Schaeffer's Trading Floor Blog

Tesla Motors Inc (TSLA) Earnings: What Does the Options Market Expect?

Breaking down volatility expectations ahead of TSLA earnings

by 5/6/2014 7:38 AM
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Earnings season is almost over, but there are still a few big names out there left to report. Tomorrow night, we have the Master of Martian Electric Cars, Tesla Motors Inc (NASDAQ:TSLA).

It's been quite the ride in TSLA the past half-year (pun semi-intended). (Click chart to enlarge.)

Daily chart of TSLA since November 2013
Chart courtesy of TD Ameritrade

The stock traded as low at $116.10 on Nov. 26, 2013, then peaked at $265 exactly three months later. It's traded in a bit of a down channel ever since, mostly thanks to the bashing of All Things Momentum in the last couple of months. If you squint, it looks like we're breaking out of the intermediate-term downtrend.

As of now, the options board is pricing in about a 9% move in TSLA after the numbers come out. There are still two full days of trading until earnings, so that could clearly change.

Just to review, that 9% number is a standard deviation calculation. As such, it really says there's a 68% chance that TSLA moves less than 9%. If TSLA moves 2% or 20%, it doesn't mean that the 9% was wrong, the same way that a 3-point favorite in the NFL winning by 30 points doesn't mean the original spread was wrong, either. It's a range and a probability, but there are outliers in both directions. Over the entire universe of earnings names, about two-thirds will likely move under the implied range that the options suggest. But the "board" can improperly price any individual name.

Based on past history, 9% feels a bit low for a TSLA move. But it's important to remember that TSLA is a maturing company, and as such, the reactions' trend become more and more muted.

As to direction, well, I could make a case either way. I tend to default to "present trend continues." But what is the trend in TSLA? The exponential, bubbly uptrend is over. But the recent intermediate-term down channel looks like it's run its course, too. There's a solid week of green bars into the number.

The Schaeffer's put/call open interest ratio (SOIR) looks pretty uninteresting.

TSLA SOIR since November 2013

The masses wanted to own puts just before the big November-to-February rally, then (of course) lost interest right around the top. Now we sit right at the middle ground over the last half-year.

My complete and total guess here is a modestly bearish reaction that morphs into a reasonably good buying opportunity in the intermediate term. I'm really going off the Tesla Motors Inc (NASDAQ:TSLA) stock chart on that, though -- again, I'm thinking that down channel has broken. Personally, I'd only play tomorrow's earnings report via put spreads.

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

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