The TSLA Iron Butterfly

I love to do iron butterflies on stocks with earnings, when there are conflicting influences on the stock. Tesla (TSLA) was a great example, not only because of these opposing “forces”, but also the impending takeover of SolarCity (SCTY) by TSLA.

TSLA has always been a “battleground” stock. Huge visions by Elon Musk, and high short interest are positive for the stock, while mounting losses and the need for financing are the negatives.

These forces have been known for awhile, but prior to this earnings report, the options were pricing in a MUCH smaller move. Here is the options page on the day of the earnings last quarter.

Last quarter TSLA earnings

As seen, the expected move was around 19.60. This quarter the expected move was much lower. Here is this quarter’s option page….

Current Quarter Option Page

Why is the expected move so much smaller? The impending takeover of SCTY by TSLA. In my 34 years of trading takeover stocks, a stock for stock deal always hits the volatility of the acquirer. In this case TSLA is using .11 of it’s stock for each share of SCTY. This means if TSLA surges on earnings, arbitragers will short TSLA and then buy SCTY. This usually results in more muted moves in TSLA as a result of earnings.

Because of this possibility, I mentioned yesterday on Simpler Stocks to short an Iron Butterfly around 225. An iron butterfly is “betting” on a muted move. It involves selling the “at-the-money straddle, and buying the “wings”. In this case I was doing a 10-point wide spread. Here is the actual spread.

TSLA Spread

I shorted this “fly” at 8.35. The maximum loss of this is only the difference in the strikes minus the credit or around 1.65 points.

Sure enough, TSLA did NOTHING today on the opening. By noon today, this spread today collapsed to 4.19!!!

TSLA Spread Collapse

This trade was good for 4000 dollars!

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