As we expected, Covid has become a huge issue in China but they stopped reporting numbers and rumors are anywhere from 50M to 350M people have been infected in the past month. At the moment, US numbers are holding steady at 66,000 infections per day (24M/year) and “only” 426 deaths per day (155,490/year), which is only as many Americans as died during the entire Vietnam war every 6 months – so why worry about that?
One effect we are seeing here is Tesla’s (TSLA) stock is dropping today because their Shanghai plant is extending production cuts into next year due to the Covid emergency. At the moment, the plant is completely shut down. Shanghai makes about 1/3 of all Teslas (3s and Ys) in the World.
$117 pre-market is down to $368Bn from $1,300,000,000,000 last Christmas – so it’s been a bad year for Elon and company. The real problem is they never should have been at $1.3Tn and, even at $368Bn, the company “only” made $13Bn in 2022 so it’s STILL trading at 28x earnings but they projected $19Bn for next year, which would be a forgivable 19 times earnings but producing ZERO cars in Shanghai for a month will cost them $1Bn.
On the other hand, TSLA has $17.5Bn net of debt in the bank – that’s a huge plus, so they are getting into the zone where they may be playable. This morning you should be able to sell the 2025 $50 puts for $10 and that would net you into the stock for net $40 and even Elon Musk shouldn’t be able to screw things up that badly – right?
Let’s say we sold 10 short TSLA 2025 $50 puts (obligating us to own 1,000 shares at $50) for $10,000 and bought 20 of the 2025 $50 ($80)/80 ($63) bull call spreads for net $17 ($34,000). That would be net $24,000 on the $60,000 spread that is 150% in the money to start. If TSLA stays over $80, you make $36,000 (150%).
That is the first bullish play I’ve picked for TSLA since they were about $50! Although I just filled up my tank this weekend at $2.85/gallon, Gasoline (/RB) priced shot back up to $2.40 over the weekend though with all the snow and grounded flights, I think it should pull back again. Oil (/CL) is $80 this morning and also a fun short with very tight stops above that line.
Speaking of bullish plays: On Tuesday we discussed TSLA but we didn’t make it official. So, for the LTP, let’s:
- Sell 10 2025 $85 puts for $20 ($20,000)
- Buy 30 2025 $100 calls for $57 ($171,000)
- Sell 30 2025 $125 calls for $46.50 ($139,500).
That’s net $11,500 on the $75,000 spread with $63,500 (552%) upside potential at $125. It’s a lot more aggressive than Tuesday’s trade, which paid 150% at $80 but we can always roll down to something like that if things don’t turn around for TSLA.