TSLA Market Action: 2018 Investor Roundtable

[erha]

If any of you have dry powder left. The best play right now is to sell put spreads in order to harvest that volatility while being protected on the downside.

Could you please explain for an options amateur like myself why you’d sell put spreads instead of just selling puts?

Is it because you need less capital?

 

[neroden]

Really? Read Internal Revenue Bulletin: 2009-48 | Internal Revenue Service

" If a manufacturer (or, in the case of a foreign vehicle manufacturer, its domestic distributor) fails to make a quarterly report in accordance with section 5.05 of this notice and at the time specified in section 6.02 of this notice, the acknowledgment letter issued under section 5.04 of this notice may be withdrawn..." ​

No waiver required. Auto Manufacturers that hide behind IRC Section 6103 are deceptively deceiving the public. With all the "hate" out there do you think no one will press their congress person for an audit of the required quarterly reports (and for that matter of the tax returns of those who flipped M3s while claiming the credits)?

Quarterly report to the IRS doesn't mean it's public. In fact, most information given to the IRS is confidential.

 

[BrianZ]

To all the people complaining about Elon tweeting and should be focusing on delivering, I'd like to point out the importance of having a break and relieving stress. Many people probably have experienced extreme stress, but less people know of the huge toll it takes on your productivity and performance. Even fewer people know that it is absolutely possible to experience extreme stress from doing things you absolutely love when under deadlines. Sounds strange, but I've experienced that first hand.

Elon, as much of a superhuman as he is, still needs a break here or there. If anyone has read Elon's autobiography, you'd know that Elon values time and efficiency to an extreme extent. It is clear his Twitter activity is his way of recharging his batteries and maintaining his extreme productivity.

 

[Boomer19]

I agree, it is frustrating and hurts right now (not as bad as 2017... scar tissue maybe), but I am optimistic that in the next 4 days maybe 4 months definitely, things will look better.

yeah the emotional side of me gets fired up about this stuff. the rational side nips at options and stk position, as always, on large drops.
and i agree, their progress will pay off eventually.

 

[neroden]

People in general have a propensity to abhor and exaggerate uncertainty.

True that.

It appears that my primary advantage in investing, from a temperment point of view, is my high level of comfort with volatility.

It's also why I'm comfortable *selling* options to harvest volatility premium. And it's why I'm making money by doing so -- because most people are so uncomfortable with volatility that they're paying a lot for options. Options are essentially insurance against certain types of volatile moves.

 

[ValueAnalyst]

ValueAnalyst on Twitter

70% of nearly 400 voters still expect a delayed version of "the short burn of the century."

5 hours left before polls close.

 

[neroden]

Question for everyone.

What are your thoughts on Tesla doing a Porsche style short squeeze?

During the Porsche short squeeze in 2008, Porsche owned 42.6% of the stock and German state of Lower Saxony owned ~20%. When Porsche announced that they own options to buy another 31.5% of VW, culminating to 94.1% of VW shares are unavailable, an instant short squeeze happened.

So I'm thinking, Couldn't Tesla do something very similar? Let's say another party wants to invest in Tesla the way Tencent did. They would approach Musk, and say, we want to buy 10% (or some chunk) of Tesla. I know that's a lot, but I can get all the shorts off your back. Here's what we're gonna do. We're gonna quietly acquire a lot of Tesla call options. Then, at a time of your choosing, you'll announce that we acquired options to buy x% of Tesla. Then there will be a short burn of the century, and we will control the rate of the short squeeze so we can make a huge profit off the short squeeze, which would fund our investment into Tesla (essentially buying Tesla shares at a huge discount due to short squeeze profits), and Tesla will get a lot of extra capital to invest in future expansion, as well as get bad actors off of Tesla for a long time.

The short sellers should be largely gone as the huge losses will force them to exit. But more importantly, this huge loss will not only deter others from doing this again, but also rob them of huge amounts of capital (could easily be 50+ billion of losses given the ~13B short interest) even if they are stupid enough to want to attempt again in the future.

Major win-win for both the investor, Tesla, and Elon Musk getting to stick it really hard to all the shorts.

Fantasy? Possibility?

Weirdly, German stock manipulation laws are weaker than US stock manipulation laws. The Porsche squeeze would be illegal in the US; management is required to report any time they do anything with the stock (within a few days), while others are required to report if they get to 5% (or options positions equivalent to it) and if they are coordinating with management.

That said there's nothing to stop another party from investing 5%, as Tencent did, without talking to anyone about it. Tencent outright predicted that someone else was going to do so and said they wanted to get in first.

 

[ValueAnalyst]

True that.

It appears that my primary advantage in investing, from a temperment point of view, is my high level of comfort with volatility.

It's also why I'm comfortable *selling* options to harvest volatility premium. And it's why I'm making money by doing so -- because most people are so uncomfortable with volatility that they're paying a lot for options. Options are essentially insurance against certain types of volatile moves.

Selling puts has certainly proved smart in the last year. Kudos.

 

[neroden]

What is MMD, please? One of the biggest challenges of this forum is all the abbreviations.

"mandatory morning dip". For some reason, short-sellers probably, Tesla always opens higher and is driven lower in mid-morning, before recovering most days. Tesla has some highly predictable daily patterns.

 

[neroden]

Wait a second ... that's completely NOT what has happened during the last 12 months. Just take a look at what the bullish story was, when the stock reached it's ATH. At least for me, the last year looks more like this ...

View attachment 314476

Perhaps you've missed that bulls are already discounting everything Musk says by a factor of roughly 20% and six months?

 

[neroden]

He will lose credibility with institutional holders if he is late on GAAP profits and cash from operations for Q3 and Q4.

It is true that Musk will lose credibility if Tesla does not report GAAP profits and positive cash flow (NOT cash from operations -- read what Musk said -- he said cash flow) in Q3 and Q4. Those numbers are important, particularly as they are the numbers which reinforce the "Tesla doesn't need your stinking Wall Street money" narrative. Which is what Wall Street does not currently believe.

 

[neroden]

Could you please explain for an options amateur like myself why you’d sell put spreads instead of just selling puts?

Is it because you need less capital?

Absolutely. My cash-secured puts have to be backed by huge amounts of capital (basically, to be safe, enough capital to buy the stock). It's a low-leverage strategy, actually.

You need way less capital for a bull put spread.

 

[bdy0627]

For options experts, what caused this? Is it simply market forces - the demand for calls vs puts? The implication is that there is perhaps more going on here.

 

[Remus]

It is true that Musk will lose credibility if Tesla does not report GAAP profits and positive cash flow (NOT cash from operations -- read what Musk said -- he said cash flow) in Q3 and Q4. Those numbers are important, particularly as they are the numbers which reinforce the "Tesla doesn't need your stinking Wall Street money" narrative. Which is what Wall Street does not currently believe.

I still think they may miss this goal. Getting close to break even will still ensure survival, but missing the mark a little bit will create another buying opportunity. This is just my blind application of elon time.

 

[erha]

Absolutely. My cash-secured puts have to be backed by huge amounts of capital (basically, to be safe, enough capital to buy the stock). It's a low-leverage strategy, actually.

You need way less capital for a bull put spread.

Thanks, that makes a lot of sense. So what’s the strategy when selling put spreads? What strike prices makes you the most money given a certain stock price? And what makes the put spreads more or less risky?

I guess I could figure this out by myself if I think it through, but it’s vacation time... I’d love some input and maybe an example of a put spread you would sell at current prices. Thanks

 

[EinSV]

I think this whole short burn idea is wayyyyy simpler than it's being made out to be. What blows up the shorts' position is Tesla becoming profitable. That's the fundamental short thesis against Tesla. There are lots of angles they use to get there, but that is their fundamental argument. Tesla becomes profitable at a production level of 5,000 model 3 per week, along with continuing to produce 2,000 model S and X per week. They just became able to do that for the first time last week. Right now, there is disbelief. The shorts were able to drop TSLA hard this week by feeding and amplifying that disbelief into something absurd.

Make no mistake that the short burn has begun with Tesla achieving the ability to mass produce their cars at a level that allows for profitability. Once Tesla demonstrates that they can sustain this level of production, the short position is totally exposed. Of course, shorts will argue various things about demand, competition, quality, Elon sucks, whatever, even after Tesla achieves profitability. In the end, once Tesla can sustain this level of production, the short burn commences. The fuse was certainly lit last week. How long is the fuse? That's the question we can't answer yet. It could be pretty short if Tesla demonstrates a production level anywhere near 5,000 model 3 per week. Elon has been very confident about Tesla's production lately - clearly different from how he appeared in previous quarters. All wheel drive and performance model production is rolling with deliveries starting by the end of this month. He indicated they wouldn't start production of these versions until the production level was at 5,000 per week. My feeling at this point is that Tesla is much closer to sustaining 5,000 per week than most people think it is. Many shorts and analysts suggest they think Tesla's sustained production level is somewhere around 2,000.

If this was a 1 week trick pulled off by Elon, with Tesla dropping back down to around 2,500ish per week, I do not think Elon would be as confident as he has been. Do I think there is still some Elon optimism going on? Sure, that's his M.O. I don't think they will sustain 5,000 per week starting now. However, I do believe Tesla will almost certainly sustain 5,000 per week within 6-8 weeks, if not sooner. If this is true, then this is a superb dip to buy on. We will climb from this dip sooner than later, as TSLA always does. Don't be surprised though if the actual short burn takes much longer.

Great post. Tesla is already at a production level where they can likely show profitability this quarter. With modest further growth and production streamlining through the end of the year they can hopefully show strong profitability in Q4.

That kills most of the short thesis and should send a bunch of them (not all) heading for the exits.

Right now the market is distracted by short term concerns and FUD that have the effect of a mind trick that leads to ignoring exciting developments and products that are on the relatively near term (1-2 year) horizon like ramping to 10K/week, Model Y, Semi, TE profitable and doubling or more every year, as well as other longer-term projects like European and Chinese GFs, Pickup and autonomy.

Hopefully once the market is hyperventilating less over the immediate financial picture Tesla’s incredible long-term potential will start being factored in and more heavy hitters will jump into the mix, driving the SP upwards while wiping out this generation of shorts.

 

[mongo]

Thanks, that makes a lot of sense. So what’s the strategy when selling put spreads? What strike prices makes you the most money given a certain stock price? And what makes the put spreads more or less risky?

I guess I could figure this out by myself if I think it through, but it’s vacation time... I’d love some input and maybe an example of a put spread you would sell at current prices. Thanks

Investopedia has lots of write ups.
Bull Put Spread

 

[YasB]

Perhaps you've missed that bulls are already discounting everything Musk says by a factor of roughly 20% and six months?

Nah, meanwhile i'm aware of that and almost used to it. So you are saying, if they deliver only 800.000 cars in 2020 and the Model Y won't be available until mid 2020, that's good enough for you? ;-)

 

[erha]

Investopedia has lots of write ups.
Bull Put Spread

Thanks, this is referring to bull put spreads tho. I’m not sure, but I think @neroden was referring to selling bear put spreads. Or does that work out as the same?

 

[mongo]

Thanks, this is referring to bull put spreads tho. I’m not sure, but I think @neroden was referring to selling bear put spreads. Or does that work out as the same?

@neroden is a bull, and I think that write up is from the side of the writer, not the purchaser. But I could be reversed. The site has the bear put spread also.
There are also sites that run all the projected option returns for various senatios...