– I’m not a regular reddit user, but I’m very excited about this idea so I’d like to share and get your opinion. If you think this is worth discussing further, please share it with others you know as well.
– I don’t have too much savings but more or less fixed income. So I’m looking for all or nothing kind of deal with good odds. If you are like me, this could be a quite interesting idea.
– I like Tesla as a company. But if price per stock was millions of dollars, I wouldn’t buy the stock (well, couldn’t afford it really). My point being, I would like to short tesla because I think it might be a profitable bet, despite how good the company and Elon Musk’s vision is. (For example stock market didn’t care Amazon’s vision in 2000s, and I don’t think it works any different now)
What I suggest:
Buy 3STS periodically. Not all at once, but every month or two with the same fixed amount. Do not sell until tesla reaches around 200$s maybe even 100$s depending on how adventurous you feel.
ie. Dollar cost average your short and grab popcorns. Nothing bad can happen to you now, other than losing the monthly insurance you pay for a while and doubting yourself.
(Note: 3STS is not an Option contract (it is not a put or call option), it is an ETP. This means it doesn’t expire. For more information, please take a look at https://graniteshares.com/institutional/uk/en-uk/etps/3sts)
What I expect:
In the next 1 to 2 years, tesla might fall to at least where it was before pandemic, so around 100-200$ range. This means, there will be a point if you bought 3STS, you might get a return between 100-600x.
If this is true and you are betting 1,000$ in 3STS every month, there will be a time that you make 100,000$ to 600,000$ from a single months bet, much more in total with all past bets accumulated.
Why do I expect that (my assumptions and reasoning):
To put it modestly, the economy is not better than what it was before pandemic. If there is a rise in stock valuations, I assume we will at least “reset” to where things were before pandemic at some point in future. Given Russia/Ukraine, inflation, shortages, it probably is going to be worse but that’s my opinion, say we will just reset as it happened many times before in stock market.
So, if stocks will “at least” reset back to their original price before pandemic, what would happen to tesla. Now at 1.5.2020, Elon Musk said Tesla was overvalued when it was around 140 (no wonder why he sold a lot later on). Lets say 100 to 200 is where Tesla will end up (current PE ratio for tesla is 222.71 and note that 100-200$ per share is still potentially overvalued).
Okay, so say you believe tesla stock price might reasonably reset back to 200$. My question is how would you make the most from this with least amount of risk? The risk I can tolerate should provide:
- not losing more than what I invested (no margin call & going homeless fear).
- no subjective attempt on timing the market (rather distribute over time)
Enter 3STS. It is a 3x leveraged inverse ETP so you cannot lose more than what you invested, and what it approximately does is simple. If Tesla goes up 1% in a given day, 3STS goes down 3% approximately that day (due to LSE time difference). If Tesla goes down 1% that day, 3STS goes up 3% approximately that day (watch the movements for a while).
So let’s take a simple case that won’t happen, to see how things may play out. [Warning: Math ahead] Say Tesla was falling from 1000$ to 200$ with 3% constantly a day. So we multiply the price with 0.97 every day. We would need to do this 53 days (1000$*0.97^53 is about 200$). Each time tesla falls 3%, we make 9%. So we would make 9% for 53 days. 1.09^53 is 96, so you would make 96 times of the initial investment. If we waited until tesla is like 100$, that would make 1.09^75 = 641 times the initial investment! So in ideal conditions that won’t happen if we stop somewhere between Tesla price 100$ to 200$, we would make about 100x to 640x of the initial investment (just think about what would happen if things actually got worse than before and Tesla price reached under 100$, losing more than 95% of it’s peak value like what happened to amazon in 2000s).
But of course, things won’t go that smoothly. What is the catch?
- Even if we are doing great and are so happy, say we made 50x and dreaming of 100x to 600x, Tesla price might jump 34% in a single day because Elon Musk tweeted a Tesla factory on Mars, then 3STS would hit to 0 in a single day. This you could at least avoid by taking off some profits once you make some multiples of the initial invested amount.
- Now more realistically, let’s say Tesla on average goes down 3% but every now and then jumps 5% with some excitement. Say it does this once a week. For 200$ price, it would take 77 times 3% falls, and 15 times 5% jumps (1000$*0.97^77 * 1.05^15 = 200$) and we would get 66x (1.09^77*0.85^15) of the initial invested amount. And for the 100$ price target, we would get, 111 times 3% falls and 22 times %5 jumps (1000$*0.97^111 * 1.05^22 = 100$), so we would make 400 times the bet (1.09^111*0.85^22). In short, volatility eats up from the gain but not that much.
- 50 to 400 times the gain sounds crazy right? That would be the compounding effect. But we left out one last major factor. When shit goes down, things don’t just fall 3% every day. There are days of selloff where things will fall like 10-20%. Say we get a “facebook day” where tesla falls 25% and then keeps falling. Then for 200$ price it would take 63 days of 3% fall and 12 days of 5% up (0.75*1000*0.97^63 * 1.05^12 is about 200) and we would make about 40 times the bet (1.25*1.09^63*0.85^12). For 100$ price, it would take 97 days of 3% fall, and 20 days of 5% up (0.75*1000*0.97^x * 1.05^(x/5) is about 100). So we would make 200 times the bet (1.25*1.09^97*0.85^20). In short, fast falls eat up from the gain by reducing compounding effect, but we can take a few and still make insane returns.
If tesla reaches somewhere between 100-200$ without an extreme jump (20+%), the worst case scenario above (with weekly 5% jumps, and fast selloffs) still has the potential of making 40-200 times the initial bet. Say this was all wrong and things went worse (tesla bottoms at 200$, more 5% jumps happen during bear market, and we get more than one ~25% drop), above would still lead to gains.
Let me know what you think about this strategy, as I’m really interested in any critical feedback