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Goldman Sachs has uncovered a Tesla trade designed to make money no matter how the company's battered stock performs

Published 05/17/2018, 09:18 AM
Updated 05/17/2018, 09:59 AM
© Larry Busacca / Getty Images for The New York Times
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  • Trading Tesla (NASDAQ:TSLA)'s highly volatile stock has been difficult for investors.
  • Goldman Sachs (NYSE:GS) offers up a trade that it says will make money, regardless of how Tesla's stock trades.

Trading Tesla's stock can be a daunting task.

For bulls, it can be difficult to stay the course amid countless negative headlines. Whether that means stark tales of the company's torrid cash burn or horror stories from the production line, defending a long Tesla position can be a daunting task.

Not to mention the ever-present short sellers nipping at the heels of the long trade — a group so convinced of Tesla's imminent demise that they've made it the most shorted company in the US market for much of the past 18 months.

Speaking of bears, they have to grapple with a stock that's managed to wiggle out of trouble time and time again, their shorts bearing the brunt of those gains. Not to mention CEO Elon Musk seems hell-bent on destroying them. Heck, he's even ponied up millions of his own dollars to punish them.

So with that in mind, what's a trader to do? Goldman Sachs has a solution: Make a trade that's insulated from Tesla's volatile stock price.

Goldman recommends doing so using the company's convertible bonds. Here's the trade, as put together by Jonathan Kahnowitz, a cross-asset research analyst at the firm:

  • Buy Tesla 0.25% convertible bonds maturing in 2019
  • Sell a March 2019 call option on the same bond to isolate the credit value

"By selling a $360 call against the convertibles investors can create a package that returns 6.4% annualized yield over a 10-month investment period at any stock price if the company is able to pay down the bond at maturity," Kahnowitz wrote in a client note.

That last part is key, and represents the possible downside risk. Goldman's trade hinders on Tesla's ability to maintain a strong capital structure and keep raising enough cash. Fear not, the firm says.

"We see several avenues for the company to meet these upcoming capital requirements through a combination of secured/unsecured debt, additional convertibles, and equity — with the mix more weighted to debt," analysts wrote to clients.

And if you're still wondering about how to trade Tesla's stock, Goldman has some ideas on that too. Put simply, you should sell. That's largely because, according to the firm, the company will continue to see negative free cash flow through its forecast period.

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