HAL9000

Beautiful run, high expectations... Watch out!

NASDAQ:TSLA   TESLA INC
THE GOOD
Still showing positive momentum on most time frames, after a solid 51.23% rally in < 3 months. This is the type of behavior only such a momentum stock can produce.

THE BAD
Looking overbought on most time frames. Has been trying to work out this condition, as is visible on the daily chart (below): Hammer reversal at the historical high on Feb 14 followed by 3 lower closes until Friday.

THE UGLY
The inverted hammer near the historical high on the daily chart is doubled with a doji candlestick on the weekly chart. Add the failed breakout above tunnel resistance and above historical high... And this spell uncertainty with potential bearish reversal.

WHERE TO NOW?
The market is awaiting a fundamental sign to continue to push higher. This acid test will be for tomorrow, when the company announces earnings and guidance. At this juncture, it might take a big surprise to take us higher, while the slightest disappointment could take us significantly lower. I would think that the odds are for a higher risk than reward in this trade, at this point in time.

WHAT TO DO WITH THE STOCK?
Options remain the best tool to play this earnings event. Current owners: Could sell calls above the breakout level and use the proceeds to buy puts, hence protecting from downside risk while keeping the position live. Aggressive traders: Could simultaneously buy and sell ATM calls/puts, hence potentially benefitting from a significant move in either direction. This is a costly strategy and only justified if one expects the stock to move >7% either way. Others: Could buy options outright, depending on directional conviction, or await the earnings to make a move (the safest action!)

snapshot

Komen: Building on this idea and considering the current market levels, a trade which makes a lot of sense would be the following: Buy the shares at the current market price, simultaneously sell a call maturing on 16 June 2017 with a $300 strike and buy at put at the money expiring at the end of this week. This would be a perfectly hedged trade on the downside, while providing some upside should the stock shoot up.

In summary, and with indicative market prices:
Buy 100 TSLA = $277.48
Sell 1 16Jun17 $300 call = $14.50
Buy 1 24Feb17 $280 put = $9.50

Economics and risk/reward
TOTAL CREDIT $5/Share
If the stocks tanks --> Exercise put and make the spread b/w prevailing market price and $280/Share
If the stock flies --> Get assigned on the call and make $20/Share + Credit from strategy
If the stock does nothing: To be determined by the tone post earnings...

PS This is an interesting trade destined to fast traders with eyes on the market.
Komen: So we got the direction right, as the shares are down more than 6% and we are making good capital gains on both options, on the basis of the closing options prices.

Time to make this a lucrative, risk-free trade: 1. Exercise the option to sell the shares at $280, 2. Remain short call until maturity, 3. Purchase another, same maturity $295 call for an indicative $7.91 (closing price). The risk/reward for this structure becomes exceptional: A guaranteed $9.11/Share WITHOUT ANY RISK since we have unwound the underlying stock position.

Scenario analysis at maturity:
1. TSLA < $295: Do not exercise, make the options spread of $9.11/Share;
2. $295 < TSLA < $300: Sell the $295 call at a profit and let the other expire, make $9.11/Share + capital gains on the $295 put sale;
3. TSLA > $300: If assigned, exercise the $295 call and make the spread on the options + the difference in strike prices = $14.11/Share. If not assigned, go back to scenario 2.
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