Trading the other side of TSLA S&P addition

by YellenTheDestroyer

The big day is here, Elon has delivered. TSLA is finally entering the S&P 500. That means 422b of new market cap, the biggest company ever to be added to the S&P. On the other hand, we will likely see one or more tickers removed from the index which could mean short term underperformance. This trade revolves around shorting names that could be booted from the S&P because of Tesla.

The bottom 10 stocks in the S&P by market cap (likely to be removed) are currently (www.slickcharts.com/sp500)

  • Xerox (XRX)
  • Apache Corporation (APA)
  • SL Green Realty (SLG)
  • Ralph Lauren (RL)
  • Vontier (VNT)
  • Discovery Inc. Class A (DISCA)
  • HollyFrontier (HFC)
  • TechnipFMC (FTI)
  • UAA (Under Armour Class A) (UAA)
  • UA (Under Armour Class C) (UA)
  • News Corporation Class B (NWS)
READ  What are some observations, pitfalls, or do's and don'ts that you've learned while trading options?

Out of the 10 companies removed from the S&P this year, 2 have been in oil and gas (Helmerich and Payne, Cimarex Energy), and 5 have been retail/consumer facing (Kohls, Coty, Nordstrom, Capri Holdings, Macy’s).

If we look at companies in the bottom of the S&P which fit this profile, a few stick out (excluding UA due to the share class structure):

  • Apache (APA) (Oil/Gas)
  • Ralph Lauren (RL) (Consumer/Retail)
  • HollyFrontier (HFC) (Oil/Gas)
  • TechnipFMC (FTI) (Oil/Gas)

These are four companies that seem to have a reasonable chance of being excluded, and subsequently underperforming. I’m taking cheap bear call spreads on each that will net a payout initially, and hold up if one or more of the companies are excluded from the S&P

Let me know what you think of this trade, was also looking into selling calls on these names, but got a bit scared by higher potential downside if the market goes on tear randomly

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.