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It seems debates on Tesla continue to be almost fierier than Brexit or the U.S election and Tesla has become one of the most controversial stocks since the dot.com boom.

Tesla stock has such serious growth already priced in, as it trades around 180 times forward earnings and does not currently pay dividends.

Tesla is not just a car manufacturer as it has diversified interests from its all-electric vehicles (EVs) to scalable clean energy generation and storage. This includes Powerwall, Powerpack and Solar Roof to help homeowners and businesses manage their clean energy. It is a big player in technology and since bringing its cell production in-house has produced longer lasting batteries and reduced costs, with batteries being a major cost in manufacturing.

Tesla has a new major challenger as Apple enters the EV production game and expects to develop a next generation battery by 2024. Apple surprised by beating expectations of production levels in the final quarter of 2020.

The stellar rise of Tesla by some 743% was so spectacular in 2020 it was added to the S&P 500 index on the 21st of December, coming in as the fifth largest company, although when you combine those of the Alphabet group it drops to sixth. The Friday prior to Tesla’s inclusion it recorded a record high of $695, valuing the company above $600bn and equal to the combined value of all the other major car manufacturers.

Tesla’s value dropped on the Monday to around $660 and fell some 6.5% from its Friday high. This volatility does raise questions over the S&P’s decision to bring Tesla into the index. That said, it only has a 1.69% weighting in the S&P 500 index and for every $11.11 Tesla moves the index moves one point. Will this be enough to turn the S&P into another Nasdaq with constant volatility or erratic behaviour? Of course, this year it has registered another new high over $700 as longs continue to dominate.

It is yet to be seen what the overall impact Tesla will have on the S&P 500 index moving forward. However, as a trader, it does bring a few questions to mind, such as what is the best way to trade Tesla shares apart from as a single stock now it has been included? Having spent some time over the break researching and considering it, I have come up with a couple of strategies.

My strategies to trade Tesla stock

The first is to trade options, which I did on many products in 2020 due to the increased volatility as this at least limits the loss (and I am sure there are a lot of Tesla shorts which had done that!), as I’m the buyer of the option only and it avoids having to micromanage the risk. The second, which is less known to many traders, are the sectors that make up the S&P 500 Index (and indeed the Eurostoxx).

Tesla is in the consumer discretionary sector of the S&P 500 and accounts for almost 10% of it. This could be the best trade against Tesla and even opens up the opportunity to arbitrage the S&P 500 index against the consumer discretionary sector. If I do consider the latter, I will need to ratio this trade due to tick size etc!

Armchair Trader readers can currently enjoy a discount on Chris Tubby’s trading courses using the discount code ARMCHAIR5% when booking. More details on Chris’ courses can be found at www.masterc.co.uk 

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Chris Tubby Master Consulting

Chris Tubby

Chris Tubby started his career in commodities, becoming a senior trader by the age of 22. He moved on to the financial markets when they came to London in the early 80s. Chris has traded, prop, arbitrage and as a market-maker for various exchanges on a range of products - STIRs, Equity index for an Italian Bank in Milan, energy for both the major Oil exchanges, Gold, HRC, MSCI, Iron ore, Cocoa, and Wheat.

Chris enjoys passing on his knowledge, passion and trading skills to others and watch them mature into traders through his range of courses.

Armchair Trader readers can receive a 5% discount on Chris's range of trading courses using the discount code ARMCHAIR5%

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