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Tesla Motors Inc (TSLA) Rally Stirs Short-Term Option Bulls

Tesla Motors Inc fans are flocking to now in-the-money call options

by 5/27/2014 2:32 PM
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Option Brief: Momentum stocks are on the rise today, and Tesla Motors Inc (NASDAQ:TSLA) is no exception. The shares were last seen 2.1% higher at $211.67, and option bulls are rushing the automaker's options pits.

Intraday call volume is running at a slight mark-up to the norm, with roughly 51,000 calls exchanged. Speculators are showing an affinity for short-term contracts, as the equity's 30-day at-the-money (ATM) implied volatility (IV) has surged 10.4% to 41.9%.

Most popular thus far is the weekly 5/30 210-strike call, where more than 4,700 contracts have changed hands. A healthy portion of the calls crossed on the ask side, IV at the strike is 12.9 percentage points higher, and volume has surpassed open interest -- all signs of newly bought bullish bets.

Digging deeper, the now in-the-money calls traded at a volume-weighted average price (VWAP) of $4.49, meaning the buyers will reap a reward if TSLA settles north of $214.49 (strike plus VWAP) at Friday's close, when the options expire. In fact, the buyers' profit will increase with each step north of breakeven, and is theoretically unlimited. On the flip side, risk is capped at the initial premium paid for the calls, should TSLA backpedal beneath the strike by the end of the week. In the wake of today's jump, delta on the call has soared to 0.58 from 0.40 at Friday's close, implying a 58% chance of expiring in the money.

Elsewhere, traders taking a slightly longer-term view of TSLA are apparently buying to open the out-of-the-money July 235 call, amid hopes the stock will surmount the strike -- a feat not accomplished since early April -- by back-month options expiration at the close on Friday, July 18. However, considering nearly 30% of the security's float is sold short, it's possible the calls are being bought to hedge bearish bets.

Whatever the motive, now is an opportune time for option buyers to roll the dice with TSLA's short-term contracts. Despite today's ATM IV jump, the equity's front-month contracts are relatively inexpensive, as the stock's Schaeffer's Volatility Index (SVI) rests at an annual low of 38%. Meanwhile, Tesla Motors Inc's (NASDAQ:TSLA) Schaeffer's Volatility Scorecard (SVS) stands at 100, suggesting the shares have tended to make outsized moves on the charts, relative to what the options market has priced in.

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