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How to Make 27% in 45 Days With a Bet on Tesla:
Tesla is a company which has thousands of passionate supporters. They have bid up the price of a company with fabulous ideas but no earnings to near all-time highs. If you peruse some of the multiple articles recently written about the company, you can’t help but wonder how the current lofty price can be maintained.
Here are some of the things that are being said:
It's possible that the Model 3 could bury Tesla in several ways, including:
• It being substantially late.
• It not being profitable at the low price it was promised, and thus require a much higher selling price.
• A much higher selling price or emerging competition leading to much lower than expected volumes.
Tesla will need to spend about $8 billion in its network of charging stations in the U.S. alone if it wants to make recharging a car as convenient as going to a gas station.
Tesla’s acquisition of SolarCity was really a bailout. SolarCity was in deep financial trouble. It could have gone bankrupt, and will need a huge infusion of capital to survive.
The company has historically issued overly optimistic projections, and the recent exodus of its CFO is evidence that some executives are rebelling.
More and more traditional car companies are coming out with all-electric models that will compete directly with Tesla.
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China represented 15.6% of its automotive sales during 2016. China's market is weakening during early 2017 due to tax changes. Hong Kong will be crashing due to the elimination of a tax waiver which will nearly double the price of a Model S.
Goldman Sachs recently downgraded the stock and said it expected it would fall by 25% over the next six months.
Tesla has a market cap of $40 billion on revenue of around $7 billion, while General Motors (G) has a market cap of $55 million on revenue of $166 billion. Ford (F) has similar multiples, and Toyota (TM), despite significant topline growth, still has a P/S ratio of only 0.49. These numbers make Tesla look astronomically overvalued and are the reason TSLA is a magnet for short sellers.
TSLA will probably need $35 billion over the next 9 years to support its planned ramping up of manufacturing. This will require additional stock sales which could dampen prices.
And there are many others out there making other dire predictions…
So what do you do if these writers have collectively convinced you that TSLA is overvalued? One thing you could conclude is that the stock will not move much higher from here.
Here is a possible trade you might consider:
With TSLA trading about $252, you might believe that it is highly unlikely to move higher than $270 in the next 7 weeks. This is a trade you might consider:
Buy To Open # TSLA 21Apr17 270 calls (TSLA170421C270)
Sell To Open # TSLA 21Apr17 275 calls (TSLA170421C275) for a credit of $1.10 (selling a vertical)
This spread is called a vertical call credit spread. We prefer using calls rather than puts if you are bearish on the stock because if you are right, and the stock is trading below the strike price of the calls you sold on expiration day, both call options will expire worthless and no further trades need to be made or commissions payable.
For each contract sold, you would receive $110 less commissions of $2.50 (the rate Terry's Tips’ subscribers pay at thinkorswim), or $107.50. The broker will place a $500 maintenance requirement on you per spread. Subtracting out the $107.50 you received, your net investment is $392.50 per spread. This is also the maximum loss you would incur if TSLA closes above $275 April 21, 2017 (unless you rolled the spread over to a future month near the expiration date, something we often do, usually at a credit, if the stock has gained a bit since the original trade was placed).
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Making a gain of $107.50 on an investment of $392.50 works out to a 27% for the 7 weeks you will have to wait it out. That works out to over 200% annualized, and you can be wrong (i.e., the stock rises) by $18 and still make this gain.
If you were REALLY convinced that TSLA wouldn’t move higher in the next 7 weeks, you might consider selling this spread:
Buy To Open # TSLA 21Apr17 255 calls (TSLA170421C255)
Sell To Open # TSLA 21Apr17 260 calls (TSLA170421C260) for a credit of $2.00 (selling a vertical)
This spread does not allow the stock to move up much at all (about $3) for the maximum gain to come your way, but if you are right and the stock ends up at any price below $255 on April 21, you would gain a whopping 67% in the next 7 weeks.
As with all investments, option trades should only be made with money that you can truly afford to lose.
Happy trading.
Terry
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Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts. seth@terrystips.com
You can see every trade made in the actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
Even better, you can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account at the best options broker around - thinkorswim. If you open an account with our link, they will give you 60 days of free trading or up to $600, the same deals they give to everyone who opens an account with them. You must use this link to sign up - open thinkorswim account – and once you have funded your account with at least $3500, email Seth@TerrysTips.com and let him know that you have done it, and this is what he will do – sign you for our Premium Service package ($119.95 value plus an extra 4 months of our Premium Service, valued at another $190.80). You get $300.65 worth of services without paying us one penny.
I look forward to having you on board, and to prospering with you.
Terry
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