Setting Up Next Pairs For Tesla Motors Versus Solar City
Dr. Duru | Sep 18, 2016 02:02AM ET
A little over two weeks ago I made the case for implementing a pairs trade on Tesla Motors (NASDAQ:TSLA) long versus Solar City (NASDAQ:SCTY) short. What unfolded from there rolled out according to my first scenario: SCTY continuing to sell-off and TSLA outperforming. Indeed, TSLA’s outperformance has returned to the all-time high level set earlier this year.
TSLA’s outperformance over SCTY is streaking straight up again.
As a result of SCTY’s continued sell-off, I was able to log a profit on the pairs trade which expired on Friday, September 16. I will relaunch the pairs trade hopefully in the coming week, but I am going to pick my spot carefully.
SCTY is making a bid for a triple bottom. Friday in particular featured a break below the two previous lows of 2016 followed quickly by buyers who managed to close out SCTY with a gain. The resulting pattern is called a hammer. It describes a set-up where sellers finally exhaust themselves and buyers rush into the vacuum. All SCTY needs is follow-through; confirmation of a (short-term?) bottom could come with a close above the recent consolidation range (around $18.25 or so).
Solar City (SCTY) is making a bid to hold a triple bottom after over two weeks of accelerated selling
TSLA also looks like it is carving out a bottom after a near test of the June lows. The move is not quite as dramatic as SCTY, but TSLA did start the month with intense selling. TSLA’s bottoming is less seller’s exhaustion and more buyer’s resolve.
TSLA is making a bid to hold a trading range that has been in place for over 4 months.
For the pairs trade, I am not interested in playing a potential bottom. Instead, I am sticking with the primary scenario: TSLA drops its bid for SCTY whether for regulatory reasons or shareholder disapproval. Under this scenario, TSLA should rally and SCTY should sell-off. I see the current bid as an attempt to save SCTY from bankruptcy, so the trade with the greater potential is a bet against the acquisition. There is likely no upside in betting on a successful acquisition. I also see a TSLA sell-off and a SCTY rally as the least likely scenario. Thus, my pairs trade is long TSLA and short SCTY. If I can fade a rally on SCTY, I will get the best price on this pairs trade. The chart of the TSLA/SCTY ratio also suggests that SCTY is overdue to outperform TSLA.
Get The News You Want
My first pairs trade was a test. The next pairs trade will be more substantial and targeted for a longer timeframe, perhaps somewhere between January and March.
Be careful out there!
Full disclosure: no positions
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.