How to Play Tesla Stock with Options

Originally published by Cabot Wealth on September 27th

As I shared after-hours cocktails with Cabot Wealth Summit attendees two weeks ago, a large table of us shared our big-picture stock ideas. On the subject of Tesla stock, my thesis, after a couple bourbons, was that because of the innovations in self-driving cars made by Tesla (TSLA) and Uber, my young kids may never get a driver’s license.

Countless neighborhood friends of mine, who have older kids who are of age to get their licenses, have told me that their kids have no interest. “Why would I want a car? I can just Uber” is what one neighbor’s son told his dad. And the research trends back up this lack of interest.

As noted in Money Magazine and Business Insider, Researchers Michael Sivak and Brandon Schoettle from the Transportation Research Institute at the University of Michigan compared the percentage of people of different age groups with drivers’ licenses in the United States in 1983, 2008, 2011 and 2014. The study found that in every year examined, there has been a decrease in the percentage of 16- to 44-year-olds with drivers’ licenses in the U.S.

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From 1983 to 2014, there’s been a drop of 47 percentage points in 16-year-olds with drivers’ licenses. For people ages 20 to 24, there’s been a 16 percentage point decrease over the same time span.

This chart of the decline of young licensed drivers is a sign of the times, and could bode well for Tesla stock.And much of this data was compiled before Uber and Tesla began to really shake up the automotive world!

In 2015, these same researchers noted, “In the most extreme scenario, self-driving vehicles could cut average ownership rates of vehicles by 43 percent—from an average of 2.1 vehicles to 1.2 vehicles per household”.

And as we know, the range of opinions on Tesla and Uber is wide ranging. For example, earlier this year, China’s Tencent Holdings (TCEHY) bought a 5% stake in TSLA.

“Tesla is a global pioneer at the forefront of new technologies,” a Tencent spokesperson said. “Tencent’s success is partly due to our record of backing entrepreneurs with capital; Elon Musk is the archetype for entrepreneurship, combining vision, ambition, and execution.”

That said, there are no shortage of critics of the company, including Bob Lutz, an auto industry legend who held top positions at Ford (F), Chrysler, General Motors (GM) and BMW throughout his career. In a Los Angeles Times article Lutz had plenty to say about TSLA. Here are some excerpts:

What’s your take on Elon Musk and Tesla?

“I don’t know why it is that otherwise intelligent people can’t see what’s going on there. They lose money on every car, they have a constant cash drain, and yet everybody talks as if this is the most miraculous automobile company of all time.”

What do you think will happen with Tesla down the line? Bought by a traditional auto company?

“Maybe, but who needs it? [Musk] has no technology that’s not available to anybody else. It’s lithium-ion cobalt batteries. Every carmaker on the planet has electric vehicles in the works with a 200-300-mile range.

“Raising capital is not going to help, because fundamentally the business equation on electric cars is wrong. They cost more to build than what the public is willing to pay. That’s the bottom line.”

What about the design?

“The one advantage [Musk] has is that the Model S is a gorgeous car. It’s one of the best-looking full-size sedans ever. The Model X? It looks like a loaf of bread. There’s no arguing the Model 3 is nice-looking but it doesn’t break any new ground aesthetically.

“Don’t get me wrong, what Musk has achieved, whether it is profitable or not, is incredible. He’s created an automobile company based solely on electric vehicles, and they have pretty good, not yet completely reliable, autonomous capability.”

What Wall Street Thinks of Tesla Stock (This was

Wall Street is also divided on Tesla stock, as traders position for the stock to crash, or explode to new highs.

So with TSLA trading at 345, how might I bet on, or against, Tesla stock trading options?

If I believed in Elon Musk, and the future of Telsa, I might execute the following trade:

Buy to Open the TSLA December 355 Calls for $22.

The most you can lose on this trade is $2,200 per call purchased, if Tesla stock were to close below 355 on December 15, 2017.

However, this trade has unlimited upside potential, just like a stock purchase, but at a fraction of the cost ($2,200 vs. $34,500)

If I wanted to bet against TSLA stock, I might execute the following trade:

Buy to Open the TSLA December 330 Puts for $16.

The most you can lose on this trade is $1,600 per put purchased, if TSLA were to close above 330 on December 15, 2017.

The advantage to buying puts is that most brokerage companies don’t allow average investors to short stocks. However, they do all allow you to buy puts, which is a bearish position, because your potential loss is limited to the price you paid for the put ($1,600).

For more information on how to trade options, consider taking a trial subscription to Cabot Options Trader

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