TSLA Trading Strategies

[MitchJi]

Two more comments.

I considered buying options with a lower strike price to reduce the risk but I decided one way to reduce risk is to spend very little.

Another reason for the choice is liquidity, there are a lot of open contracts for the $400's.

 

[AlMc]

Two more comments.

I considered buying options with a lower strike price to reduce the risk but I decided one way to reduce risk is to spend very little.

Another reason for the choice is liquidity, there are a lot of open contracts for the $400's.

Mitch, I agree that it costs a LOTmore to buy DITM Leaps. You have a much bigger risk and a much greater potential reward.
The DITM Leaps are just one step up from owning the stock outright. Less risk and less reward but a nice leverage over owning stock.

I am considering selling off the J17 $150s between the GF Party and Q2 ER in the hope of either sitting on the cash until the J19s come out in November or buying stock.
The J18 150s I will hold
The J17 300s will be the 'lotto tickets' for me if we get the big squeeze that some feel we will get this year.
Personally, I don't think we see a big squeeze. We may not even see ATH this year

 

[TMSE]

Mitch, I agree that it costs a LOTmore to buy DITM Leaps. You have a much bigger risk and a much greater potential reward.
The DITM Leaps are just one step up from owning the stock outright. Less risk and less reward but a nice leverage over owning stock.

I am considering selling off the J17 $150s between the GF Party and Q2 ER in the hope of either sitting on the cash until the J19s come out in November or buying stock.
The J18 150s I will hold
The J17 300s will be the 'lotto tickets' for me if we get the big squeeze that some feel we will get this year.
Personally, I don't think we see a big squeeze. We may not even see ATH this year

I think ATH or a big short squeeze will happen if Tesla demonstrates profitability. The short squeeze in 2013 happened right when it was clear that Tesla will post +ve non GAAP EPS, around Q2'2013.

Shorts are in firm belief that Tesla will never post +ve non GAAP EPS. I think Tesla can definitely accomplish that in Q3 if deliveries are over 19k. When that belief is broken again you can get short squeeze.

 

[neroden]

@MitchJi, this pretty much is the question: other than just accumulating shares, how do you play this "it'll pop sometime but no idea when" game?

Well, I'm sort of making a similar bet.

I've been repeatedly selling OTM puts. I have to have spare cash to do this, in case the price drops and I get exercised (in which case, I have bought shares cheaply). Each time the stock doesn't pop and doesn't crash, I collect premiums, wait for expiration, and do it again. When the stock temporarily dips, I automatically get shares and am well prepared for a pop. When it finally pops, I sigh and stop trading.

I guess this is more of a bet on "it'll take a long time to pop but it'll pop eventually"! I trade away the upside of the rise in exchange for time value. Bullish call strategies have time value decay, whereas bullish put strategies give you benefit from time value.

This is only worth doing because there's an *awful* lot of bears buying puts in this stock. I looked into it in other stocks and the premium wasn't worth it to me.

 

[MitchJi]

@MitchJi, this pretty much is the question: other than just accumulating shares, how do you play this "it'll pop sometime but no idea when" game? Just rolling way out of the money LEAPs? One would have to do some modeling on how soon/how big a pop would have to be vs. deep in the money options or straight stock. I want to do it but it won't make it anywhere near top of my priority list for a long while :/

DOTM LEAPS are extremely risky! The opposite extreme to DITM LEAPS. With DOTM LEAPS you pay even less for time value than you with DITM LEAPS. In this case you get what you pay for, almost no time value.

The only times IMO that they make sense is when you have excellent reasons to believe that a major shift is coming, preferably imminent. In this case I think there's a very good chance of a squeeze so paying $40 per lottery ticket seems reasonable to me.

If you go to this site you can look at what happens with different LEAPS strike prices. You'll notice that the DOTM LEAPS have a very steep curve.
Options profit calculator

 

[Crowded Mind]

You're not missing anything. (Well, maybe one downside: see the bottom of this comment.)

MikeC is basically right, but it's likely that the SCTY options will not actually become standard-strike TSLA options; they'll become weird "TSLA1" options (or they might even keep the SCTY symbol, but the deliverable will be Tesla stock). That's what they do with stock-for-stock mergers.

I've been trading puts rather than calls, but yes, there's been a massive premium for SCTY puts over TSLA puts at the "equivalent" stock price (based on the lower end of the range of exchange ratios in Musk's letter). I'd expect a similar situation for calls, which you seem to have found. (I should note that at the .122 exchange ratio, an SCTY $25 is really a TSLA $204.9, not a $200, so take that into account).

At the Chicago Board Options Exchange and the Options Council, they explain what happens with all-stock mergers, and I've linked some of the sources in previous comments. Since you're not paying me, I'm not going to find the links again for you; learn to find 'em yourself. The basic principle is that the options exchange attempts to maintain the same economic meaning of the option after the merger, whatever that is. If 1 share SCTY stock turns into .122 shares TSLA stock, then the deliverable for an SCTY option changes from 100 shares to 12.2 shares. (If 1 share SCTY stock turned into $20 cash, the deliverable would become $2000 cash... see how that works?)

The downside is that after the merger, the SCTY options (or the TSLA1 they turn into) will be extremely thinly traded. If you're planning to hold until expiration or exercise, this is fine. If you were planning to exit the position by buying or selling it, you may not be able to. In fact, SCTY options are *already* extremely thinly traded compared to TSLA options. When I get into SCTY options positions, I do *not* expect to be able to exit those positions by purchase or sale; it may not be possible.

This probably has something to do with the difference between SCTY and TSLA options pricing: a lot of options traders are extreme short-termers who never plan to hold options to expiration or exercise, and the extreme illiquidity of SCTY options would make them avoid those options.

Thanks, very helpful.

Mobile users may want to read this in landscape.

I have made a table comparing the price of "TSLA1" Jan '18 calls (right to buy 100 shares of TSLA) with their most comparable TSLA Jan '18 calls. The data in this table are from close of market on Friday, 7/22 and I have assumed that the merger goes through at the high end of the offered range (0.122 TSLA to 1 SCTY, or 8.197 SCTY to 1 TSLA). There appears to be a significant discount here for traders of these TSLA options that believe the SCTY merger will be completed and would accept holding to exercise. When calculating returns, I have assumed a purchase at the mid of bid/ask, except for the red highlighted fields where I have used the ask due to high spread.

SCTY $23 looks particularly attractive to me. This is effectively purchasing a TSLA1 $188.50 strike with a breakeven of $227. If TSLA were to close at $303, you are getting a 200% return vs. 114% return with a TSLA $190 vs. 36% with stock. If TSLA remains flat at $222.27, you are returning -12% vs. -39% with a TSLA $190 vs. 0% with stock.

Can anyone poke a hole in this aside from lower liquidity and the risk of merger not being completed? Liquidity doesn't bother me, and I feel it is extremely likely that the merger will be completed. The only other thing I can see would be TSLA adjusting to a higher offer. Anyone have insight on the likelihood of that?

Thanks.

 

[Johan]

Thanks, very helpful.

I have made a table comparing the price of "TSLA1" Jan '18 calls (right to buy 100 shares of TSLA) with their most comparable TSLA Jan '18 calls. The data in this table are from close of market on Friday, 7/22 and I have assumed that the merger goes through at the high end of the offered range (0.122 TSLA to 1 SCTY, or 8.197 SCTY to 1 TSLA). There appears to be a significant discount here for traders of these TSLA options that believe the SCTY merger will be completed and would accept holding to exercise. When calculating returns, I have assumed a purchase at the mid of bid/ask, except for the red highlighted fields where I have used the ask due to high spread.

SCTY $23 looks particularly attractive to me. This is effectively purchasing a TSLA1 $188.50 strike with a breakeven of $227. If TSLA were to close at $303, you are getting a 200% return vs. 114% return with a TSLA $190 vs. 36% with stock. If TSLA remains flat at $222.27, you are returning -12% vs. -39% with a TSLA $190 vs. 0% with stock.

Can anyone poke a hole in this aside from lower liquidity and the risk of merger not being completed? Liquidity doesn't bother me, and I feel it is extremely likely that the merger will be completed. The only other thing I can see would be TSLA adjusting to a higher offer. Anyone have insight on the likelihood of that?

Thanks.

Why "aside from"? Those are the risks giving you the leverage with this trade. I do agree the deal will go through, but not sure at what price/exchange ratio. The SCTY board, if acting truly independently, should see how badly Tesla want SCTY and negotiate a better deal for SCTY shareholder. You whole trade/arbitrage hinges on the currently proposed exchange ratio ("price").

 

[Crowded Mind]

Why "aside from"? Those are the risks giving you the leverage with this trade. I do agree the deal will go through, but not sure at what price/exchange ratio. The SCTY board, if acting truly independently, should see how badly Tesla want SCTY and negotiate a better deal for SCTY shareholder. You whole trade/arbitrage hinges on the currently proposed exchange ratio ("price").

Regarding "aside from" - because those are the risks that I have already identified. Just want to make sure I am not missing anything as I have never traded such a scenario.

 

[Johan]

Regarding "aside from" - because those are the risks that I have already identified. Just want to make sure I am not missing anything as I have never traded such a scenario.

No I don't think there are other risks.

How do you feel about the likelyhood of SCTY accepting the first bid? To me it would signal corruption on the part of the SCTY board, or alternatively they they're in bad shape financially.

 

[TMSE]

Regarding "aside from" - because those are the risks that I have already identified. Just want to make sure I am not missing anything as I have never traded such a scenario.

There is a very small but finite amount of risk that deal may not go through. Although the probability is very low, impact is huge. If it happens, SCTY could crash to under $15.

By the way, SolarCity is no position to demand a better deal.

 

[Johan]

By the way, SolarCity is no position to demand a better deal.

Why not?

 

[Crowded Mind]

No I don't think there are other risks.

How do you feel about the likelyhood of SCTY accepting the first bid? To me it would signal corruption on the part of the SCTY board, or alternatively they they're in bad shape financially.

Thanks. Thinking through it a little more, the possibility of a higher offer seems to be the biggest risk. Unfortunately, I don't have enough experience to solidly quantify that likelihood. Would anyone else be able to offer some perspective? TSLA could increase their offer by 7% to .114 shares (or 8.78 SCTY shares for 1 TSLA share) before the breakeven on the SCTY $23 (TSLA1 $188.52 would become TSLA1 $201.94) would become equivalent to the breakeven on a TLSA $190, though they would carry different risk profiles.

 

[TMSE]

Why not?

Because beggars are not choosers. Tesla is throwing them a lifeline. Yes, I see synergy and benefit to Tesla. But, without this offer, SolarCity is finished. Atleast, that's how market thinks and reacts accordingly.

 

[Johan]

Thanks. Thinking through it a little more, the possibility of a higher offer seems to be the biggest risk. Unfortunately, I don't have enough experience to solidly quantify that likelihood. Would anyone else be able to offer some perspective? TSLA could increase their offer by 7% to .114 shares (or 8.78 SCTY shares for 1 TSLA share) before the breakeven on the SCTY $23 (TSLA1 $118.52) would become equivalent to the breakeven on a TLSA $190, and the TSLA1 would still carry an advantageous return profile.

@TMSE just replied in the other thread that "SCTY is in no poistion to negotiate" but I don't see why not?

Sorry, same thread

 

[Johan]

Because beggars are not choosers. Tesla is throwing them a lifeline. Yes, I see synergy and benefit to Tesla. But, without this offer, SolarCity is finished.

How do you know this?

 

[MitchJi]

Thanks. Thinking through it a little more, the possibility of a higher offer seems to be the biggest risk.

That's why I decided not to pursue this trade.

I believe that the the acquisition squeeze will be much more lucrative anyway.

 

[Crowded Mind]

That's why I decided not to pursue this trade.

I believe that the the acquisition squeeze will be much more lucrative anyway.

Thanks, Mitch. I have been following your posts on the acquisition squeeze closely and still haven't seen a solid counter-argument to your hypothesis, though I am hesitant because it seems so obvious.

Regarding the TLSA1 option scenario, does anything specific worry you about the possibility of a higher offer? To me, it seems unlikely, especially given that Musk is now saying the deal should easily pass a vote. Elon Musk now convinced Tesla-SolarCity merger will pass after talking to major investors
SCTY has barely traded above the lower end of the range that was dictated in the original offer ($26.50). I just don't see much to indicate the need for a higher offer, but again, I don't have much experience here.

 

[MitchJi]

Thanks, Mitch. I have been following your posts on the acquisition squeeze closely and still haven't seen a solid counter-argument to your hypothesis, though I am hesitant because it seems so obvious.

I agree. But all you need to do to take advantage of this is to:
Watch for it to happen.

Exit any remaining long positions near the peak (preferably not a long time before), but if you do you will still have the chance to make at least as much on the way back down...

By buying some puts near the peak.

 

[neroden]

Regarding the TLSA1 option scenario, does anything specific worry you about the possibility of a higher offer?

OK, just to be clear, by "higher offer" here do you mean an offer where SolarCity stockholders get LESS money? Because that's normally called a "lower offer". If Tesla makes a *higher* offer where SCTY stockholders get *more* money (for instance, a .131 exchange ratio), then bullish SCTY options trades are actually *better* than they would be with the .122 exchange ratio -- they amount to a larger discount on TSLA stock.

I don't think Tesla can make a lower offer because it involves retracting a public offer. If you're making a bullish trade, a higher offer isn't a risk, it's upside opportunity. If you're making a more complicated arbitrage trade, a higher offer would be a risk.

 

[tander]

I think ATH or a big short squeeze will happen if Tesla demonstrates profitability. The short squeeze in 2013 happened right when it was clear that Tesla will post +ve non GAAP EPS, around Q2'2013.

Shorts are in firm belief that Tesla will never post +ve non GAAP EPS. I think Tesla can definitely accomplish that in Q3 if deliveries are over 19k. When that belief is broken again you can get short squeeze.

I haven't done the homework lately to see if you're right, but if all it takes is 19k deliveries...we're looking at 8-13k-ish just in July.