Tesla - Pre-Q321 Earnings check-in: going long with risky bets based on chart setup
Hold onto your butts. The Elmer Desk has purchased some call spreads as there might be some blue sky in sight.
Tesla’s Q3 2021 earnings report is coming up next week on October 20th, and this one looks like it may be consequential for the stock - not necessarily because of anything in the report itself (I am too detached from the game to speculate on what to expect) but rather because of the chart and where shares currently sit. (so yes, this post will be more about chart voodoo than a fundamental analysis of earnings expectations.)
Yahoo Finance shows that analysts are expecting about $1.50/share in EPS this quarter or about $1.5 billion in GAAP net income. They are expecting about $1.70/share or $1.7b next quarter (relevant if Tesla provides guidance though they generally just speak to units sold rather than financial results). Tesla beat on units delivered (announced a few weeks ago) and EPS estimates didn’t really move - perhaps there are increased costs due to global supply chain issues, perhaps the forecasts are sandbagged and TSLA will blow it out. We shall see.
But what really gets me jazzed up about this earnings report is the chart. Of course, Elon could deliver a total unexpected stinker, either regarding financial results or call antics or further articulation of the recent implication that he’d be selling shares (in relation to an options exercise), but assuming that the report and call are all good, the chart looks like TSLA may be ready for another leg up.
Here’s a zoomed-out view dating all the way back to when this massive move started in the fall of 2020, including some imaginary lines drawn by yours truly:
As is evident, when TSLA has broken out of this channel over the past two years, 3 out of 4 times it continued to the moon. In early 2020, it broke out from ~$130 to over $200. In June/July 2020, when its monster move from $200 to $300 resulted in the ticker getting pinned on the bottom of CNBC, the breakout above the channel at $300 was near the top of euphoria, and other than a brief pop to ~$350, it then returned to the channel to cool off for a little bit. When that brief cooling off was over, it broke out of the channel (then at $350) and quickly rallied to $500, a ~40% gain in a month. Then, after consolidating further, its last major breakout began in late 2020, when it broke out of the channel at $450 and doubled to its all time high of $900.
Since the peak in early 2021, TSLA retraced nearly 50% (makes sense after going up 1000%), made another run at greatness but faltered, bounced again at $550, and since then, has very neatly and somewhat quietly gained ~50% over the past six months proceeding fairly orderly in this long-standing channel.
And now, once again, it looks like TSLA may be breaking out.
TSLA made a golden cross in late August (the 50 day moving average crossed above the 200 day) and the averages have continued to diverge as shares have added $100 since then. And now, just this past Friday (10/15/21), TSLA shares finally poked out above the channel, setting up for a potential blue-sky rally back to ATHs or beyond (of course, more than contingent upon this upcoming ER on the 20th).
During the prior two blast-offs, after the move out of the channel (i.e. the analog for Friday 10/15), there were a few days of consolidation prior to heading higher as shown in the chart above. This speculator, for one, would welcome that development, as the late-day $10 rally on 10/15 juiced options premiums much higher and to a point at which the trades shown below are no longer as attractive.
Below is a screenshot of a portion of my positions (I’d say don’t laugh but I laugh at these myself and I will go on to explain the speculation a bit further below). Many of these were bought during the afternoon on 10/15 prior to the end of day move (or over prior days), and as shown in the right-most column, the daily change on these contracts ended up 50-100% in some cases - on a relatively insubstantial move in the stock for still very out of the money options.
Lest you think that I am a total lunatic (other than my baseline level of lunacy), I wanted to remind that the majority of positions above, for better or for worse, relate to call spreads. A few example trades are below.
So, in each example, I am long the lower strike and short the higher strike to 1) reduce the cost of the trade and 2) turn this into what I like to think of as a defined probabilistic trade.
In the first snippet, I bought weekly $910s and sold weekly $920s for a net cost of $.33 per contract. If TSLA finishes the week above $920, the contract pays out $10. Thus, I think of it as that the market is pricing the stock as having a 3.33% chance of finishing above $920. And while $920 is $75 above Friday’s close, requiring a 9% appreciation in shares, I personally think the chance of that is much greater than 3.33% - perhaps 10% given the chart activity, sandbagged ER expectations, etc. And while I could certainly be wrong, I perceive the expected return on this trade to be 3x or perhaps greater - which is why I put it on (even though this time, it certainly might not pan out).
Most of what I put on over the past few days (as seen in the later two screenshots) are a bit higher and further out. Now we are entering the “gut feeling” zone (which is where anyone must admit they are if they are buying 20% OTM calls), but I personally think that there is a solid chance that we further breakout from here (from purely the chart and ER), and if we get back to ATHs at $900 (just 6.5% away from Friday’s close), then we will enjoy some blue sky above it. Again, these are low-probability, high risk, high potential reward bets. The November 5th $950/$1010 cost $1.23 to potentially pay out $60 - or about 50-1 - or again, I think about it as that the market gives it a 2% chance of happening whereas I think there might be a 5% or 10% chance of it happening.
And a few general comments on spreads, looking at the screenshots above:
Narrow spreads are tough as you really need to be ITM and have little time left on the clock to collect a big portion of the payday. Lets say everything goes more than right and TSLA opens at $950 on Thursday after a great report and call Wednesday. The $910/920 would probably be worth $3-5 at that point as both options have similar amount of in-the-moneyness and volatility. So while the trade might be a 10xer at that point (and I’d be more than happy to bank that), it won’t be the theoretical 30x unless both TSLA and I have the meddle to hang on until Friday.
Wide spreads avoid that issue to a degree. Finger in the air, if we opened at $950 on Thursday, the 11/05 $950/$1100 spread might be worth $20 or $30 - the now-ATM option would be quite valuable and the still-OTM option would be quite a bit cheaper.
And sometimes spreads are just dumb, i.e., on that last trade (the 10/29 $950/$1050). I only made the trade about 20% cheaper by selling the higher call, but if we do manage to make it to $1000, it’s going to make the trade a lot less lucrative than just owning that $950s for materially the same price. So, I should have thought that one through a bit better and just gone naked, but hey, nobody’s perfect.
So, to conclude, I like this setup in TSLA a lot. I’ve bet on this setup using low-probability, high-reward OTM call spreads (some fairly far OTM) as I think that the market is under-pricing the potential for a continued breakout and blue-sky rally. Unfortunately (and not that I would ever want anyone to emulate my baggy ideas), these call spreads nearly doubled in price in some cases during Friday afternoon, changing the risk/return to a level that is far less attractive. Should TSLA consolidate early this week and should options prices get a bit more reasonable, I will be keeping my eye on adding a bit more risk as I think that the market is undervaluing the potential of a breakout back to ATHs ($900), then to psychological $1,000, and then perhaps beyond.
As always, never advice, and good luck to all those daring enough to make a bet on Q3 ER, one way or another.
-Elmo