Tesla: Rethinking Options Pricing for Speculating on January Earnings

A week ago, I laid out a game plan for playing Tesla (TSLA) earnings on January 29th based on a belief that the market was under-pricing TSLA call options. At the time, TSLA’s stock price sat at $510.50, and options priced in a +/- 10% gain for TSLA on January 31st. The week opened (on Tuesday) with TSLA gapping up and closing at $547. My claim turned out correct for the pre-earnings period, but I also had to scramble to create a new strategy and reposition. I took profit on a call option and ended the week with two call spreads alongside shares short.

Tesla (TSLA) has stalled out the last two days after another gap up to an all-time high.
Tesla (TSLA) has stalled out the last two days after another gap up to an all-time high.
Source: FreeStockCharts

What a difference a week makes. TSLA gained 10.6% over the week, and in response the market is now pricing in an additional +/- 12% change for January 29th. See my previous post for the details on making this calculation. Using my previous strategy, I would buy January 29 $630/640 call spreads for about $1.50 and an expected 85% gain.

However, I now think options are over-pricing upside potential while fairly pricing downside potential. This run-up in TSLA is breathless and an incredible outlier. Even with the current uptrend, I cannot bet aggressively on another 12% gain in a week. Such a move would deliver a 51% year-to-date gain for TSLA in just one month. It would deliver a 148% gain in three months. Fortunately, the $630/$640 call spread is cheap enough to give an acceptable risk/reward ratio for betting on an incredible extension of an incredible run. (Of course, TSLA gained about 360% in 5 months in 2013, so I can understand if some disagree that the current run-up is outlier behavior.)

The short-term bearish view

For completeness, I am considering the short-term bearish viewpoint because it is a way for Tesla bulls to hedge against long positions, especially good for protecting some profits without selling shares.

Michael Khouw of CNBC’s Options Action proposed a put calendar spread that takes advantage of the earnings premium in the near-dated options to buy the June $475 put and sell the January 29 $500 put. Presumably, the near-dated put is going to expire worthless (or close enough) given it is 11.3% away from Friday’s close. After the coming week, TSLA longs can maintain some downside protection and TSLA bears can enjoy five months waiting for more downside potential without continuing to churn on other short configurations. At Friday’s close, the January/June diagonal put spread cost about $24.

Be careful out there!

Full disclosure: long TSLA call spreads and short shares

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.