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This Cult Stock is Set to Explode

By Costas Bocelli August 1, 2018 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

In just a short while, one of the most controversial publicly traded companies will report second quarter financial results...

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... with massive implications for the stock's price.

I’m referring to Tesla Inc. (TSLA), the electric-car manufacturer led by eccentric billionaire and CEO, Elon Musk.

How will the stock behavior following the earnings event (which takes place after today’s close)?  That’s anyone’s guess.

But if you believe what the options market believes... buckle your seatbelt!  Because Tesla’s stock is about to go into “Ludicrous mode”.

In Options Soup, our options educational product, subscribers have access to proprietary volatility tools that gauge the price of options.

And as we approach Tesla’s earnings release, options premiums are priced through the moon roof.

The graphic is a volatility chart on Tesla over the past 52-weeks.  The gold line tracks the implied volatility of a “30-day” option in Tesla.

(Click any image to enlarge)

IV tsla

The higher the implied volatility, the more expensive options are in the market.

What the above image tells us is that investors are paying up big time for Tesla options, both for the Calls and the Puts.

Why?  That's easy…

They’re expecting a massive price move following the earnings event.

How massive?  The options market is implying roughly a nine percent move in the stock, or about $25 in either direction.

With Tesla (TSLA) recently at $290 per share, the options market the stock to be trading at $315 on a positive reaction and $265 on a negative reaction.

tsla

But here’s the thing…

The reaction could be even greater!

We’ve already seen larger-than-expected moves in Facebook (FB), Twitter (TWTR) and Netflix (NFLX), following earnings.

Think of the implied volatility move as odds makers setting the “point spread” on a football game.  Many times they hit the nail on the head or come very close.  But sometimes, they’re way off…even failing to predict the outright winning team.

And if there is one stock that can surprise the odds makers, Mr. Market and the options market, it’s Tesla (TSLA).

You see, Tesla is one of the most controversial companies on Wall Street.  It’s also one of the hardest stocks of which to gauge "intrinsic" value.  After all, the company hasn’t earned one red cent in its existence.

In fact, Tesla is expected to report a net quarterly loss of -$2.81 per share for the second-quarter.

That said, what Tesla does have going for it is strong revenue growth.  Sales are expected to be $3.99 billion for the April-June quarter, which is an increase of 30% from the same quarter a year-ago.

But the company is still living perilously close to the edge as it continues to generate negative cash flow and carries roughly $9 billion in debt on the balance sheet.

If ever there was a classic "battle" of supply and demand, it’s being fought in shares of Tesla.

On The Street, analysts' "consensus" is anything but.

Have a look at the opinions of 25 of the most prominent institutional analysts who cover Tesla.

analysts ratings

Their ratings are all over the map.

The same goes for the opinions of some of Wall Street's biggest hedge funds and money managers.  These guys have got plenty of skin in the game.  They're wagering billions of dollars on Tesla's success.

At the same time, billions of dollars are being bet against Tesla, by investors who see the company as simply the next great company to fall from grace and implode.

And in just a few hours, shortly after the closing bell, the next skirmish in this battle will be fought.

For investors who want to play Tesla’s earnings event, there is no better and safer venue than the options market.  Options are flexible, versatile and can clearly define risk on many types of options strategies.

In high volatility, high-priced stocks such as Tesla, investors can make directional bets using vertical call spreads.

For example, if you’re bullish on Tesla, you could look to purchase the August 300/315 Call spread for about $5.50.  If the stock trades above $315 at expiration, in a little more than two weeks, it would hand you a nearly 200% profit.

Likewise, if you’re bearish on Tesla, you could look to purchase the August 280/265 Put spread for about the same price, $5.50.  If the stock trades below $265 at expiration, it would also generate a nearly 200% return.

And even if you get it entirely wrong, no matter by how much, you can only lose what you pay for the options spread, not a penny more.

For sure, trading in a stock like Tesla can seem like swimming in the deep end of the pool.  But if you learn how to invest with options, you can turn any stock, even Tesla, into a kiddie pool.

So, are you a bull or bear on Tesla?

If you have an opinion and care to make a play in a chaotic stock such as TSLA, a well-placed vertical spread is a good way to gain exposure and with far less risk.

Until next week!

Costas

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