Tesla stock retreated 30 per cent since a Dec. all-time high, wiping out US$468 billion from it’s market capitalization
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As a post-election rally in the shares of electric-vehicle maker Tesla Inc. rapidly unwinds, some market watchers are spotting a lucrative trading opportunity.
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The premise is simple. Despite the recent rout, Tesla shares are still the most expensive next to expected profits among mega-cap technology firms, suggesting further room for a potential downside. Moreover, the stock has unmoored from the fundamentals of the car business after soaring on hopes President Donald Trump’s return to the White House and Elon Musk’s newfound political prominence will ease the way for Tesla’s ambition for creating a fully self-driving vehicle.
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To Michael Purves, chief executive at Tallbacken Capital Advisors, this is a signal to buy Tesla put spreads, in this case the US$300/US$250 spread expiring in May. Implied volatility earlier this month fell to the low end of its range over the past year, reducing the price for options protection, especially for spreads where the sale of the lower strike offsets part of the overall cost.
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“While this works as an outright directional trade, we also think it can serve as a quasi market hedge,” Purves said, noting that if there is a selloff in the stock market, a momentum and sentiment-driven stock like Tesla will get sold aggressively. However, “if the market continues its grind sideways/higher, this trade still has good risk-return,” he added.
Tesla shares are currently trading at 110 times projected earnings, compared with an average of 30 times for the Bloomberg Magnificent Seven Price Return Index, and 22 times for the S&P 500 Index.
But that isn’t the only thing going against Tesla, as Purves noted the stock is also seeing technical weakness. Shares fell as much as 6.2 per cent on Tuesday, extending their losses for the fifth straight day and falling below the critical 100-day moving average line.
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And options traders have become a lot less bullish after betting big that the stock would benefit from Trump’s election. The premium for one-month calls over puts has disappeared for the first time since the vote. And in the past few days, volatility has started to pick up after a steady decline from the beginning of the year, signalling that not only have traders turned away from buying call options — they are starting to pay more for contracts that protect against a further slide.
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The EV-maker’s stock has retreated 30 per cent since reaching an all-time high in mid-December, wiping off US$468 billion from it’s market capitalization during that time.
Over the past few weeks, negative news around the company have piled up, starting with weak fourth-quarter results late last month and followed by a string of sharply lower sales numbers from Europe, China and even California.
—With assistance from David Marino.
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