Tesla the Tantalizing: SEC Settlement Likely Confirms Range

On Friday evening, headlines screamed that Tesla ( TSLA ) CEO Elon Musk had reportedly made a surprisingly bold and extremely risky decision to fight charges of fraud by the Securities Exchange Commission (SEC). On Saturday, it looked like reason and rationality prevailed with an official announcement of a settlement deal issuing a slap on the wrist including a $40M fine (split between Musk and his company), resignation as chair of the TSLA board, two additional board members with no ties to Musk, and no admission or denial of guilt. On Friday, it looked like Musk was willing to take the company down in flames to preserve his ego. Now, it looks like TSLA is ready to rev higher again. This tantalizing volatility sits quite comfortably as of a 21-month trading range that is the stubborn breakout from the previous near 4-year trading range.

After TSLA gapped down on the abrupt resignation of its CFO , I explained why I was finally done betting on TSLA although I was not going to sell into the panic. On Friday, I was of course relieved that I decided to sell those shares into the relief rally. Still, there are short-term trades available on TSLA as it continues to churn through its trading range(s). For example, I am still holding onto my old November 380/420 call spread as an outside bet that TSLA somehow attains the value its CEO thinks the company deserves. Obviously, time is running out on that position.

In the wake of the SEC charges that drove Friday’s gap down and 13.9% loss, I covered a hedged short position and established a fresh set of hedged option plays. I expected more downside pressure with the outside possibility of a rapid decline through a series of gap downs. The settlement news makes the stock much more likely in the short-term to experience a relief rally right back to 50/200DMA resistance. My combination of far out of the money put, put spread, calendar put spread, and calendar call spread now looks overly weighted to the bearish side. Monday’s trading action will likely determine my next adjustments (I still do not want to own shares until after the company executes its next funding round). TSLA is churning and volatile, but its penchant for bouncing away from key resistance points and rebounding off key support levels makes the stock too tantalizing to resist.

The volumes of commentary have also been a fascinating feature of TSLA’s latest drama. The SEC charges and then news that Musk turned down a settlement offer finally motivated pundits like Jim Cramer to come out and unequivocally expound upon the bearish case. Here is a brief clip of Cramer’s longer commentary.

I also enjoyed the frantic reporting and the defense of a staunch TSLA bull who insisted on keeping his focus on the very long-term TSLA story.

And then there was the less frantic and very measured reporting from James ( Jim ) Stewart of the New York Times . Stewart presented a clear and compelling case for Musk to settle with the SEC (good thing Musk apparently listened to people like Stewart!).

In the SEC, Musk finally met his match. He was forced to back down a bit from his perch and his social media commentary will likely become a lot less colorful going forward. Still, I do not expect a lack of fireworks from Musk to translate to muted action in TSLA’s stock. The TSLA story remains a very divisive one with so many taking strong sides one way or the other. Both positive and negative news headlines should continue to generate strong reactions until TSLA’s future becomes clears up. Perhaps TSLA is no longer “$420 or bust,” but it is still “revolution or bust.”

From SEC Chairman Jay Clayton:

“This matter reaffirms an important principle embodied in our disclosure-based federal securities laws. Specifically, when companies and corporate insiders make statements, they must act responsibly, including endeavoring to ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.”

Be careful out there!

Full disclosure: long TSLA put, put spreads, and calendar call spread
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