Tesla will remind people of a Palm Pilot when compared to an iPhone—except I don’t remember Palm Pilots killing anyone

HFA Padded
Adventures in Capitalism
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Given the amount of time I’ve spent talking about Tesla Inc (NASDAQ:TSLA) on this site, I’d be remiss if I didn’t point out that I materially changed my position over the past few days.

Q1 hedge fund letters, conference, scoops etc

Screenshot via Joe Rogan show

Back in October of 2018, I felt that shorts were pressing their bets a bit too hard and noted that, “…All evidence seems to show that they’ve used every trick from every financial fraud over the past 100 years to put lipstick on the Q3 financial results.” I booked most of my put position at a $255 reference price compared to a reference price of $320 when I first wrote about them and fortunately missed the thermo-nuclear short squeeze that followed. I feel we’re in a somewhat similar position today, where the short interest has spiked from a low of 24.8 million on January 31 to a current reading of 43.6 million as of May 31. This represents quite substantial selling pressure from individuals who are likely to be “short tourists.”

For those who are unfamiliar with the term, “short tourists” are those who show up late in a sell-off, feel emboldened and pile on near the lows. These individuals also tend to be the very first to panic and cover when the trade goes against them. Let’s just say their conviction level is low. With this much of the float in “short tourist” hands, any moves to the upside are likely to be exaggerated.

Depending on who you want to believe, Tesla will either meet the low end of Q2 delivery guidance or only fall slightly short of guidance. Normally, when you miss guidance, your shares get obliterated. Given the high short interest and the fanaticism amongst longs who are unlikely to sell no matter what happens, I believe that a slight miss may lead to something between a non-event and a strong rally. In any case, with only six months left before my put options expire and the decay curve starting to accelerate, I felt it was imprudent to stick around into the delivery number. I decided to roll the trade forward at roughly a 220 reference price.

I bought the January 2020 200/100 put spread back in December 2017 for about 15 net. Today it’s about 23 net, which is a 53% gain. While it wasn’t the home-run I was hoping for, it has been yet another profitable Tesla put spread position. Don’t think I’ve given up on the Giga-Fraud. Instead, I have rolled the trade forward into 2021 paper. I am long the June 2021, 200 put against the January 2021, 75 put for a 46.5 net cost. If I get lucky, the January 75’s will go out worthless and I’ll have a free look at everything beneath. If not, it pays 125 against a 46.5 cost, which is a healthy return on my capital.

At the same time, I sort of expect a bit of a relief rally following the delivery number, before they report a rather atrocious earnings number a few weeks later. During that window, my hope is that the implied volatility comes in a bit and the shares drift higher allowing me to really lay into this trade at an even lower net cost. If not, I already have plenty of 2021 Tesla paper on my books.

I admit to being surprised at just how long Musk has kept this scheme going for. A lesser man would have let it unravel long ago. In any case, I’m buying an added 2 years here. By then, there will be so much better competition on the road that a Tesla will remind people of a Palm Pilot when compared to an iPhone—except I don’t remember Palm Pilots killing anyone…

Disclosure: Funds that I control are long and short various TSLA puts and calls

Article by Adventures In Capitalism

HFA Padded

In 2003 I started a hedge fund, Praetorian Capital. The fund's success is the result of the strategies I write about. I also travel around the world searching for markets to invest in. As a result, I founded Mongolia Growth Group, Ltd TSX-V:YAK in February 2011. Mongolia is expected to be the fastest growing economy in the world for the next decade. For more information go to www.mongoliagrowthgroup.com.