TSLA Market Action: 2018 Investor Roundtable

[neroden]

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.

Actually, no matter what happens in Q3, I think the short-sellers will find a way to spin it negatively. They'l say

"Oh, it was cash flow positive, but only due to
(1) borrowing more on lines of credit
(2) selling ZEV credits
(3) the cars in transit at the end of Q2
(4) one big battery project
(5) luck
... or whatever."

Q3 is going to be close in any case.

It's the Q4 financial results which should be undeniable and should shut down the bankwuptcy narrative. Interestingly, they will come out in mid-February BEFORE the March convertible bond maturity. Everyone who can read a balance sheet agrees that Tesla has enough cash to get through to that point, even in the most pessimistic scenario.

Whether Tesla will also have enough cash to pay off the March bonds outright is a harder matter to predict, though I am personally sure that any financing gap can be covered by available access to credit lines, and there is a possibility (if Q4 profits are good enough) that they won't need to increase financing. Of course if the stock is over $360.32 at the end of Febuary, those bonds will be converted rather than paid off.

---
Actually, I'm trying to game the behavior of the convertible holders out. Conversion can happen starting December 1. If TSLA is over $360.32 any time after December 1, we'll probably see conversions.

It would be quite logical for a convertible bondholder to short-sell stock against the convertible whenever the stock was higher than $360.32 + their carrying cost for carrying a short position until December 1; it's essentially a way to cash out early. Looking at margin rates for big sellers, this would probably provide strong selling pressure between $360 and $370 until December 1.

I also just realized this is a possibly-legal way to shift income between years by short-selling against the box, which may imply that some conversions will happen on January 1 rather than December 1 to postpone tax payments.

Convertible holders probably mostly hedged the call option aspect of their purchases immediately (though one talking head on TV recommended not doing so and treating them as deliberate call option positions so some may have done this), but I think they would have sold calls rather than going straight into short-selling stock as that's an incorrect hedge early on. When the stock is high enough, close enough to maturity, however, it becomes a correct move.

We should expect to see similar stuff going on with the 2021 convertibles, but the carrying cost of holding a short position for 3 years (including possible increases in interest rates and stock price increases) makes it much more dangerous so we probably won't see much of it until 2020. The 2022 convertibles are almost certain to be in the the money at maturity and may well be converted early.

 

[neroden]

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? ;-)

Honestly? Yeah. That's good enough for me. I'm not greedy.

 

[Navin]

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.

Interesting thoughts. Do you have a link to where tencent said this?

 

[neroden]

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

I don't do spreads personally right now (one would mostly be doing them to increase leverage, which I don't need, and the tax consquences on spreads can be... complicated, and I got tripped up on tax stuff with options a couple of times), but I'm going to point you here:

Strategies

 

[neroden]

@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...

OK, so every spread involves being BOTH a writer AND a purchaser of options. Generally at different strike prices, sometimes at different expiration dates.

To be clear.

 

[Tslynk67]

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

Mass Media Delusion - as shared by M. BS. Spiegel, Kolodny & Co.

 

[ggr]

@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...

Basically, you write (sell) the puts in the direction you expect the price to go, while buying protective puts in the other direction, relatively speaking. So if you write a $330 put, while buying a $300 put, you make the most money if the price increases past $330. So that's a bull put spread. If you write the $300 put and buy a $330 put, you make the most money if the price declines below $300. That would be a bear put spread. As usual, bullish if you're hoping the price goes up, bearish if you hope it goes down. At least that's my understanding. I am not expert at this.

 

[BrianZ]

Actually, no matter what happens in Q3, I think the short-sellers will find a way to spin it negatively. They'l say

"Oh, it was cash flow positive, but only due to
(1) borrowing more on lines of credit
(2) selling ZEV credits
(3) the cars in transit at the end of Q2
(4) one big battery project
(5) luck
... or whatever."

Q3 is going to be close in any case.

It's the Q4 financial results which should be undeniable and should shut down the bankwuptcy narrative. Interestingly, they will come out in mid-February BEFORE the March convertible bond maturity. Everyone who can read a balance sheet agrees that Tesla has enough cash to get through to that point, even in the most pessimistic scenario.

Whether Tesla will also have enough cash to pay off the March bonds outright is a harder matter to predict, though I am personally sure that any financing gap can be covered by available access to credit lines, and there is a possibility (if Q4 profits are good enough) that they won't need to increase financing. Of course if the stock is over $360.32 at the end of Febuary, those bonds will be converted rather than paid off.

---
Actually, I'm trying to game the behavior of the convertible holders out. Conversion can happen starting December 1. If TSLA is over $360.32 any time after December 1, we'll probably see conversions.

It would be quite logical for a convertible bondholder to short-sell stock against the convertible whenever the stock was higher than $360.32 + their carrying cost for carrying a short position until December 1; it's essentially a way to cash out early. Looking at margin rates for big sellers, this would probably provide strong selling pressure between $360 and $370 until December 1.

I also just realized this is a possibly-legal way to shift income between years by short-selling against the box, which may imply that some conversions will happen on January 1 rather than December 1 to postpone tax payments.

Convertible holders probably mostly hedged the call option aspect of their purchases immediately (though one talking head on TV recommended not doing so and treating them as deliberate call option positions so some may have done this), but I think they would have sold calls rather than going straight into short-selling stock as that's an incorrect hedge early on. When the stock is high enough, close enough to maturity, however, it becomes a correct move.

We should expect to see similar stuff going on with the 2021 convertibles, but the carrying cost of holding a short position for 3 years (including possible increases in interest rates and stock price increases) makes it much more dangerous so we probably won't see much of it until 2020. The 2022 convertibles are almost certain to be in the the money at maturity and may well be converted early.

Awesome post! Based on your logic presented in this post, wouldn't that mean the stock is unlikely to break significantly above $360 anytime this year without some seriously game changing developments due to the strong selling pressure by shorts to force Tesla to pay cash to repay the bonds? In a sense, Tesla themselves might also be inclined to keep it that way as a very high stock price would mean they'd overpay significantly for their loan? But then, a higher stock price probably will benefit Tesla more overall than the benefit of preventing overpayment of their loans.

This of course, won't happen if the shorts get it in their heads that Tesla will not have a problem paying off its loans with cash. But they're not the smartest bunch.

 

[CuriousSunbird]

An

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?

And also you offset the time value decay.

 

[CuriousSunbird]

It's true we

Awesome post! Based on your logic presented in this post, wouldn't that mean the stock is unlikely to break significantly above $360 anytime this year without some seriously game changing developments due to the strong selling pressure by shorts to force Tesla to pay cash to repay the bonds? In a sense, Tesla themselves might also be inclined to keep it that way as a very high stock price would mean they'd overpay significantly for their loan? But then, a higher stock price probably will benefit Tesla more overall than the benefit of preventing overpayment of their loans.

This of course, won't happen if the shorts get it in their heads that Tesla will not have a problem paying off its loans with cash. But they're not the smartest bunch.

It's true we are too mathematically challenged to figure how you pay off $23 billion of liabilities with $3 billion of cash.

 

[mongo]

OK, so every spread involves being BOTH a writer AND a purchaser of options. Generally at different strike prices, sometimes at different expiration dates.

To be clear.

True.
To be muddy: what a bull would buy/ acquire is the opposite of what a bull would write/ sell.
Bull writers sell to bears, bull buyers buy from bears. (Oversimplied since there is no direct link between writer and purchaser for the two different legs and the spread can have a but and a sell)

 

[CuriousSunbird]

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.

View attachment 314511

Increasing volatility was off-setting the underlying price decline (is what he's saying - I haven't checked).

 

[brian45011]

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.

What is your point? Are you assuming the words mean Free Cash Flow (i.e. after cash used for CapEx)? Or the interpretation that "cash flow" includes cash from financings?

The one of the shareholder letter's headlines was:

"Expecting positive GAAP net income and positive cash flow in Q3 and Q4 2018"​

The recent 8k said:

"We also reaffirm our guidance for positive GAAP net income and cash flow in Q3 and Q4,"​

 

[bdy0627]

Awesome post! Based on your logic presented in this post, wouldn't that mean the stock is unlikely to break significantly above $360 anytime this year without some seriously game changing developments due to the strong selling pressure by shorts to force Tesla to pay cash to repay the bonds? In a sense, Tesla themselves might also be inclined to keep it that way as a very high stock price would mean they'd overpay significantly for their loan? But then, a higher stock price probably will benefit Tesla more overall than the benefit of preventing overpayment of their loans.

This of course, won't happen if the shorts get it in their heads that Tesla will not have a problem paying off its loans with cash. But they're not the smartest bunch.

Not at all, but it may not stay above that level. It could run up and down past that level a bunch of times between now and then, just as it has already done. It's a momentum stock that is making lots of $$$ for swing trading hedge funds.

 

[Rarity]

What time frame do you think we *are* hoping for? I'm currently expecting Model 3 at 8K/week by end of year.

Musk said 10K, so I apply the usual 20% Musk Optimism Discount Factor(TM). Normally I would also apply a time discount, but duplicating all the lines which need to be duplicated in 6 months just doesn't seem like a stretch.

When did Musk say 10K M3s per week by the end of the year? I don't think it has been recently. As far as I recall, he has been much less clear on this point in the last half year.

I have the sense that Tesla will be crushing it a bit less than I had hoped in the remainder of this year, but profitability will be guaranteed by the tent while they fix GA3.

 

[neroden]

It's true we

It's true we are too mathematically challenged to figure how you pay off $23 billion of liabilities with $3 billion of cash.

*eyeroll* I suppose you've never analyzed a corporate balance sheet EVER? In your LIFE?

You pay off debts only as they come *due*. I mean, God, how obvious can this be. Some liabilities actually just vaporize themselves (like "obligation to deliver car" or warranty obligations when there are no warranty claims). Others, which are actual debts, are only paid when due. On Tesla's balance sheet, many of the debts are maturity-matched with and collateralized by income streams -- these are the non-recourse loans at the bottom of the debt schedule -- and are really accounted for already.

The adults here are looking at the debt maturity schedule for the recourse loans and comparing it with projected additional profits from producing more cars per year. I don't know what you're doing, but you do seem financially challenged.

The entire point of a business loan is that you borrow money now, make profits, then pay it back later. Comparing cash on hand to total liabilities is ludicrous.

 

[brian45011]

Actually, I'm trying to game the behavior of the convertible holders out. Conversion can happen starting December 1. If TSLA is over $360.32 any time after December 1, we'll probably see conversions.

The BoD has the option of changing the conversion ratio for the Free Conversion Period --At what conversion ratio does the Board of Directors want to announce to induce settlement with shares ? The conversion rate appears to capped at 3.9597 (equivalent to $252.54/share)
TSLA Market Action: 2018 Investor Roundtable

 

[neroden]

What is your point? Are you assuming the words mean Free Cash Flow (i.e. after cash used for CapEx)? Or the interpretation that "cash flow" includes cash from financings?

The one of the shareholder letter's headlines was:

"Expecting positive GAAP net income and positive cash flow in Q3 and Q4 2018"​

The recent 8k said:

"We also reaffirm our guidance for positive GAAP net income and cash flow in Q3 and Q4,"​

I am straight up saying that the word "cash flow" means GAAP "cash flow." Including cash from financing. Because that's what cash flow *means*. If he had meant operating cash flow he would have said it; he can be rather precise sometimes.

Musk has also said that Tesla will not need financing *except regular lines of credit*. Draws on the undrawn portion of the line of credit are valid in order to get positive cash flow. (Though obviously it has no effect on GAAP profit one way or the other; it would have to be used for capex, not for opex.) As of March 31, there's half a billion in undrawn capacity in the main (recourse) Credit Agreement.

 

[dakh]

My problem with that reasoning and why I believe that Tesla is currently undervalued, is that the uncertainty on the execution of that growth just got smaller. It is one thing to base a stock price on future potential, but to then see a significant step of that execution completed lessens the uncertainty on the future potential.

I hope we can agree that buying the stock now for the same price as what it was 8 months ago, is much better given
the positive developments in the meantime.

So I would say that yesterday's price drop is a signal to buy.

Note I'm simply trying to guess what the market consensus is made of, personally I'm just holding a leveraged long position and I am not so confident at the moment it'll work out well.

As to buying now vs then: no, this isn't a clear choice. Back then Tesla didn't discredit itself as much by missing its own guidance, folks were actually hopeful they learned from Model X disaster. Turned out, they didn't quite do that. They overspent on automation (wasted money and effort, some auto production expert commented that $2B spend on production line is unheard of), they had to stretch their finances and they are in a less advantageous position now vs. what was anticipated a year ago. Sure, the uncertainty of when M3 ramp happens is resolved, but for valuation to go up on that we would have to assume that valuation was based on an even more grim forecast (say, 5K/month 3 month from now) than what reality delivered.

 

[Brando]

Your welcome. Earned myself my first two disagrees! Now I've finally achieved at least one of every kind. Who would've thunk I'd earn them trying too help someone out though?
Maybe it's MID, maybe it's MANDATORY. maybe it should be MMMD. Regardless, I think you get the point!
There ought to be a sticky somewhere around here listing all the acronyms used so us neophytes stand a chance at keeping up.

Just don't use acronyms. Too specialized. Doesn't help communicate, only hinders communications.