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Stalking TSLA expected entry to the S&P500

On Sep 4th, the S&P Index Committee which generally re-balances the index quarterly, announced the additions and deletion to the S&P500 index. This kind of announcement is always a big event because it is estimated that there's over 11 trillion in assets bench-marked to the S&P500, with over 4 trillion in indexed funds.


The main story was that TSLA which many investors expected to be included in that quarter, as it reported its forth consecutive quarter of profitability in July (one of the conditions in order to be eligible to join the index), was still left outside. If it was to join the index then more than 100 million shares of TSLA would have been bought by funds that track the index.(about $40 Billions !!!).


Just a reminder that after announcing its 5:1 stock split on Aug 11th, TSLA stock had an amazing run from 300 to its all time high at 500 on Sep 1st. On that day, supported by the traders hopes that it's going to be included in the S&P 500 index, TSLA raised $5 billion in capital.

That was the final nail in the coffin of those who believed that one day TSLA is going to go bankrupt, as it raised more money that its debt, and promised it continued development for the following years.

However as TSLA stock wasn't included in the S&P500, the stock fell to 330 on Sep 8th, but recovered to the 400 levels and has been consolidating for the last two months.


On October 21st, TSLA reported the Q3 earnings with another profit + record revenue, which is its fifth consecutive quarter of net profit, and now holding more than $14 billion in cash.


Will TSLA be added to the S&P500 soon?

The index committee considers many factors so there is no certainty in that decision making. However the fact the the S&P500 is lagging behind peer indexes that already have TSLA in it (for example the Russell 1000), will pressure the committee to include TSLA soon.

The next announcement is supposed to be in the beginning of Dec (maybe Dec 4th AMC?) for changes that will take place 2 weeks later (maybe on the expiration date on Dec18th?) . If it is still not included in the index in this quarter, there is a very high probability that it will be added by the Mar rebalancing date (Mar 5th announcement/ Mar 19th changes ?).


Are the Options expensive ?

looking at the Time Lapse Skew we can see that TSLA implied volatility is much lower then what it used to be around the last announcement.


Also we can see that the historical volatility and the IV are down in the last 2 month of consolidation.



This tells us, that being long options around these levels may make sense (straddles ?). But still, Dec ATM straddle cost around 60$ which is relatively not so cheap.


Also checking the Open Interests we can see that crossing strike 400 down will cause a selling pressure of about $2-3B.



Game plan:

Stalking TSLA for correction under 400 (380-390) and being ready to pull the trigger on buying calls to the December expiration date. Position sizing of 0.5R for this trade, just in case it won't be added again on Dec , and then as it crashes down buy Calls for Mar (0.5R).


If the Volatility will sky-rock again, then consider adding a put bull spread with the higher strike at X point under the money (X= ATM call premium).


Stalking means - follow quietly and carefully in order to catch it.

Patience is required.


Cheers




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