Tesla Inc (TSLA)

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Tesla’s Legal Drama Is About to Take Center Stage
By: MarketWatch | March 19, 2019

Tesla stock (TSLA) is falling on Monday, following a JPMorgan note arguing that more negative headlines dredging up old legal concerns could hurt the shares.

The Back Story. Like the sunlight’s gleam off a new car, all the drama surrounding Tesla in 2018—from the combative conference calls to the go-private tweet that ran afoul of regulators—seemed to bounce off the stock. The shares closed on Dec. 31 6.66% above where they opened the year, while the broader markets fell. However, 2019 has been less kind to Tesla, and the stock has fallen 19% so far. While the company is still debuting new models and keeping stores open, investors are worried about competition—and the controversial behavior of CEO Elon Musk amid his continuing battle with the Securities and Exchange Commission.

What’s New. The SEC is likely to file its own response any day now to Musk’s response to the court’s order to show cause, which will probably be followed by an evidentiary hearing toward the end of the month. JPMorgan’s Shawn Quigg says that the market is too sanguine ahead of these developments: “While it is difficult to determine where the coming legal events shake out, given it appears Musk is in breach of the prior SEC agreement, in addition to his continuing public belligerence towards the SEC, another slap-on-the-wrist (i.e. a larger fine) appears unlikely,” he writes. “The removal of Elon Musk as CEO, or a ‘Director’ within the company, remains an option for the SEC, and is a risk that may become increasingly more evident in the weeks ahead.” He notes that similar fears previously caused the stock to notch multiyear volatility highs, as investors pondered what a Musk-free future might mean for the company.

Looking Ahead. Quigg believes that the bull case for Tesla is “eroding,” and with the options market seemingly not charging any volatility premium ahead of expected legal developments, investors can get ahead of what he argues will be negative headlines. He recommends buying “Tesla April 265 strike puts for $13.95, indicatively ($275.43 reference price)…to monetize this mispricing.”

The stock is down 1.9% to $270.29 in recent trading.

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