About That Tesla Volatility Spike

Surging interest in the automaker's call options triggered a big jump in TSLA implied volatility levels

by Bernie Schaeffer |

Published on Apr 11, 2017 at 9:29 AM
Updated on May 30, 2017 at 2:15 PM

Perhaps because so many memorable stock market sell-offs have been accompanied by major spikes in the CBOE Volatility Index (VIX), there's something of a popular misconception that volatility surges and bearish price action are inextricably linked. And while a correlation between the two certainly exists, Tesla Inc (NASDAQ:TSLA) offered a reminder last week that volatility eruptions can also be tied to bullish price moves.

Per the Trade-Alert chart below, TSLA gapped higher on Monday, April 3, after the automaker announced record first-quarter deliveries. The share price jump propelled Tesla into the role of the No. 2 most valuable U.S. car company, supplanting Ford Motor (F).

In the options arena, the stock's single-day rally of 7.3% translated into TSLA's second-highest volume day of 2017 -- and a 30-day at-the-money implied volatility (IV) jump from 34.11% (as of Friday, March 31) to 37.62% as of Monday's close. And following that big initial surge, 30-day IV on TSLA continued to climb in the ensuing sessions. While TSLA shares finished Friday on a gain of 8.7% week-over-week, 30-day IV on the automaker's options popped nearly 20%.

Meanwhile, the 30-day IV skew checked in as low as 5.3% as of Thursday, which Trade-Alert ranks below 99% of other readings over the past year -- indicating that TSLA puts had rarely priced in a tamer volatility premium relative to TSLA calls. Or, to frame this from the opposite perspective: TSLA calls have rarely priced in a higher volatility premium relative to TSLA puts. This seems to confirm the notion that the big IV spike in TSLA last week was sparked chiefly by an exploding demand for TSLA call options, which -- by dint of those most basic economic forces, supply and demand -- effectively inflated the cost to buy those options.

As to what this means for TSLA investors, the rise in IV (and specifically, call IV) presents a potential opportunity for covered-call writing, particularly for those who anticipate a short-term consolidation around the $300 century level. That said, the 30-day at-the-money IV for TSLA registered just shy of 41% as of Friday's close, in the 66th annual percentile. That's not yet a level that could be considered "prohibitively high" for prospective premium buyers -- especially given that TSLA shares have tended to realize higher volatility than what the options market has priced in over the last year, per its Schaeffer's Volatility Scorecard (SVS) of 80.

tsla daily option volume 0407

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, April 9.

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