JPMorgan Recommends Tesla `Crash Puts' as Tail Risk Is Rising

(Bloomberg) -- Things may just keep on getting worse for Tesla Inc.

Irrespective of first-quarter production results, shares of the electric-car maker -- already down 27 percent in just three weeks -- may have more to lose, according to JPMorgan Chase & Co. Quantitative and derivatives strategists at the bank including Shawn Quigg and Marko Kolanovic recommend to hedge against further declines, saying the market is underpricing tail risk.

“Tesla shares may be unable to escape a continued selloff as a confluence of unfortunate events may seal its fate regardless of Q1 production results,” the strategists wrote in a note to clients Tuesday prior to the results. “A shift in sentiment in both the equity and debt markets the past two weeks may have altered the reward-risk dynamic of the stock, making any debt refinancing potentially more difficult and more expensive.”

While Tesla shares rose as much as 6.9 percent at the New York market open after reiterating a target production rate, investor optimism for the company has suffered in recent weeks following a credit-rating downgrade, a recall of about 123,000 Model S vehicles and news that Tesla's driver-assistance system Autopilot was in use last month when a Model X driver died in a gruesome California crash. With bonds slumping as well, concern is growing over Tesla's $10 billion debt load and high cash burn.

The JPMorgan strategists advise taking profits from a previous options recommendation, and using the proceeds to buy puts expiring in June with an exercise price of $100 -- 60 percent below Monday's closing price.

“A stock decline could accelerate equity dilution concerns and create a self-feeding downward spiral in the stock, making our tail risk scenario plausible,” they wrote.

JPMorgan analyst Ryan Brinkman has an underweight rating on the stock with a year-end price target of $190. The model doesn't incorporate any type of equity dilution; therefore a potential bear-case scenario could lead to a “significantly lower” price than that estimate, according to the note.

To contact the reporter on this story: Cecile Vannucci in London at cvannucci1@bloomberg.net.

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Joanna Ossinger, Anne Riley Moffat

©2018 Bloomberg L.P.