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Tesla Motors Inc (NASDAQ:TSLA) Trader Braces for a Plunge

Long-term puts on TSLA dominated Friday's option activity

by 4/15/2013 9:20 AM
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Put volume spiked on Tesla Motors Inc (NASDAQ:TSLA) last Friday, with roughly 24,000 contracts crossing the tape during the course of the session. For comparison's sake, that's more than twice the electric automaker's average daily put volume of fewer than 8,300 contracts. Most of the day's action took place in the January 2015 series, where 14,801 contracts traded at the 30-strike put. In fact, the bulk of this volume changed hands in a single block of 13,500 contracts, which traded at the ask price of $7.00 in the early afternoon.

Open interest at this LEAPS strike surged over the weekend by 14,667 contracts, confirming the addition of new long puts on TSLA. By buying to open these long-term puts, traders are looking for the shares of Tesla Motors Inc to drop below $30 over the next 20 months -- or, as Trade-Alert's Fred Ruffy suggests, it's possible that a TSLA investor picked up these bearish bets in order to hedge against a steep pullback in the shares.

In any event, based on the entry price of $7.00 for that block of 13,500 contracts, those January 2015 30-strike puts won't become profitable unless the stock drops below breakeven at $23 (strike price less net debit). That's quite a plunge from TSLA's current perch at $43.75. However, the shares have a penchant for volatile price swings, and they were trading south of $23 as recently as late January 2012.

Whatever buyers' motivation might be, puts have clearly emerged as the options of choice on Tesla Motors in recent weeks. The stock's 10-day put/call volume ratio is 1.06, based on cumulative buy-to-open data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio ranks above 87% of other such readings taken during the past 52 weeks, revealing a stronger-than-usual skew toward bearish bets over bullish.

Technically, TSLA kicked off the month of April by gapping above former resistance at the $40 level, and this round-number area has since emerged as a tentative layer of support.


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