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Targeting a Breakdown in Tesla Motors Inc (TSLA) Shares

One Tesla Motors Inc spread buyer bet on a near-term pullback

by 4/2/2014 1:57 PM
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Tesla Motors Inc (NASDAQ:TSLA) remains a favorite with the speculative crowd, and today is among the five most active equities trading in the options pits, as total option volume is running at a 33% mark-up to what's typically seen. With call and put volume near parity, it appears as though action is split between the bullish and bearish camps.

One thing traders can agree on is a decidedly short-term focus. Today's 10 most active Tesla options all expire by mid-April; in fact, eight of the 10 will cease trading at this Friday's close. The remaining two are traditional April-dated options, on which a healthy portion of today's action is related.

Shortly after the open, symmetrical blocks of 1,480 contracts traded at the April 205 and 220 puts. The lower-strike put traded closer to the bid price, at $3.50 per contract, while the higher-strike put went off closer to the ask, at $9.05 apiece. Given that implied volatility ticked higher with both transactions, it appears as though this spread buyer may have opened a bear put spread at a net debit of $5.55 per pair of contracts. All told, he spent $821,400 (number of spreads, times the net debit, times 100 shares per contract).

In short, the spread represents a bet that Tesla shares will shift lower over the next couple of weeks. The best-case scenario for this bearish trader is for the shares to dip all the way to $205 at expiration, at which point the 220-strike put has an intrinsic value of $15, the 205-strike put expires worthless, and profits are maximized at $9.45 (the difference in strike prices less the premium paid). Contrarily, if TSLA maintains its perch north of $220, the maximum potential loss is 100% of the debit paid. Breakeven, meanwhile, is $214.45, or the higher strike less the debit paid. Tesla traded south of this breakeven level as recently as yesterday, and last explored the sub-$205 area last Thursday.

Demand for Tesla puts has been on the rise of late. The stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 1.01 is higher than 87% of similar readings taken during the last 12 months. In other words, options players have been scooping up long puts (relative to calls) at an accelerated clip over the last two weeks.

Tesla Motors Inc (NASDAQ:TSLA) is of course a volatile stock, having gained more than 400% in the last 12 months to rest at $226.79. (Today alone, the shares have popped 4.5%.) In light of this monster uptrend, it is possible that recent deep out-of-the-money put buying could be the work of shareholders looking to hedge against downside in the shares. That said, there is no telling where the stock will wind up when trading concludes on Thursday, April 17 (when April options expire). By executing a spread, today's Tesla options trader elevated his breakeven price and lowered his risk, versus an outright long put purchase.


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