, and I know a bunch of startups having relocated to Brandenburg area, mainly the state capital Potsdam, to enjoy some of ILBs incentives.

The ILB has a bunch of standard programs, mostly in the ballpark of a couple hundred thousand euros or a few million. In these they often match an investment by the company or through an outside investor. Another common scheme for them is paying the salary of new hires (for highly technical/innovative tasks) for the first year. These incentives are usually literally free money. However, in some cases they can take a while to materialize. A friend of mine whose Dad runs an SME in the state has been waiting on some incentive since Jan 2019 due to overload at the ILB.

That being said, I don't think the Tesla case fits any of standard deals or that they'll have to wait in line like some 100 people SME. However, it might still be a relatively favorable loan including further incentives.

 

[ReflexFunds]

How did you find this ?

Just to be sure the way it should work is to calculate openinterest * delta for all the strikes, for all expirations.

Total delta hedge = sum across expirations (sum across strikes (OI * Delta))

10525 * 0.982 (C250)
+ 6292 * 0.9841 (C260)
+ ....
+ 7510 * 0.5052 (C350)
+ 6680 * 0..2437 (C360)
+ ....

Unless you have the data it would be difficult to calculate.

BTW, good to see more folks coming around to seeing how important options are to things that happen to SP. I've been saying this for a long time.

Yes, I pulled data for open interest for every available call and put option, then calculated delta and price etc

 

[Fact Checking]

What is the exposure of all of these positions to a +$10 move in Tesla share price?
For +$10 the net change in delta hedging requirement from the whole options market and from the convertible notes hedging is + 4.0 million shares or $1.4bn of Tesla stock purchases. This is an incredibly powerful feedback mechanism to drive the stock higher.
For +$10 share price the size of the Tesla short owned by real shorts will increase in $ terms. To maintain the same $ size of position Tesla short will have to buy Tesla shares to reduce the number of shares short. For $10 this would have to be 0.7 million shares.
So between the two, this is buying pressure for 4.7 million shares due to a $10 increase in share price.

What is the exposure of all of these positions to a -$10 move in Tesla share price?
For $10 the net change in delta hedging requirement from the whole options market and from the convertible notes hedging is - 4.7 million shares or $1.6bn of Tesla stock sales. This is again a powerful feedback mechanism to drive the stock lower. At the moment the mechanism is slightly more powerful in the downward direction – this is because the recent price increase has moved so many Tesla calls into the money and delta to its maximum of 1. There is more room for changing in delta with downward movements currently. This will likely even out as calls mature and people roll calls into more out of the money strikes.
For -$10 share price the size of the Tesla short owned by real shorts will reduced in $ terms. To maintain the same $ value, Tesla shorts will sell a further 0.7 million shares short.
So between the two, this is selling pressure for 5.4 million shares from a -$10 move in stock price.

I agree with most of what you wrote and your delta hedging pressure estimates are fantastic - here's a few caveats I think:

• As pointed out in my previous comment, I don't think the majority of convertible bonds come with a short interest - they are basically primarily long plays by risk averse bond traders and require no hedging. I.e. true short exposure is probably even higher than you estimate.
  
• I don't think the delta-hedging inventory pressure is symmetrical: for example TSLA hitting a new 10-month high of $350 yesterday probably represented a bigger upside risk than a small intraday correction back to $344, right?
• I.e. if market makers were delta-hedging all day long, symmetrically treating upside and downside risks in a similar fashion, then we'd be seeing a lot more volume: for example on 11/01 the day opened at $315 and then TSLA went down to $309, which ~$6 drop should have resulted in about ~2.5 million shares of delta hedging alone, yet only 1.3 million shares were traded during that drop. On the upside, when new highs are broken we are seeing a lot higher buying volume though, close to the numbers you established.

If we think of options market makers as some variant of trend following traders (which is probably the best they can do in terms of delta hedging quality - they cannot just follow the price because that's very expensive in terms of transaction costs), then I'd expect the upside buying pressure from them to be twice as strong at the moment as the downside pressure.

This can change, of course, on strong pullback/correction signals - and we might have seen that on 10/28 when TSLA pulled back from an intraday high $340 to a low of $322.

Interesting times ahead ...

(Not advice, as usual.)

 

[SpaceCash]

No way.

Intellectual property is something that Tesla has fought to keep to themselves from the get go. I can definitely see them selling parts to VW, and maybe battery tech, but not their AI.

Nah, opposite is true imo. Less hardware exports more software exports, as far as business exchanges going forward
But bullish either way

4.Elon Musk is a securities fraud-committing pathological liar.

I wish he was, the SP would be in the thousands by now

 

[Fact Checking]

$351.50 in Germany

$353 in Nasdaq pre-market trading now, on volume of ~10k shares which is pretty high considering that we are 2 minutes into pre-market trading.

There's a fresh round of macro pessimism though, so Nasdaq might have a red day.

 

[wheelwhright]

I think this funding program is a good candidate for orientation: Our ILB subsidy programmes

It is in south brandenburg so, 20% matching of the facility.

 

[Artful Dodger]

Closed: Nov. 13, 4:02 a.m. EST · Disclaimer
Pre-market 353.00 +3.07 (0.88%)

EDIT:

Pre-Market High:
$353.75
(04:09:21 AM)​

 

[Fact Checking]

I don’t think Tesla got much of a deal. European Union rules do not allow countries, provinces or communities to give support in the shape of tax exemptions, grants or other perks, as they want a level playing field for all companies and do not want a race to the (tax) bottom.

I don't think that's true: EU rules don't allow discriminatory incentives and tax cuts (often given to local or "favored" corporations) - but they very much allow per country tax rates (taxation is a sovereign right kept with EU members) and uniform incentives available to all market participants.

I.e. I'd expect very sweet financing terms from this deal, and a streamlined permitting process (within statutory boundaries, of course), and a task force at the highest levels to help make GF4 reality.

The "Tesla Effect" is very real and will attract a lot of other companies to the Brandenburg area.

It's all above board: if BMW wants to expand to Brandenburg at a similar scale they will be able to get a similarly good deal, but of course the German car industry is fighting with a big problem of contraction and disruptive transition right now. I.e. they have too many old ICE factories in Germany - for years most of them will be looking at trying to 'convert' those, instead of expanding to new sites. This gave Tesla an opening with Brandenburg state, which is one of the lower income German states and which doesn't have much of an auto manufacturing sector.

 

[LN1_Casey]

Also, how has this not been announced yet?

Elon Musk on Twitter

Do they call it Gigafactory Moon?

 

[RobStark]

Tesla Snags Permit to Start Mass Production in China

Bloomberg - Are you a robot?

Tesla Inc. won permission to start mass production at its China factory, clearing one of the last hurdles to begin selling locally built cars in the world’s largest electric-vehicle market.

The clearance was disclosed by China’s Ministry of Industry and Information Technology on its website Wednesday.

 

[MC3OZ]

Please don't use the words "naked" and "Spiegel" in the same conversation!

I'm still trying to come to terms with "orgy" and "Lopez" from the other day...

Well now you have put all 4 words in a single post, and I'm eating dinner in around 30 minutes....

I must think about something else .... perhaps I'll reconsider and count Model 3's in GF3.

 

[Tslynk67]

but what does everyone think about the batteries?

seriously, does that mean like what they’re doing at gf1?

or like china where they’re using catl?

what does it mean?

Personally I think they'll be ready to make their own by then and it would be a good moment to begin. YMMV.

 

[Tslynk67]

Why would this happen if GF3 is valued at 0 and is about to start pumping out cars, but GF4 is at least 2 years away?

It's like saying truck reveal will have any impact. Hello Y?

MY reveal was down-played like crazy, MP will be full-on theater I think.

 

[Nakata]

Does it have to be in that quadrant? There is room on the other side of the road with much more space.
View attachment 476402

So now we know why Elon paid a million dollars for teamtrees.
To offset for the trees he has to cut for GF4.

 

[Fact Checking]

Tesla Snags Permit to Start Mass Production in China

Bloomberg - Are you a robot?

Tesla Inc. won permission to start mass production at its China factory, clearing one of the last hurdles to begin selling locally built cars in the world’s largest electric-vehicle market.

The clearance was disclosed by China’s Ministry of Industry and Information Technology on its website Wednesday.

I believe this explains the TSLA jump in European and US early trading.

This is a Big Falcon Deal: the last pillar of TSLAQ truthing about the "swamp" GF3 has just collapsed. Rational shorts should probably start looking for the exits of when to capitulate. Are any rational shorts left?