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Unusual Options Activity: Tesla Motors (TSLA)

Posted: 19 Aug 2019 03:00 AM PDT

Large buy on extremely low-valued put option.

It's been a tough year operationally and for shares of Tesla Motors (TSLA). One trader is even betting on a further drop in shares in the next month, possibly as a result of a broad market decline, but also possibly because of company-specific issues.

On Friday, over 40,000 contracts traded on a September 2019 $50 put option, expiring just over one month away. With shares around $220, the $50 strike would trade in-the-money only if shares dropped over 75 percent!

With a cost of $0.04, or $4 per contract, the option is a cheap bet on a big percentage drop in shares. Should the company drop even 10 percent, the option could double in value—although there isn't much time for this trade to play out. Tesla will next report earnings in late October, well after this option expires.

Action to take: Tesla's haphazard operating history has weighed on shares, but the company also enjoys a strong following by believers in the company, its technology, and its larger-than-life CEO, Elon Musk. We like Tesla as an options play conceptually, but this September $50 option is a bit like trying to turn a nickel into a dime—a strategy that often loses as much as a less-risky one in the options market.

Tesla bears should consider a more reasonable strike date for the trade to play out, and with a more reasonable price. January 2020 $175 put options could do well, as that price is near the 52-week low.

Insider Activity: General Electric (GE)

Posted: 19 Aug 2019 03:00 AM PDT

CEO and director buy heavily following bearish report.

On Thursday, August 15th, Larry Culp, CEO of General Electric (GE), bought 252,000 shares, paying just under $2 million. He was joined by director Paula Reynolds. She bought 10,000 shares, paying about $85,300 to do so.

GE was one of the most actively-traded companies on Thursday, as a bearish report by analyst Harry Markopoulos (in conjunction with an unnamed hedge fund) stated that as much as $38 billion in wealth at the company may be improperly accounted for.

General Electric shares have been out of favor in the past few years as the company has worked to shed its non-industrial conglomeration of businesses and reduce its debt load.

Action to take: We admire a CEO who puts their money where their mouth is—and this $2 million buy is a much bigger vote of confidence than the lackluster comments offered by the company itself on Thursday. This insider buy is an excellent contrast to Enron (a company compared to GE on Thursday) executives who dumped their shares as fast as possible, leaving the employee 401k plan holding the bag.

While we still expect shares to be weak over the next few months—and buying a GE put option could be a great trade if markets continue trending downward—management is sending the signal that there isn't an existential threat with its current liabilities and accounting practices. Over time, that should work out well for long-term holders.

Consumer Sentiment Drops on Trade Fears, Fed Cut

Posted: 19 Aug 2019 03:00 AM PDT

Consumption indicator drops to January low.

On Friday, August consumer sentiment data was released, showing a read of 92.1. The July read was 98.4, and expectations were for a read close to 97.5. Overall, this data represents a steep drop sending the data to levels last seen in January.

The consumer sentiment index is constructed to show 100 as flat, any number over 100 as growth, and any number under 100 as a decline.

While the headline consumer sentiment showed declining faith in spending by consumers, current economic expectations by consumers measured 107.4, indicating some growth. However, this was also a drop from a reading of 110.7 in the prior month.

The worst read in the data came from the index of consumer expectations, which hit 82.3 against a consensus of 89.0 and a read of 90.5 in July. This indicates that consumers are increasingly pricing in a slower economy—a fact that may become a self-fulfilling prophecy if enough consumers scale back their spending now to increase savings.

One-third of survey takers cited possible tariffs on Chinese goods as a potential sign that the economy was showing. Other survey takers also cited the rate cut by the Federal Reserve as a hint that they should be more cautious with their spending as the economy may be slowing.

UBS Sets $235 Price Target on Apple

Posted: 19 Aug 2019 03:00 AM PDT

Wearables growth capable of moving shares higher.

On Friday, UBS analyst Timothy Arcuri released a report on Apple (AAPL), indicating that the company's wearable division, touting such products as the iWatch, is being underpriced in the current market. He has set a buy rating on shares with a $235 price target.

Specifically, that segment grew by 50 percent in the most recent quarter, "contributing materially more Y/Y growth than the services segment for the first time in the company history."

Arcuri also sees "phenomenal demand" for AirPods, the wireless earphones, as only about 7 percent of iPhone users have an attach rate to the new product at this time.

Apple shares have been critiqued by some in recent quarters for having no massively original ideas since the iPad tablet in the early 2010's, and with little increase in functionality with each new iPhone model.

Action to take: We like Apple as a consumer tech play, and at 18 times earnings and its solid growth it should continue to do well, although it's hardly a bargain at current prices. However, the $235 price target at UBS is only about 12 percent higher than the current price, and shares only yield about 1.5 percent.

Rather than buy shares, we suggest buying a January 2021 $235 call, which can offer a better percentage return on the next market bounce for the company.
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