TSLA Market Action: 2018 Investor Roundtable

[RationalOptimist]

Is there any precedent for a company going private to offer existing option holders with strike dates later than the transaction, the chance to continue to hold their options, the same way that share holders can continue to own shares? I would love that to happen in this case. Right now as my Jan 2020 call options with strike prices as high as $700 are taking serious hits. But the owners of those calls are among Tesla's biggest believers. I would guess Elon would want to protect them. He could do that by arguing for option holders rights to transfer to the private company. ie. holders would retain the right to buy shares in private Tesla in jan 2020 for $700. If he were to announce that, I'm guessing the value of those long-term options will rapidly recover.

 

[Johan]

So, why not just buy ALL the call options with break even point under 420? Wouldn't that make the most sense?

There is a premium on options. And there is this little thing called time decay. You'd be playing catch a falling knife.

 

[Ulmo]

Blog post/Email to employees (ignore if posted already, can´t keep up):

Taking Tesla Private

That message reads as if Elon thought about this the first day of considering becoming a big part of Tesla and never looked back, but just wrote it right now without editing because he already knew exactly what to say. This is a long planned move.

 

[Runarbt]

I guess if it's margin calls then it could squeeze like any other, but the big players can probably just wait and cover on $420 - a massive loss for them, of course, but not like it would have been.

Can you explain how they can wait and cover at 420$?

They dont own any shares - and get no right to buy shares at 420$.
They need to buy them back before Tesla goes private?

If Tesla goes private - they need to fin a way to buy shares from this private entity. They then have to be on board with Elon already and part of the plan to go private?

 

[Sparky]

Yeah, I am not sure about holding private shares in an IRA. Anyone know?

I just asked my broker for my IRA brokerage acct and she said it's unlikely this account can participate or convert in a private sale. But, in the past I have transferred funds from this account to a "directed IRA" that does allow me to by shares in private offerings. So, if this thing moves along to a private offering, that may be a route. Also I won't have to take capital gains to transfer.

 

[sub]

Grabbed the 120 shares at prices between 371-385, hadn’t to do a few orders as I sold options and didn’t want to miss out on a huge spike.

Worst case scenario I have more public TSLA.

 

[Fact Checking]

The broker is allowed to go after ALL YOUR ASSETS whether they are at that brokerage or anywhere else!

Yeah, I know that this is the case for retail shorts. But I actually think that only a couple of million shares of TSLA are retail traders, and the rest are much bigger fish: "Type III" shorts if you will.

Those shorts are corporate entities which are shielded from personal bankruptcy, and let's suppose they have ~15 billion dollars of collateral lined up for their current short position of ~30 million shares (which at today's closing price would be worth about 13 billion dollars). What happens if the price spikes up to say $1,000+ without them being able to cover or post more collateral, which would make the short position have a mark-to-market value of 30 billion dollars or more - which they have neither the collateral, nor the total assets to cover?

Will their corporate entities go bankrupt, lose the collateral, and the Wall Street banks they are banking with will eat the remaining 15+ billion dollars of losses?

 

[Remus]

You and me both?!?

me three ;-)
The only explanation I have is that there are many shorts firmly believe Elon lies about EVERYTHING.

 

[TradingInvest]

Read Elon's email, you will understand the whole deal.

 

[SinghCo]

He's proposing to delist the stock from public markets, making it into a privately held company, and offer anyone who wants to sell their stock $420/share. (He apparently has a consortium of buyers ready to make that offer.) If you keep your stock when it goes private, it will only be possible to sell it intermittently at prices determined by either the Board or other private investors who you talk to.

How does your stock work if it's in a IRA or RRSP? I want to keep it, however not sure if it's in a retirement plan.

 

[T-Will]

If Tesla goes private, are shareholders essentially guaranteed $420/share? So buying now around $380 will guarantee a ~10% gain in the short term?

 

[Jayjs20]

There is a premium on options. And there is this little thing called time decay. You'd be playing catch a falling knife.

Does that still apply now?

For instance, J20 265 have a premium of 135.75. Break even is 400.75. When the conversion happens, you'll get 420-400.75 = 19.25x100 = 1925 per call option, for the current price of 135.75. Or is that not how it works?

 

[Johan]

That message reads as if Elon thought about this the first day of considering becoming a big part of Tesla and never looked back, but just wrote it right now without editing because he already knew exactly what to say. This is a long planned move.

Exactly. The IPO was extremely premature and very forced due to their financial situation at the time. These years on the public market is just going the be a limited time of unwanted stress in hindsight, Elon is a long-term thinker and I would guess he's been biding his time ever since the IPO just focusing on proving Tesla's value and that the business and growth model is sustainable so that he can convince enough big investors to fund Tesla privately.

 

[Anstandswauwau]

Substantially?
No, we don't.

Wow, that's ****ing perfect. Way to get screwed by believing in a company …

Should I cover ASAP or do you think is there a chance that a squeeze will outweigh the time value lost?

 

[Boomer19]

Ahhhh, but that's not how it works. Have you ever read the agreement you sign when you get a margin account? Specifically regarding short sales?

You as a short-seller can't just default on the collateral. The broker is allowed to go after ALL YOUR ASSETS whether they are at that brokerage or anywhere else! They can clean out any other brokerage accounts you have. They can take your bank accounts, they can take your car, they can take your house, they can take the contents of your house, they can garnish your paycheck. They can repo your TV and sell it. The only escape is bankruptcy!

Margin loans and short-selling are NOT like a "no-recourse" mortgage where you can say "Take the collateral, I'm out of here". They are *recourse* loans, where the broker can take EVERYTHING.


A lot of bankruptcies...

The short-sellers would be well advised to cover IMMEDIATELY. Even if that leaves them having to pay off the debt to the broker over the course of years, at least the debt will have a finite value, rather than spiralling ever upwards.

yet they’re all over the place crying foul and stating they will increase their short positions.

 

[Johann Koeber]

As a long term holder of TSLA I'm fine with this. I appreciate the opportunity to take share in the private company.

The downsides:

- no more stock option trades (I like to sell time value, Puts and Calls alike); TSLA offered fabulous premiums most of the time
- less liquidity
- probably not marginable, just cash; thats a big one, because just the option of getting into margin gives me peace of mind when liquidity gets thin
- no more TSLA investor discussions on TMC
- what to do with the spare time?

Maybe we should start discussing other stocks/trading strategies. Anybody want to suggest a proper venue?

 

[neroden]

Interesting. So that would chop out pretty much all of two-faced wall street if so, wouldn't it ? But there is a Fidelity SpaceX fund?

There are funds which are not considered "mutual funds" in the same sense, and they are allowed to own private equity. A mutual fund can actually legally convert into one of this other types of funds.

The big difference is that there are restrictions on who's allowed to own them and who they're allowed to advertise to; basically the government doesn't want ignorant small-money investors losing their money on private equity deals. Existing shareholders *might* be grandfathered in such a conversion, or might now.

 

[Runarbt]

Yeah, I know that this is the case for retail shorts. But I actually think that only a couple of million shares of TSLA are retail traders, and the rest are much bigger fish: "Type III" shorts if you will.

Those shorts are corporate entities which are shielded from personal bankruptcy, and let's suppose they have ~15 billion dollars of collateral lined up for their current short position of ~30 million shares (which at today's closing price would be worth about 13 billion dollars). What happens if the price spikes up to say $1,000+ without them being able to cover or post more collateral, which would make the short position have a mark-to-market value of 30 billion dollars or more - which they have neither the collateral, nor the total assets to cover?

Will their corporate entities go bankrupt, lose the collateral, and the Wall Street banks they are banking with will eat the remaining 15+ billion dollars of losses?

Yes, thats my guess. Someone have to cover the losses.

 

[jhm]

I am quite sure the only reason the vote would fail is if the stock price quickly goes WAY higher than $420.

Obviously if the going price is way above $420, nobody would want to take the tender offer, but also many investors would rather keep public shares at high liquidity than private shares with low liquidity. A number of funds may not be *allowed* to hang on to private equity, and they could vote no if they think Tesla has a great future. Index funds will happily get cashed out, but couldn't hold private equity, and would be very unhappy to get cashed out at $420 if the going price was way above that.

The offer they would take is to exchange public shares for private shares. Think of it this way.

Under this private offer, a public share becomes a call option on a private share with strike $420 plus $420 cash.

What is the value a private share? It is the value of public share minus the liquidity of the public share PLUS the dilution of the public share caused by shorting.

So mostly we are getting rid of the dilution effect of shorting. That is what makes the private share worth about 20% more than the public share. Through going private, shorts will be forced to close out their position, buying some 34M shares on the open market.

So remember what the shorts will be forced to buy: an option on a private share that they can no longer shorts to dilute its value. They will be forces to buy back the value they have taken from longs through dilution.

 

[Johan]

Does that still apply now?

For instance, J20 265 have a premium of 135.75. Break even is 400.75. When the conversion happens, you'll get 420-400.75 = 19.25x100 = 1925 per call option, for the current price of 135.75. Or is that not how it works?

When the conversion happens you get $0. Call options are not equal to shares. They are contracts for you to buy shares sometime in the future, provided TSLA is still publicly traded at that time. Now you might be able to exercise the option early, converting the contract to shares. If you bought those calls and executed them that would mean you bought TSLA at $400.75. Why would you want to do that, given you could just buy TSLA shares directly on the open market for less than that (current price in the after market is $378).