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Time to short TSLA ?

The following trade frame is an example for educational purpose only. Please read the Disclaimer at the bottom.


In my November 10th post, I suggested that it's time to stalk TSLA expected entry to the S&P500. At that time TSLA was trading at 420.


https://www.options-course.com/post/stalking-tsla-expected-entry-to-the-s-p500


A few days later, the S&P committee announced that it will be added to the S&P500 index on the Dec expiration date.


Charlie Munger, Buffett's longtime partner, said earlier this year that "he'd never buy or short Tesla stock".

But we are traders, and when opportunity arise, we need to take a shot. That's our nature.


Yesterday, Michael Burry, whose bet against the housing market was made famous by "The Big Short", revealed that he's short Tesla.


https://markets.businessinsider.com/news/stocks/tesla-stock-big-short-michael-burry-elon-musk-share-issuance-2020-12-1029859345


He advised CEO Elon Musk to issue more shares while they sit at their "ridiculous" levels.

I couldn't agree more with that statement, because as I already mentioned in my previous post, a day before the September S&P committee announcement, he did exactly that. TSLA raised 5B$ on Sep 1st at its all time high, and send the stock from 500 to 400 in 2 days.

That was very smart capital raise as it gave TSLA more cash then its entire debt, and was the last nail in the coffin of those who believed that TSLA can go bankrupt.


So we are not allowed to be surprise, if such a capital raise of 10-20B$ will be announced soon. This will give Musk the ability to have all the cash that TSLA will need in the next 10 years, without getting diluted (it's ridiculous dilution). Given that about 75B$ is expected to be bought by the index funds (at the 600$ levels), this raise is quite possible.


Now the question is when to short and how to cap our risk. Too many traders have already blow up their account and lost their shorts :) by going against Musk.


Lets consider the following options strategy for the Jan 15th expiration date (a month after it will be bought by the index funds). Since the Implied Volatility is very high, we need to consider doing spreads.


  1. Bear put spread 490/440. This target is reasonable given where it was trading before the announcement. This spread cost about 10.3$ and can get 50$ back at 440 and under:

2. Bear call spread 680/640. I want to do that spread to pay for the put spread. However I won't accept unlimited risk. So I need to cap it. If you don't like the R:R you can do only the first put spread, but the R:R looks like that because the probabilities for wining in this spread by Jan 15th are very high.

3. And finally the combination: -P440 +P490 -C640 +C680 at zero cost:

You can see that I didn't paid for it, and the max loss is 4K where as the max gain is 5K.

BE point from 490 to 640.

This P&L chart fits my objectives for the TSLA short trade:

Even if it will go to 700 in the S&P addition, I can still BE or even profit by Jan.

Now I can start building up position according to the position sizing I regularly take.

I have time, but you never know when they will raise money.


Never short TSLA without capping your risk. You don't want your position to be closed ahead of time.


Go Musk! Take the money, and put some in Bitcoin so it wouldn't vanish :)

Cheers



Disclaimer

We are not an investment advisory services, nor are we registered investment advisors or broker-dealers and do not purport to tell or suggest which securities customers should buy or sell for themselves. Customers should always check with their licensed financial advisor and their tax advisor to determine the suitability of any investment.

It should not be assumed that the methods, techniques, or indicators presented in this example will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. We, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

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