How To Trade Tesla the Mark Cuban Way
Teslas crashing everywhere! Same with its stock. How to profit.
“If you win a million dollars in the lottery, you’d best become a millionaire. Because then you get to keep the money.”
– Jim Rohn
2022 is shaping up to be the worst year for the U.S. stock market in decades.
It’s been even worse for risky assets.
Bitcoin is down 75%. Other cryptos like Luna and Terra, and FTT have gone to zero.
Meme stock AMC Theatres (NYSE:AMC) is down almost 79%, as its Apes are licking their wounds.
Cathie Wood’s Ark Innovation ETF (NYSE: ARKK) is down 63% just this year, even as its inverse Tuttle Capital Short Innovation ETF (NYSE:SARK) is up 65.5%
The conclusion is inevitable. Reality is setting in.
The post-pandemic bull market in speculative assets is over.
The trillions of dollars wiped off the value of these assets will never return.
Yet a handful of investors managed to make money during times of market turbulence.
Today, I want to revisit one of my favorite stories of how a savvy investor made – and preserved – his fortune amid a market crash.
And I will conclude with an example of a similar trade you can put on today with Tesla.
Thanks for reading The Global Guru: On Booms, Busts, and Wall Street's BS! Subscribe for free to receive new posts
How Mark Cuban Kept His Billion-Dollar Fortune
Few billionaires in the U.S. have a higher public profile than Mark Cuban.
Boasting a net worth of $4.6 billion, Cuban has established a media presence as a host of ABC’s reality show Shark Tank.
This fellow Pittsburgh native also owns the NBA’s Dallas Mavericks.
You may not know the remarkable story behind how Cuban made – and kept – his first billion-dollar fortune.
Cuban’s story offers a terrific lesson on how to protect your portfolio from the ravages of the next market crash.
Let me explain…
In 1998, Cuban and his partner Todd Wagner sold Broadcast.com to Yahoo for $5.7 billion.
At the time, Cuban received 14.6 million shares of Yahoo, then trading at $95.
With his shares worth $1.4 billion, Cuban became a billionaire overnight.
The internet bubble had minted several other paper billionaires. But after the bubble popped in March 2000, few of them got to keep their newfound wealth. (Even Jeff Bezos watched his wealth evaporate as Amazon’s stock price dropped 95%.)
Cuban was the rare exception.
That’s because he had the foresight to execute one of the most remarkable options trades in financial history.
After selling his company to Yahoo, Cuban was subject to a lockup. As a result, he could not sell his shares immediately.
But Cuban knew that Yahoo stock was funny money.
So he entered a massive options trade to lock in much of his $1.4 billion value stake.
For every 100 shares of Yahoo stock he owned, Cuban bought one put contract (strike $85) and sold one (strike $205). The term of each option was three years.
He bought and sold a total of 146,000 puts and 146,000 calls.
The cost of the puts precisely offset the premium of the calls. This made the trade essentially free.
So how did Cuban’s bet pan out?
Yahoo's share price hit $237 by January 2000 – far above the sale price of Cuban's $205 call options.
For a while, Cuban’s trade looked like a painful and expensive mistake.
Then the internet bubble burst.
By late 2023, Yahoo had tumbled to a low of $13.
Had he not hedged his bet, Cuban would have lost more than 85% of his wealth had he not hedged his position.
Instead, thanks to his options trade, Cuban kept almost all of it.
Put another way…
Cuban didn’t become a billionaire when he sold his company to Yahoo for $1.4 billion.
He became a billionaire when he proved he could keep the money.
Of course, this trade looks brilliant with the benefit of 20/20 hindsight.
But it was far from “easy money.”
Cuban had to wait four years before his option bet panned out.
In the midst of a bet that goes against you, this can seem like an eternity.
Here’s the good news…
Today, you, too, implement a spread options trade like Cuban did.
Putting on a “Cuban Trade” with Tesla.
The final bubble to be pricked in today’s everything bubble is Tesla.
With the stock down over 50% this year, investors’ patience has run thin.
Blame Twitter, China, the Fed, rising competition… whatever.
The cause is irrelevant.
Tesla was, at one point, arguably the most overvalued company in history.
It was never valued as a stock.
It was valued as a token on Elon musk.
That token is now falling.
And it is still ripe for a Mark Cuban-style option trade. It must fulfill two criteria.
First, the options must be long-dated.
Second, the sale of the calls should pay for the put.
So here’s one trade to consider-
Sell January 2025 $440 calls for trading about $11.88
Buy January 2025 $80 puts for trading about $11.75
The proceeds from the sale of calls will pay for the purchase of the puts.
If a drop to $80 seems too much, keep in mind that, at that price, Tesla would still have a market cap of $250 billion.
That’s the equivalent of five(!) GMs- each with over twice Tesla's current sales.
Note that this is not a specific recommendation.
There are many ways to put on this trade with different option prices and and expiration dates.
Thanks for reading The Global Guru: On Booms, Busts, and Wall Street's BS! Subscribe for free to receive new posts and support my work.