Tesla Options Traders Eye Inflated Premiums Ahead of Earnings

TSLA stock has a history of negative earnings reactions

May 2, 2018 at 11:49 AM
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Short-term volatility expectations are elevated on Tesla Inc (NASDAQ:TSLA) ahead of the electric carmaker's first-quarter earnings report, due out after tonight's close, per the stock's 30-day at-the-money implied volatility of 54% -- in the 90th percentile of its annual range. And while this isn't too surprising given the uncertainty surrounding a company's quarterly results, one options trader is apparently hoping to profit on a post-earnings volatility crush.

Specifically, the stock's weekly 5/4 310-strike call was most active yesterday, and data from Trade-Alert indicates a number of these positions were sold to open. Implied volatility on the option jumped 11.6 percentage points to 97.1%, bringing the closing price for the call to $6.42. Ideally, the call writers will be able to buy back the options at a lower price, should implied volatility decline after earnings.

The $310 region has marked a ceiling for TSLA stock since late March, but before that, served as a floor for most of the first three months of 2018 -- and coincides with Tesla's year-to-date breakeven mark. Today, the shares were rejected earlier near $302.50 -- a 50% Fibonacci retracement of their February through April sell-off, and are currently churning just below the round $300 mark at $299.60, after Nikola Motor said it is suing the company for patent infringement in its Tesla Semi design.

tsla stock price chart may 2

However, if history is any guide, TSLA stock could be due for volatile trading tomorrow. Over the past eight quarters, the shares have averaged a single-session post-earnings move of 5.2%, regardless of direction, with the options market pricing in an 11.2% swing for Thursday. While a move of this magnitude to the upside would put Tesla well above the 310 strike, the reactions to earnings have been negative in four of the past five quarters -- including the two most recent.

And while the action in the options pits seems more targeted toward implied volatility, broader sentiment on Wall Street is certainly more skeptical in nature. Short interest, for example surged 20.6% in the most recent reporting period to a record 38.26 million shares. These bearish bets represent 30.5% of TSLA's available float, or 2.9 times the average daily pace of trading.

Elsewhere, 11 of 17 analysts covering Tesla stock maintain a "hold" or worse rating. Plus, the average 12-month price target of $316.92 is a slim 5.6% premium to current trading levels.


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