JPMorgan has identified the perfect Tesla trade to protect against Model 3 'production hell'
- Tesla is expected to provide an update to its Model 3 production schedule sometime in early April.
- The derivatives team at JPMorgan says the risks around the event aren't adequately priced into the market right now, and offer a trade recommendation.
When it comes to Tesla's stock, it's usually the latest Model 3 production data that dictates much of its trading. Which is why the company's upcoming release - expected in early April - will be so important for shareholders deciding what to do going forward.
But the derivatives team at JPMorgan doesn't think investors should let it get to that, and it has an idea for how they can brace for the worst ahead of time. After all, even Tesla chief executive officer Elon Musk himself has labeled the Model 3 situation as "production hell," suggesting traders would be well-advised to keep their wits about them.
At the core of JPMorgan's Tesla recommendation is the idea that the company's stock has little to gain from reporting an in-line number, or even one that beats estimates - and an outsized amount to lose in the event of a disappointing number.
"We believe the market may be underpricing the potential significance of the Model 3 production release, which we expect in early April," Shawn Quigg, an equity derivatives strategist at JPMorgan. "We see greater reward-risk in positioning for a downside move."
Also informing JPMorgan's suggested options trade is what it describes as a kink in Tesla's term structure - or the slope of implied volatility expectations going forward. As the accompanying chart shows, there's minimal expectation of price swings in April, which the firm says has created this prime opportunity.
With that established, onwards with the trade recommendation: JPMorgan says investors should sell April-May calendar put spreads - which involves buying April puts and selling those expiring in May - both with a strike price of $300.
The maximum profit for investors will be the premium collected, as long as the trade is closed at April expiry. Further, JPMorgan also recommends unwinding both legs of the trade at or before expiration in April.
With all of this in mind, it must be noted that Quigg & Co. are following the lead set by Ryan Brinkman, the JPMorgan analyst who covers Tesla and the rest of the automotive space. Quigg, using Brinkman's outlook, concludes that sentiment is at a "precarious position" right now, and warns that some widely-held bullish arguments are "on the cusp of rolling over."
"We believe the market may be underpricing the potential significance of the Model 3 production release, which we expect in early April, and thus recommend investors consider selling calendar put spreads to take advantage of the terms structure kink."
In the end, it's actually somewhat surprising that traders don't seem to be particularly worried about the April production update, considering Tesla's stock has been the most-shorted in the US market for quite some time, according to data compiled by financial analytics firm S3 Partners.
It just goes to show that despite overarching caution, there are still money-making (and possibly money-saving) opportunities for traders willing to look deeper - with JPMorgan's help, of course.
Tesla's stock is up 12% over the past year, but has slipped more than 5% so far in 2018.
