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JPMORGAN: Tesla investors are ignoring the possibility that CEO Elon Musk will be forced out. Here's how they can protect against that worst-case scenario.

Published by Business Insider on Tue, 19 Mar 2019


Tesla has experienced a series of issues stemming from CEO Elon Musk's use of Twitter, and several legal milestones are approaching.JPMorgan argues that investors are underestimating the possibility that Musk is forced to step down as either CEO or as a director of Tesla.The firm offers an options-trade recommendation for investors hoping to get ahead of any negative headlines as well as the stock-price turbulence that could result from them.The headlines around Tesla and its embattled CEO, Elon Musk, have been escalating on a seemingly weekly basis. But if that turmoil is affecting the company's investors, they sure aren't showing it.So says the derivatives strategy team at JPMorgan, which finds a shocking lack of investor positioning around a volatility spike that could send Tesla shares tumbling.At the center of JPMorgan's consternation is an apparent lack of worry from traders that anything of significance will happen to Musk, whose long-term vision accounts for a great deal of the company's roughly $50 billion valuation.The firm argues that investors should really be more braced for the worst-case scenario of a Musk ouster ahead of some crucial legal decisions. Those milestones include the deadline for Musk's response to the court's Order to Show Cause on May 19, and an evidentiary hearing scheduled for March 26."The removal of Elon Musk as CEO, or a 'Director' within the company, remains an option for the SEC, and is a risk that may become increasingly more evident in the weeks ahead," Shawn Quigg, an equity derivatives strategist at JPMorgan, wrote in a client note. "However, the market appears to be overlooking these legal events and the potential ramifications."He went on to say that was "surprising given these fears previously caused a significant decline in Tesla shares and surge in volatility to multi-year highs."Read more: A Wall Street expert explains why the US is the 'worst place' for Alexandria Ocasio-Cortez's favorite economic theoryand breaks down the 'absolutely horrifying' impact it could haveIf you think Quigg is overreacting, consider how volatile Tesla's stock has gotten amid negative events in the past. JPMorgan finds thatin the period between Musk's infamous "going private" tweet on August 7 and the settlement he reached with the Securities and Exchange Commission on October 230-day realized volatility spiked to a five-year high of 81%.Quigg's secondary argument around a Tesla share collapse revolves around the stock's recent lack of resilience. He says Tesla has been only partially recovering from declines while also failing to sustain gains when positive headlines transpire.To Quigg and his JPMorgan colleagues, this suggests that Tesla's long-standing, almost-mythical growth story is losing luster."We anticipate a re-acceleration of legal headlines and publicity in the weeks ahead likely to stir renewed key man fears, at a time when the once impenetrable Tesla narrative appears to be eroding," Quigg said.Fortunately for the more cautious segment of the Tesla shareholder base, JPMorgan has formulated an options trade to get ahead of any future turbulence. The firm issues the following recommendation for investors looking to "monetize the mispricing" in Tesla's stock:Buy TSLA April 265 put contracts for $13.95The chart below reinforces just how mispriced Tesla options appear to be.SEE ALSO:A Wall Street expert explains why the US is the 'worst place' for Alexandria Ocasio-Cortez's favorite economic theory ' and breaks down the 'absolutely horrifying' impact it could haveJoin the conversation about this storyNOW WATCH: What El Chapo is really like, according to the wife of one his closest henchman
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