TSLA Trading Strategies

[tander]

Tander I was kind of concerned about that but look: these leaps have market value. That is all you need to know. If those options become worthless in the event of a successful merger then they would be trading for near zero.

The problem with these new post-merger TSLA leaps is they will be really goofy fractional contracts and super thinly traded. So they would have a worse bid/ask spread post-merger and therefore deserve a bit of a discount now for that reason.

That's a good point, they would be worthless if that's how it worked out I guess. Even if they are thinly traded I guess you can always exercise and sell for calls.

 

[tander]

I'm not seeing how you get them cheaper than the current TSLA '18 $320 calls (say you can get those at $6). That means you spend $600 to be able to buy 100 TSLA shares at $320. If you bought a SCTY '19 $35 call (say you get it for $0.8, or $80 for 1 contract), that lets you buy 11 TSLA shares at ~$318, so you paid $80/11 = $7.27 for the right to buy 1 TSLA share.

Still a great discount, because of the arbitrage, the cheaper time value of the extra year for SCTY, and the fact that you can get it now, while TSLA is still on sale this week. But not cheaper than the comparable TSLA options for 2018.

As far as the options disappearing, I just don't know. The general consensus here seems to be that one contract for SCTY turns in to 1 special contract of TSLA, with a weird strike price (say $318.18) and an "options multiplier" of 11, instead of 100. I am not an expert, but I'm willing to risk it, because my limited research confirms this.

Edit: Agree that there is the additional disadvantage of them being thinly traded post merger. I'm thinking if TSLA is at $500 in mid 2018, the time value of anything this deep in the money is negligible, so you'd just exercise the options and sell the shares. Being special options with only 11 shares makes them way easier to exercise (it costs $3500, not $32,000).

10 Jan 18' SCTY Calls$35 strike, I think the last price was .55 per share, so $550 for 10 calls
That's 1000 shares of SCTY that cost 35k to exercise
1000scty=110 shares tesla, both cost 35k in this scenario (plus 550)
35k/110=about 318 per share of tsla
So using SCTY calls, you can buy 110 shares tsla or 1.1 call for 550

So compare last price of 1 Jan 18' TSLA call $320 strike of $620, so with the SCTY shares you're paying like $70 less per call and you get an extra ten shares. Is my math right? Sounds good in my head ha.

Now go back and compare Jan 19' SCTY Calls $35 strike for $85 per call
You're paying $850 for 110 shares or 1.1 TSLA calls, and I'm guessing that the premium on the 2019 TSLA calls (if they were out yet) would be higher.

 

[MitchJi]

The problem with these new post-merger TSLA leaps is they will be really goofy fractional contracts and super thinly traded. So they would have a worse bid/ask spread post-merger and therefore deserve a bit of a discount now for that reason.

Maybe post merger will be a good time to buy them too.

Worth keeping an eye on them for sure.

 

[ggr]

Maybe post merger will be a good time to buy them too.

Worth keeping an eye on them for sure.

After the merger, they will be priced based on the TSLA stock price, that is, the arbitrage play will be gone. That's where the current discount is coming from. Yes, you might get a slightly keen price because someone is desperate to sell, but I doubt it'll be 15% below like it is at the moment.

 

[Svetlin]

10 Jan 18' SCTY Calls$35 strike, I think the last price was .55 per share, so $550 for 10 calls
That's 1000 shares of SCTY that cost 35k to exercise
1000scty=110 shares tesla, both cost 35k in this scenario (plus 550)
35k/110=about 318 per share of tsla
So using SCTY calls, you can buy 110 shares tsla or 1.1 call for 550

So compare last price of 1 Jan 18' TSLA call $320 strike of $620, so with the SCTY shares you're paying like $70 less per call and you get an extra ten shares. Is my math right? Sounds good in my head ha.

Now go back and compare Jan 19' SCTY Calls $35 strike for $85 per call
You're paying $850 for 110 shares or 1.1 TSLA calls, and I'm guessing that the premium on the 2019 TSLA calls (if they were out yet) would be higher.

You are right. We are using the same math, and getting the same result (thankfully). I just thought you were claiming that the 2019 SCTY options are cheaper than 2018 TSLA options. They would definitely be cheaper than 2019 TSLA options (when those come out).

Now the hard questions... how much more am I willing to risk for this before they spike up next week...

 

[MitchJi]

After the merger, they will be priced based on the TSLA stock price, that is, the arbitrage play will be gone. That's where the current discount is coming from. Yes, you might get a slightly keen price because someone is desperate to sell, but I doubt it'll be 15% below like it is at the moment.

The arbitrage opportunity will obviously be gone.

But they still have the problem of reduced liquidity. That's a problem if you have some to sell, but a potential opportunity if you're a buyer.

 

[uselesslogin]

Whelp, still not doing the whole SCTY opportunity but just loaded up on short term options. I bought mostly Nov/Dec. There are too many signs pointing to this quarter being a great one.

 

[ZenMan]

Just bought Oct 21, 2016 Bull Call Spread.
Bought the 220 strike, sold the 235 strike. Cost was $1.15 each.

Bought twice as many as I felt comfortable with. Will sell half if Tesla jumps $10 next week. At about $213 should be able to sell these for at least $2.30 each. Then can let the remaining calls mature risk free.

Maximum loss $115 per contract if Tesla is <$220 at maturity. Maximum gain $1500 per contract if Tesla >= $235 at maturity. 13X potential gain.

The $10 pop occurred as expected, but I haven't sold yet. Hope I don't regret it. Holding on to 100 contracts for another day. Will sell 1/3 at $3.45 and then I can let the remaining 2/3 ride risk free through 10/21.

 

[pz1975]

I haven't done this yet, but am considering selling naked SCTY Jan 2018 puts as a way to utilize the arbitrage opportunity.

For example, a SCTY Jan 2018 $20 put can be sold for $6.60ish. An equivalent TSLA Jan 2018 $180 put ($20.00/0.11) can be sold for $28.00ish (which = $3.08 if you could sell 0.11 of them). That is a 2.1x premium if you sell 9 SCTY puts ($5,940) vs. 1 TSLA put ($2,800). Of course there is risk if the merger doesn't go through. The loss would be capped at $13,400 for each SCTY put sold (if SCTY went to 0). Seems like a good strategy if you are *sure* the merger will go through.

Thoughts?

 

[Jonathan Hewitt]

I haven't done this yet, but am considering selling naked SCTY Jan 2018 puts as a way to utilize the arbitrage opportunity.

For example, a SCTY Jan 2018 $20 put can be sold for $6.60ish. An equivalent TSLA Jan 2018 $180 put ($20.00/0.11) can be sold for $28.00ish (which = $3.08 if you could sell 0.11 of them). That is a 2.1x premium if you sell 9 SCTY puts ($5,940) vs. 1 TSLA put ($2,800). Of course there is risk if the merger doesn't go through. The loss would be capped at $13,400 for each SCTY put sold (if SCTY went to 0). Seems like a good strategy if you are *sure* the merger will go through.

Thoughts?

The 2nd biggest problem after risk of merger fall through is you will want to hold onto that position until January 2018. This will hold up a ton of capital when most of the gains will hopefully be made at the time of the merger. As the writer of the put you can't exercise so your choices will be to wait until it expires worthless in 2018 or close out the position with bad bid/ask spreads (losing a bunch of your gains).

I'm not saying it's a bad idea but it might be better to look at shorter term durations. You should be able to get a good amount for Jan 2017 or April 2017 but over a much shorter time period. If you don't have better uses for your capital in 2017 then please ignore all this.

 

[MitchJi]

The 2nd biggest problem after risk of merger fall through is you will want to hold onto that position until January 2018. This will hold up a ton of capital when most of the gains will hopefully be made at the time of the merger. As the writer of the put you can't exercise so your choices will be to wait until it expires worthless in 2018 or close out the position with bad bid/ask spreads (losing a bunch of your gains.

That might be a better way (compared with TSLA options) to profit from any gains between now and J18, except that if there are any problems with the M3 ramp they could be worthless at the expiration. I believe that the J18 TSLA options are extremely risky for that reason. But a similar option with poor liquidity seems like a bad idea.

 

[TMSE]

The 2nd biggest problem after risk of merger fall through is you will want to hold onto that position until January 2018. This will hold up a ton of capital when most of the gains will hopefully be made at the time of the merger. As the writer of the put you can't exercise so your choices will be to wait until it expires worthless in 2018 or close out the position with bad bid/ask spreads (losing a bunch of your gains).

I'm not saying it's a bad idea but it might be better to look at shorter term durations. You should be able to get a good amount for Jan 2017 or April 2017 but over a much shorter time period. If you don't have better uses for your capital in 2017 then please ignore all this.

That might be a better way (compared with TSLA options) to profit from any gains between now and J18, except that if there are any problems with the M3 ramp they could be worthless at the expiration. I believe that the J18 TSLA options are extremely risky for that reason. But a similar option with poor liquidity seems like a bad idea.

I do not see liquidity as a big problem for J18 options as you can always do offsetting transactions with regular TSLA options very near the odd strike prices of these newly minted odd TSLA1 options.

For example, say you have 91 contracts of the following oddball TSLA1 options minted after deal closure:
91 contracts of TSLA1 J18 expiry at strike price of 318.18. Each contract holds 11 options instead of standard 100.

Obviously the liquidity of these oddball options is very limited and bid/ask spread is very high. If you are long these options and would like to close, you can do it synthetically with the following:
Keep the odd ball TSLA1 options till expiry; Sell open 10 standard TSLA J18 expiry at strike price of 320. Each of these standard contracts hold 100 options.

So as for number of options offset, 91 * 11 = 1001 is almost equal to 10 * 100 = 1000
As for strike price equality, $318.18 is closest to $320.

You hold until expiry the following two positions which almost offset each other:
Long 91 contracts of TSLA1 J18 expiry at strike price of 318.18
Short 10 standard TSLA J18 expiry at strike price of 320

 

[MitchJi]

You hold until expiry the following two positions which almost offset each other:
Long 91 contracts of TSLA1 J18 expiry at strike price of 318.18
Short 10 standard TSLA J18 expiry at strike price of 320

You have the risk of the options you sold, being exercised?

 

[TMSE]

You have the risk of the options you sold, being exercised?

True. When that happens, I will exercise an equivalent number of TSLA1 options to offset the exercise.

For example, let me say I have these mutually offsetting positions:
Long 91 contracts of TSLA1 J18 expiry at strike price of 318.18
Short 10 standard TSLA J18 expiry at strike price of 320

Exercising happens only when they are deep in the money because no one wants to lose the time premium. Let us say stock price shoots to $450 and 5 of my TSLA options get exercised. To offset this exercise I can either sell or exercise 45 TSLA1 options, whichever brings the most dollars. In fact, it is better if the exercise gets triggered, as I can close the positions clean before expiry. With that clean closure, I convert synthetic closure that happened when I made the offsetting transaction into real closure.

 

[Jonathan Hewitt]

The original question was writing aka being short SCTY puts. Not buying SCTY options.

 

[TMSE]

The original question was writing aka being short SCTY puts. Not buying SCTY options.

You can do the same with short SCTY puts. the offsetting transaction will be going long on regular TSLA put option.

 

[Chickenlittle]

another great day to rotate deep in the money calls for 2017 to 2018. my 130 and 150 calls for 2017 sold for almost 2 dollar time premiums and bought 2018 deep in the money calls(strike 100) for almost 2 dollar discount. will not get rich doing this but if you are considering the rotation, i havent seen a better day to do it. usually costs up to 2 dollars to make the rotation but not today

 

[Ulmo]

I sold all of our TSLA options except our J18 $280 LEAPS. Not a lot about $2.5k.

Mostly about 50 March 380 lottery tickets. I put the proceeds into SCTY J17 $18's.


The two risks are that the merger gets voted down (if I don't take a profit before then, they are green now), or that the merger gets delayed.

OTOH at a TSLA SP of only $200 equates to a SCTY of $22 and I expect TSLA to go up as well.

Here's the chart:

Where did you get that chart?

 

[Ulmo]

How much time between SCTY + TSLA merger vote result being announced and the merging of the two stocks?

Will the Extrinsic Value of OTM or close-ITM options drop fast after the vote because people are scared the Extrinsic Value will evaporate due to thin trading of weird options post-merger?

 

[Ulmo]

Quiet thread. I find myself talking to myself.

Anyway: it seems that "Buy the Rumor" in the phrase "Buy the Rumor, Sell the News" refers to when the dumb people hear the rumor, not when us TMC people hear the rumor. The rumor hit yesterday at 2PM Trading Time (NASDAQ Eastern Time), and $TSLA went up to 206. Then, the "Sell the News" part is easier to determine: when the news hits, which in this case is exactly when they sold.

One strategy to employ during these pre-announcement or pre-news events is getting a protective put. Unfortunately, that may limit the upside.

The stock is so volatile that one could pick a mid-point and get both an up and down bet at the same time, wait for one to come true, cash out, and then enter two new positions (readjusting up and down potential outcomes). I guess this requires rolling options forward, re-adjusting their sizes according to probable outcomes.