America’s most popular electric car company (kind of like being the thinnest person on the “Biggest Loser”) reports Wednesday after the close. The consensus estimate is .18 while the “whisper number” appears to be .22. Whisper numbers are critical for companies that trade at lofty valuations so I’d focus more on the latter estimate than the former. However, TSLA will likely trade on how many cars will be shipped next quarter over anything else.
If you’re thinking that TSLA is overpriced on a valuation basis and want to play from the short side you can be right and very wrong all at the same time. Here some comprehending TSLA’s current valuation, think of it as growth tech as opposed to automotive in the same sector as GM and F. Try downing a few shots before thinking about it, that may help too.
Technically speaking the TSLA chart looks fairly good, especially considering it was in the process of a major breakdown late last year. There’s certainly room on the upside post earnings. Of course if Elon sneezes at an inopportune time on the call, it could drop 20% in a flash too. So how should you play it if you Musk, i mean must.
Let’s start by stating that volatility is just like a stock or anything else for that matter, you want to sell high and buy low. Volatility is high in TSLA so if you’re buying upside or downside, make it a spread, it will be easy to be right and wrong at the same time with these premiums in play. But here’s one idea:
Why not play TSLA to stay within a $50 trading range (180-230) over the next two weeks and be paid $3.58 at the same time? Sounds easy right? Not so much but here’s how you could do it.
*These prices are the last recorded price at the end of trading Friday so expect to see different ones Tuesday morning.
Sell the 230 call and buy the 240 call that expire next week (2/22) for a net credit of $1.07 ($2.30-1.23)
THEN (fire engine red BTW, just a coincidence I assure you)
Sell the 180 put and buy the 170 put that expire 2/28 for a net credit of $2.51 (5.66-3.15)
But why buy any options? Why not just sell the put and call and bank on it staying between 180 and 230? You could, but then you would be what’s called “naked” in the options world. Personally, there’s only one thing I like to do naked and it’s not selling options.
Buying the 240 call next week and the 170 put the following week limits your downside to $10 and they’ll be plenty more downside or upside risk than $10 over the next two weeks to be sure.
So why 180 and 230? The former should serve as at least some short term support as it was serving as resistance previously (give or take a buck or two). At 230, TSLA would be approaching overbought and would represent more than a 15% gain from Friday’s closing price (198.23).
The real lesson here is don’t be a hero. I wouldn’t be long or short heading into this earnings but if you own stock SELL some calls. If the stock is called away, you can buy it back. I suspect it will be 200 again even after a spike.
The valuation to me makes no sense but when something trades at 200x earnings it can trade at 300x or 400x, it’s irrelevant so don’t try to be clever and play for “a day of reckoning”. TSLA will trade for 20-30x earnings, but I bet it’s not Thursday or any time in 2014 for that matter.
Feel free to share how you’re playing TSLA earnings below as I’m sure there are better ways, not playing at all is one, for example. Good luck. (You may need it)
(I currently don’t have any position in TSLA and likely won’t)