TSLA - Tesla Motors

[benhacker]

I wrote a long-winded post that was lost.

 

Spek - CAO, not CFO.  CFO is only guy left in finance. ;-)

 

Eric - everyone loves to tell me about what Tesla / Musk says in Con calls, interviews, or view 3rd party PR like Elektek / IE, etc.  The best info is in their SEC filings.  Just like Valeant... when they present something / leak something / say something, and don't file an 8-K, you can bet you know why.  If you believe Musk's mis-truths, than I'm sure Tesla is an appealing investment.  I have found him to be someone who I believe nothing he says, so I look for other data to form my opinion for right or wrong.

 

Grant - I feel similarly.

 

I always wonder by those who are bullish, how do they keep these things in their mind:

1) Pedo comment

2) Comment yesterday about building car carriers

3) Battery swap offer

4) Solar roof announced out of whole cloth with <5 installations 2 years later

5) Lying about SCTY acquisition (many lies, you can pick one)... they have been shuttering it and killing volume ever since

6) Recent note that they are going to do repairs in house and throwing (by implication) their service providers under the bus (even though, immediately after the tweet Musk admitted) that spare parts from Tesla are the primary delays?

7) Claim in June last year about 20k M3's in 2017... they did a few less than that

8) Executive departures en mass (>100% turnover) -- we think the best and brightest are left?  Or maybe the ones willing to push... boundaries?

9) $420 buyout... hahahah... amazing.

X) I could go on... it's comical.  why does anyone believe anything Musk says?  It is like a preacher or a leader of a identity group which people believe because it feels good and reinforces their pre-conceived notions?  I can think of no other reason to believe this man than that we want to believe that someone exists who will "save" us.  I grew up in a religious house and this whole Musk thing feels the same.  People who are rational in the rest of their life have somehow grabbed onto this charlatan.

 

I'm not saying you can't be a terrible person and a liar and still be a great business person and make investors money... that is definitely possible.  But what seems to be the case is that in part of Musk's life people seem very clear that he is a liar... but just not when it matters to them (their cars safety, their quarterly deliveries, the reservation # that they don't update regularly, etc).  it's like he's only lying to save humanity...

 

BTW's, for those of you who are in it for the climate change, how do we justify that Musk likely has the highest carbon footprint of any human being on earth?  The cognitive dissonance must be amazing.

 

Yes, I have driven one. :)

 

Sorry, a little lunch rant. :-)

 

Enjoy guys, I've said my piece.  For those who don't feel like I feel here, I'd only ask that for the next week... every time you hear Musk tweet or talk, or you see an article written in praise... just ask why... use your skepticism.

 

It may surprise you.

[ERICOPOLY]

His comments about not sleeping and working around the clock and his bizarre comments.  He made a comment that the chargers IOnity is developing are "toys for children" for example...  He's got some kind of mental health issue it looks like, perhaps it's bipolar and he is hypomanic or manic when he goes into these tweets.  It would be consistent with his grandiosity and energy level and lack of sleep.  And delusions.  There were some comments about bipolar and Musk a year or so ago.

 

Regardless, one has to believe that they can't figure out how to run a production line smoothly if given some time to work out what's gone wrong and fix it.  He probably created the mess by not listening to advice and that's likely led to executive departures.

 

It doesn't mean necessarily that consistently lying is in his DNA if it is a bipolar issue.  So he really may be serious that they are fixing the issues and that Q3 and Q4 are going to be better.

 

I have also hear something about "stress induced psychosis" -- the guy put himself under a lot of pressure and got no sleep for a long period of time.  Then he starts tweeting about Saudi takeovers at $420 a share.  Just saying...  There are alternative explanations that fit the circumstances rather than him simply being a liar.

 

 

 

[Grant]

I'm sure Q3 and Q4 are going to be better. I expect they will be the best quarters the company has had, and will have for some time (possibly ever). However for Tesla to survive in its current form, Q3 and Q4 need to be very, very good, and this success needs to carry over into 2019.

 

I don't believe anything Musk says, but it is notable Deepak Ahuja also claimed they'd be able to pay off their debts and maintain a healthy cash balance. I might be inclined to believe him if someone could demonstrate exactly how this could happen, using math.

[Ahab]

https://www.hiddenforces.io/podcast/show/criminal-probe-tesla-gordon-johnson

 

Really good episode on Tesla's recent (and not so recent) foibles.

[ERICOPOLY]

I don't believe anything Musk says, but it is notable Deepak Ahuja also claimed they'd be able to pay off their debts and maintain a healthy cash balance. I might be inclined to believe him if someone could demonstrate exactly how this could happen, using math.

 

I saw that too.  Deepak is the guy that someone recently said was meant to be resigning right before it implodes to keep the bankruptcy off of his resume.

 

So which is it?

 

[benhacker]

I don't believe anything Musk says, but it is notable Deepak Ahuja also claimed they'd be able to pay off their debts and maintain a healthy cash balance. I might be inclined to believe him if someone could demonstrate exactly how this could happen, using math.

 

I saw that too.  Deepak is the guy that someone recently said was meant to be resigning right before it implodes to keep the bankruptcy off of his resume.

 

So which is it?

 

Spek misspoke about the C level exec he meant. The CAO (not CFO) resigned after one month on the job walking - away from $10m in equity. CFO (deepak) is still there.

[Spekulatius]

I don't believe anything Musk says, but it is notable Deepak Ahuja also claimed they'd be able to pay off their debts and maintain a healthy cash balance. I might be inclined to believe him if someone could demonstrate exactly how this could happen, using math.

 

I saw that too.  Deepak is the guy that someone recently said was meant to be resigning right before it implodes to keep the bankruptcy off of his resume.

 

So which is it?

 

Spek misspoke about the C level exec he meant. The CAO (not CFO) resigned after one month on the job walking - away from $10m in equity. CFO (deepak) is still there.

 

Thanks for the correction. You are correct. It’s still a bad sign  since the same logic applies.

[Investmentacct]

I wrote a long-winded post that was lost.

 

Spek - CAO, not CFO.  CFO is only guy left in finance. ;-)

 

Eric - everyone loves to tell me about what Tesla / Musk says in Con calls, interviews, or view 3rd party PR like Elektek / IE, etc.  The best info is in their SEC filings.  Just like Valeant... when they present something / leak something / say something, and don't file an 8-K, you can bet you know why.  If you believe Musk's mis-truths, than I'm sure Tesla is an appealing investment.  I have found him to be someone who I believe nothing he says, so I look for other data to form my opinion for right or wrong.

 

Grant - I feel similarly.

 

I always wonder by those who are bullish, how do they keep these things in their mind:

1) Pedo comment

2) Comment yesterday about building car carriers

3) Battery swap offer

4) Solar roof announced out of whole cloth with <5 installations 2 years later

5) Lying about SCTY acquisition (many lies, you can pick one)... they have been shuttering it and killing volume ever since

6) Recent note that they are going to do repairs in house and throwing (by implication) their service providers under the bus (even though, immediately after the tweet Musk admitted) that spare parts from Tesla are the primary delays?

7) Claim in June last year about 20k M3's in 2017... they did a few less than that

8) Executive departures en mass (>100% turnover) -- we think the best and brightest are left?  Or maybe the ones willing to push... boundaries?

9) $420 buyout... hahahah... amazing.

X) I could go on... it's comical.  why does anyone believe anything Musk says?  It is like a preacher or a leader of a identity group which people believe because it feels good and reinforces their pre-conceived notions?  I can think of no other reason to believe this man than that we want to believe that someone exists who will "save" us.  I grew up in a religious house and this whole Musk thing feels the same.  People who are rational in the rest of their life have somehow grabbed onto this charlatan.

 

I'm not saying you can't be a terrible person and a liar and still be a great business person and make investors money... that is definitely possible.  But what seems to be the case is that in part of Musk's life people seem very clear that he is a liar... but just not when it matters to them (their cars safety, their quarterly deliveries, the reservation # that they don't update regularly, etc).  it's like he's only lying to save humanity...

 

BTW's, for those of you who are in it for the climate change, how do we justify that Musk likely has the highest carbon footprint of any human being on earth?  The cognitive dissonance must be amazing.

 

Yes, I have driven one. :)

 

Sorry, a little lunch rant. :-)

 

Enjoy guys, I've said my piece.  For those who don't feel like I feel here, I'd only ask that for the next week... every time you hear Musk tweet or talk, or you see an article written in praise... just ask why... use your skepticism.

 

It may surprise you.

 

 

(their cars safety, their quarterly deliveries, the reservation # that they don't update regularly, etc)

 

For Car Safety data:

May want to check out some safety data about all 3 existing Tesla Models. Conspiracy theory may find nhtsa data to be faulty, so take with grain of salt. Review all type of safety ratings and then compare to all stated other existing and non-existing cars/SUVs.

 

 

https://www.nhtsa.gov/vehicle/2018/TESLA/MODEL%2525203/4%252520DR/RWD

 

 

[Investmentacct]

Tesla is an amazing company that created cars that greatly appealed to an overlapping cross-section of market demand. Their cars are appealing to:

1. luxury car buyers

2. premium performance car buyers

3. Early Tech adoptors

4. Environmentally conscious car buyers

 

They were building for themselves a very nice niche within these markets and I could see them having a long-term success if they stayed in this area.

 

I think they could have even pulled off the Model 3 as a lower priced option for those 4 markets broadening their markets, it would have been a stretch but I think they might have been able to. They miss marketed it as a mass market car.

 

But they decided to get into other areas, primarily Solar City and took on the debt associated with that business. also to a lesser extent, they got distracted with solar roofing, power walls, and other cool things.

 

I don't think I would have had the guts to buy Puts if it weren't for the Solar City debt.

 

Add category 5). Economical . Once you realize that you are no longer dependent on Oil; and figure out to charge with free solar options ; your daily/yearly/life time driving is free of cost to no cost. So-Cal has several charging spots complete free. So, adding this category may help since luxury and economical may not have heard or experienced. But that's what is driving sales.

[awindenberger]

Here are some thoughts on Telsa for shorts to consider. Note that I'm certainly not a bull as the stock is much too pricey for my blood, but I also think that shorts could be in for pain given that Telsa's results will be looking better than ever over the next few quarters.

 

1. The car side has been analyzed ad infinitum and I have no insight there, except to say that my car obsessed friend who recently bought the Model 3 says it blows any other cars he's owned out of the water. He hasn't owned any $100k+ cars, but given the amount of cars he's owned and flipped, its saying something.

 

2. I don't recommend using the SolarCity debtload as a good reason to short the stock. Almost all of that debt is non-recourse debt against their leased solar systems, which is being paid down through the monthly payments their customers are making on their PPAs. Tesla may have overpaid for SolarCity, but they've significantly lowered expenses in the core business of selling/leasing panels, and that is actually a reasonable business right now (see Vivint and Sunrun). I'm in the solar space and have looked pretty hard at the business model. I will say that the Buffalo plant is a massive question mark, but I don't see it as a company destroying problem.

 

3. On the energy storage side, Telsa has more demand than they can handle. I understand that their powerpacks have a 12 month + leadtime right now (they deployed 203 GWHs in Q2, so this is not a small business). I also understand that they recently increased prices on the batteries by 10-15%, which will have a significant impact on margins starting in mid-2019, given that their cost of manufacturing the batteries should continue going down.

 

Again, I'm certainly not long Telsa here, but I wouldn't short the stock either given how much demand there is for their products and how their ramp is going right now.

[benhacker]

Here are some thoughts on Telsa for shorts to consider. Note that I'm certainly not a bull as the stock is much too pricey for my blood, but I also think that shorts could be in for pain given that Telsa's results will be looking better than ever over the next few quarters.

 

1. The car side has been analyzed ad infinitum and I have no insight there, except to say that my car obsessed friend who recently bought the Model 3 says it blows any other cars he's owned out of the water. He hasn't owned any $100k+ cars, but given the amount of cars he's owned and flipped, its saying something.

 

2. I don't recommend using the SolarCity debtload as a good reason to short the stock. Almost all of that debt is non-recourse debt against their leased solar systems, which is being paid down through the monthly payments their customers are making on their PPAs. Tesla may have overpaid for SolarCity, but they've significantly lowered expenses in the core business of selling/leasing panels, and that is actually a reasonable business right now (see Vivint and Sunrun). I'm in the solar space and have looked pretty hard at the business model. I will say that the Buffalo plant is a massive question mark, but I don't see it as a company destroying problem.

 

3. On the energy storage side, Telsa has more demand than they can handle. I understand that their powerpacks have a 12 month + leadtime right now (they deployed 203 GWHs in Q2, so this is not a small business). I also understand that they recently increased prices on the batteries by 10-15%, which will have a significant impact on margins starting in mid-2019, given that their cost of manufacturing the batteries should continue going down.

 

Again, I'm certainly not long Telsa here, but I wouldn't short the stock either given how much demand there is for their products and how their ramp is going right now.

 

AW, thanks for sharing!

 

Investmentacct.  i agree crash safety for Tesla's is very good.  Just note to clarify my safety comment, Tesla's deaths/miles driver are much worse than the cars in their class (new, expensive/luxury cars)... vs. the average US fleet car (10+ years old) I'm sure Tesla is safer... but vs. a new Audi/Lexus/BMW, it is, statistically speaking based on deaths, much more dangerous.  IIHS has data back to '14 model year cars (where Tesla didn't have enough volume to compare), but you can make some estimates if you like.  Obviously, many shorts highlight anecdotes of Tesla deaths because they are haters, but speaking non-emotionally, it's clearly worse than other luxury cars.

[Grant]

awindenberger, shorts don't deny there's currently a ton of demand for the products. What will matter is:

 

1) How much demand will there be when tax credits start to taper off?

2) When the Model 3 demand backlog is gone?

3) When other manufacturers roll out their EVs?

4) Will demand for ZEV credits collapse? Has it already?

5) Like the Model S, the 3 looks like it'll impose big warranty and rework costs on Tesla until the bugs are worked out. What will this do, given most of the demand is for a $35k car?

 

The median new U.S. Model S on ev-cpo.com is discounted $5,000. It's been $2,500 for the past few weeks; I'm assuming they're incentivizing the end-of-quarter push.

 

The biggest danger I see to shorts is simply the short-term sentiment. All Tesla has to do to see the stock price soar is break even.

[ERICOPOLY]

Here are some thoughts on Telsa for shorts to consider. Note that I'm certainly not a bull as the stock is much too pricey for my blood, but I also think that shorts could be in for pain given that Telsa's results will be looking better than ever over the next few quarters.

 

1. The car side has been analyzed ad infinitum and I have no insight there, except to say that my car obsessed friend who recently bought the Model 3 says it blows any other cars he's owned out of the water. He hasn't owned any $100k+ cars, but given the amount of cars he's owned and flipped, its saying something.

 

2. I don't recommend using the SolarCity debtload as a good reason to short the stock. Almost all of that debt is non-recourse debt against their leased solar systems, which is being paid down through the monthly payments their customers are making on their PPAs. Tesla may have overpaid for SolarCity, but they've significantly lowered expenses in the core business of selling/leasing panels, and that is actually a reasonable business right now (see Vivint and Sunrun). I'm in the solar space and have looked pretty hard at the business model. I will say that the Buffalo plant is a massive question mark, but I don't see it as a company destroying problem.

 

3. On the energy storage side, Telsa has more demand than they can handle. I understand that their powerpacks have a 12 month + leadtime right now (they deployed 203 GWHs in Q2, so this is not a small business). I also understand that they recently increased prices on the batteries by 10-15%, which will have a significant impact on margins starting in mid-2019, given that their cost of manufacturing the batteries should continue going down.

 

Again, I'm certainly not long Telsa here, but I wouldn't short the stock either given how much demand there is for their products and how their ramp is going right now.

 

AW, thanks for sharing!

 

Investmentacct.  i agree crash safety for Tesla's is very good.  Just note to clarify my safety comment, Tesla's deaths/miles driver are much worse than the cars in their class (new, expensive/luxury cars)... vs. the average US fleet car (10+ years old) I'm sure Tesla is safer... but vs. a new Audi/Lexus/BMW, it is, statistically speaking based on deaths, much more dangerous.  IIHS has data back to '14 model year cars (where Tesla didn't have enough volume to compare), but you can make some estimates if you like.  Obviously, many shorts highlight anecdotes of Tesla deaths because they are haters, but speaking non-emotionally, it's clearly worse than other luxury cars.

 

I immediately wanted to know why (luxury cars are safer than houses I've read).

 

None of the deaths were ordinary "car hits car" type of traffic accidents.  I don't know if Model S owners have had trouble containing their impulses to slam on the accelerator or what, but here's how they died through 2016:

 

We've got:

drove into pool (presumably he drowned)

a couple drove off of cliffs

hit by a dump truck on driver's side door

drove into an 18 wheeler

drove into street sweeper

drove into a ravine

drove into utility poles and caught fire (not clear if they were killed by the impact or the fire)

curb+tree+fire+explosion

ditch+rollover+fence

culvert

 

https://medium.com/@MidwesternHedgi/teslas-driver-fatality-rate-is-more-than-triple-that-of-luxury-cars-and-likely-even-higher-433670ddde17

 

Here is a picture of the dumptruck accident -- looks like it completely caved in the area where the driver sat:

https://www.cbc.ca/news/canada/manitoba/man-67-dies-after-car-collides-with-dump-truck-in-winnipeg-1.3375935

 

[Grant]

We see a lot of anecdotal suspension failures on all models of Teslas. Sometimes it's link failure, other times it's a ball joint. Failures usually occur under stress, like emergency braking to avoid going off cliffs or hitting dump trucks. It could be suspension failures preceded these wrecks.

 

I've been participating in motorsports for two decades. I've done all sorts of stupid shit in cars, including jumping them, rallying them, and occasionally hitting solid objects. I've never, not once, had a complete suspension failure. In fact I've only seen one unrelated to an impact or obvious assembly error: a friend of mine's S2000 rear lower ball joint failed. We assumed the previous owner over-tightened it.

 

I could never own a Tesla unless I was sure the suspension issues had been fixed.

[ERICOPOLY]

I looked up the dump truck accident -- wasn't suspension failure (I had described it incorrectly -- looks like the dump truck drove into the Tesla):

 

https://www.cbc.ca/news/canada/manitoba/man-67-dies-after-car-collides-with-dump-truck-in-winnipeg-1.3375935

 

The street sweeper incident was in China -- it was reported to be an Autopilot failure where the Tesla rear-ended the street sweeper.

 

 

The incident with the 18-wheeler also was an Autopilot failure.

 

The Tesla passed under the trailer and the driver died from head injuries:

 

"But then a truck slowly pulled out of a side road onto the highway, and the Tesla smashed into its trailer and passed underneath “in a cloud” of debris, according to the report. The trailer lacked side guards that would have stopped the car from going under and Brown suffered fatal head injuries."

 

https://www.theregister.co.uk/2017/06/20/tesla_death_crash_accident_report_ntsb/

 

 

500 foot plunge over cliff in Malibu:

 

https://insideevs.com/tesla-model-s-plunges-cliff-catches-fire-fatality-reported/

 

300 foot plunge over cliff in Jenner:

 

https://electrek.co/2014/12/31/first-tesla-owner-fatality-reported-as-man-drives-off-cliff-in-sonoma-county/

 

 

"a stolen Model S that hit a pole at over 100mph and split in half killed the suspect who was then revived and died a few days later in Los Angeles."

 

https://electrek.co/2014/12/31/first-tesla-owner-fatality-reported-as-man-drives-off-cliff-in-sonoma-county/

 

Model X fatality with Autopilot engaged -- appears to have accelerated from 60 to 70 and then smashed into concrete barrier:

 

https://www.reuters.com/article/us-tesla-crash/tesla-says-crashed-vehicle-had-been-on-autopilot-prior-to-accident-idUSKBN1H7023

 

 

"A Tesla Model S involved in a fatal crash in Fort Lauderdale, Fla., on May 8 was being driven 116 mph in a 30 mph zone three seconds before the accident, according to a preliminary report from the National Transportation Safety Board (NTSB)."

 

http://www.foxnews.com/auto/2018/06/26/ntsb-tesla-was-going-116-mph-at-time-fatal-florida-crash-battery-pack-reignited-twice-afterwards.html

 

 

 

[Grant]

One would think the dump truck collision would've killed a driver in any luxury car? I agree autopilot failures are probably a big reason for the excess Tesla fatalities.

[Investmentacct]

One would think the dump truck collision would've killed a driver in any luxury car? I agree autopilot failures are probably a big reason for the excess Tesla fatalities.

 

There are incidents of reports which points to Autopilots saving life as such and many more which may never been reported. If used as a tool; probably best available tool saving your life.

 

https://insideevs.com/tesla-model-3-autopilot-deemed-lifesaver/

 

https://www.cnbc.com/2016/08/05/man-says-tesla-autopilot-saved-his-life-by-driving-him-to-the-hospital.html

 

https://electrek.co/2018/04/25/tesla-autopilot-saved-owner-crash-semi-truck-video/

 

[Grant]

Anecdotes aren't helpful. To answer ERICOPOLY's question, we need to know the relative likelihood of death when using autopilot vs. not. Obviously autopilot can save lives, but it can also kill people.

 

If I owned a Tesla I'd only use it in stop-and-go traffic.

[rb]

I've been thinking for a while that it was really reckless on Tesla's side to call the feature Autopilot. The word has implications that the technology cannot deliver right now. Yes, the post disclaimers, etc but there are lots of idiots out there.

[oddballstocks]

I've been thinking for a while that it was really reckless on Tesla's side to call the feature Autopilot. The word has implications that the technology cannot deliver right now. Yes, the post disclaimers, etc but there are lots of idiots out there.

 

Agreed.  Last night passed an X, it was driving 'slow' on a main road here in heavy rush-hour traffic.  The driver had a laptop positioned on the console and wasn't even paying attention to the road, it appeared they were working on a spreadsheet or something.  They clearly believed the car could 100% drive itself in heavy traffic with erratic drivers.

 

The problem is 99% of the time it might be fine, it's that 1% that results in a serious injury or fatality.

[ERICOPOLY]

To Grant's point about the relative likelihood of death vs not... I'd say that when Autopilot fails, it's far more likely to be a spectacular crash versus if the driver were not relying on Autopilot.

 

The Tesla driver who died of head injuries after driving under the 18 wheeler's trailer was a case that Autopilot was not designed to handle -- or so it appears from this article.

 

The 18 wheeler truck was pulling out across traffic and that is a situation that Autopilot is not designed to handle, according to this article:

 

https://www.recode.net/2017/9/12/16294510/fatal-tesla-crash-self-driving-elon-musk-autopilot

 

"The system’s cameras and radars also did not detect the semi-truck that was crossing the driver’s path before the fatal collision. However, the system was not designed to detect crossing traffic and is only intended for use on freeways or highways where there is limited access to crossing or entering cars."

 

I don't think the typical Tesla owner understands this.  They are warned to still pay attention to the road and such, but I doubt that it is fully explained to them why.

 

The article goes on to say that the NHTSA claims that Autopilot reduces accidents by 40%.  That's probably true, because it keeps you from doing things like changing lanes when another car is in your blind spot.  But it appears to create some disastrous accidents when it does fail because the driver has been lulled into inattention and the brakes aren't used whatsoever.

 

[Spekulatius]

One would think the dump truck collision would've killed a driver in any luxury car? I agree autopilot failures are probably a big reason for the excess Tesla fatalities.

 

I would venture the guess that an autopilot that works 99% of the time is way more dangerous than no autopilot at all.

[SHDL]

Regarding the question as to whether the puts on this are too expensive:  I don’t think they necessarily are, at least not if you’re willing to go far enough OTM. 

 

Take, for instance, the Jan 17 ’20 20 puts, which most recently traded at 1.26.  If you think the company is going to run out of cash before the expiration date with probability > 0.8 (just to fix ideas) and that they will fail to raise cash or be bought out before that with probability > 0.2, you have something like a > 16% probability of bankruptcy.  So the expected value of the security at expiration is roughly > 20 * .16 = 3.2 and the implied expected return is > 153%.  Of course that number is very sensitive to the probabilities you attach to each event and the likelihood of total loss is probably too high to reasonably make this a large position, but given its potentially super high expected return (plus its negative correlation with the general stock market as an added bonus) it can be a perfectly fine addition to a portfolio as long as you are careful about position sizing. 

 

I personally have a tiny position like this.  Someone called it a “YOLO trade,” and I like that term, but it’s a sensible one.

 

I don’t feel quite as good about shorting the stock outright or writing calls…  The float, while large, is not large enough for me to stop worrying about the extent to which a further influx of dumb(?) money can inflict serious pain on those trades. 

 

[benhacker]

Regarding the question as to whether the puts on this are too expensive:  I don’t think they necessarily are, at least not if you’re willing to go far enough OTM. 

 

Take, for instance, the Jan 17 ’20 20 puts, which most recently traded at 1.26.  If you think the company is going to run out of cash before the expiration date with probability > 0.8 (just to fix ideas) and that they will fail to raise cash or be bought out before that with probability > 0.2, you have something like a > 16% probability of bankruptcy.  So the expected value of the security at expiration is roughly > 20 * .16 = 3.2 and the implied expected return is > 153%.  Of course that number is very sensitive to the probabilities you attach to each event and the likelihood of total loss is probably too high to reasonably make this a large position, but given its potentially super high expected return (plus its negative correlation with the general stock market as an added bonus) it can be a perfectly fine addition to a portfolio as long as you are careful about position sizing. 

 

I personally have a tiny position like this.  Someone called it a “YOLO trade,” and I like that term, but it’s a sensible one.

 

I don’t feel quite as good about shorting the stock outright or writing calls…  The float, while large, is not large enough for me to stop worrying about the extent to which a further influx of dumb(?) money can inflict serious pain on those trades.

 

Here is and image (attached) of the the option market's forward implied pricing structure on Jan '19 expiration.  I think it helps to think about stuff like this a little bit more clearly.

 

I think the key to any of these views around volatility and option MM pricing is:

1) derivatives markets are generally much more efficiently priced than the underlying

2) spreads are generally very bad

 

that said, using derivatives allow you (generally) to gain access to the lower cost of funds and leverage capacity of the MM which is superior to what you/us as retail/semi-retail folks can do.

 

I think playing with IBKR's option probability tool is pretty interesting.  Mostly though, as SHDL says, you should guess your own probabilities and find the optimal way to play any very non-linear situation like TSLA.

[Spekulatius]

^ Ben, thanks. I am familiar with the IB option Tools (webinar), but I rarely do options and haven’t really used TWS for the last 12 month as I find my iPad more convenient. It would be a learning curve for me. I did dabble into SPY puts, as I think they are underpriced relative to risk (low VIC, high stock prices, volatile political environment , trade wars). It’s easier for me to understand and the option are quite liquid.

 

TSLA is just too much shorted for my taste, but I would probably short the stock into a melt up at this point.