Schaeffer's Trading Floor Blog

Is It Worth It to Trade Tesla Motors Inc (TSLA)?

TSLA's implied volatility remains inflated relative to its 10-day realized volatility

by 3/13/2014 7:28 AM
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So, it looks like if I want to run over to the mall and buy a Tesla, I better act fast.

Tesla (TSLA) has been selling directly to shoppers at two locations in New Jersey for about a year, but state officials will now force the automaker to sell cars through a franchised car dealership.

That's just how we roll out here, we like our bridges jammed and our cars sold through middlemen.

Tesla Motors Inc (NASDAQ:TSLA) was, of course, none too pleased.

"This is an affront to the very concept of a free market," Tesla Motors (TSLA) said in a blog post on Tuesday.

"This new rule, if adopted, would curtail Tesla's sales operations and jeopardize our existing retail licenses in the state," said Tesla's post. "Having previously issued two dealer licenses to Tesla, this regulation would be a complete reversal to the long-standing position of NJMVC on Tesla's stores."

"Long-standing" may be a bit of an exaggeration, as the Tesla stores are about a year old. But point well taken … the sudden desire to enforce a rule they didn't bother with seems a bit unusual.

Tesla, the stock, has gotten "clubbed" recently. It's down about 9% from its record high of $265, tagged on Feb. 26. It's now "only" up 60% on the year. The calendar year, I mean. I'm guessing this New Jersey story turns into less than a hiccup … and besides, the stock started drifting ever-so-slightly lower two weeks before the news.

The implied volatility in Tesla remains on the high end. It sits at about 61, which is pretty much in line with the averaged realized volatility over the past few months. It's very high, though, versus the current 10-day realized volatility, which sits at about 35. There's no particular news that accounts for the implied volatility premium, as earnings are three weeks in the rearview.

Tesla is moderately hard to borrow. Judging by the options board, the implied annual cost of borrow looks like it's in the 3-5% range (it's somewhat dependent on the duration), so that's not a major driver of any extra volatility.

Implied volatility in the very general sense moves inverse to the underlying in most stocks and stock indices. The big exception to that rule is in very strong, "bubbly" sorts of names like Tesla. If the stock ever shows signs of topping, implied volatility will likely get hit as well. A garden variety "mature" tech stock might carry a 30 implied vol, depending on many factors. I wouldn't be shocked to see TSLA's implied volatility drift down to that level one of these days (months?, years?).

That's a long-winded way of saying I would not want to own "time" in here. As high as 61 implied vol sounds, I'd sooner overpay there then pay like 45 or 50 implied volatility for longer duration. That is, of course, assuming I'd want to own options here to begin with … I don't right now.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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