Trading TSLA Ahead of Elon Musk

03/28/2013 8:00 am EST


Mark Sebastian

Founder, Option Pit LLC

Even though other CEOs have previously landed in hot water for releasing material company news prematurely, that didn’t stop Elon Musk from following suit, so Mark Sebastian of offers a play on the upcoming big announcement.

Elon Musk put out a tweet Tuesday explaining that he is going to have a big announcement next week. I was asked to discuss this potential announcement on Bloomberg.

My basic point is that IV on TSLA options really hasn't moved very much, and in fact, was slightly down on the day. We can see April and May vol sold off Tuesday, despite the uptick in volume.

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I might think about simply buying a call until I looked at the skew structure.

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The structure is seriously flat, meaning I can sell an OTM call at a higher IV than I can a near the money call. Anytime we see that, we want to trade a bullish a call spread. It is a rare set up and currently the only other stock I have seen with a similar set up is AAPL. A call spread buys a lower vol and sells a more expensive vol. This creates a cheap call spread.

The May spread I suggested only costs .85 and has a 20 delta. With the combo of low IV and long gamma, if TSLA rallies to 40 we should easily do better than 50%. I think that is entirely possible, the market has a tendency to bid up these types of events. I see no reason why this trade would be any different.

The Trade
Buy the TSLA May 40/45 call spread for .85, with an offer to shut it down at 1.30. If the trade is up on Monday night, I would close it regardless. No reason to carry this through to what will likely be much ado about nothing.

By Mark Sebastian, Blogger and Contributor,

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