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.
JOIN FREE

Get Schaeffer's Opening View every morning before the bell rings.


MORE | MARKETstories


The Stock That's Tripled On Blockchain Buzz
J.P. Morgan Securities sees increased risk in RMAX stock
Deckers Outdoor Stock Ideal for a Bullish Options Trade
DECK call options are attractively priced at the moment
Fed Rate Hike, Net Neutrality, GOP Tax Bill Highlight Busy Week
All three benchmarks are pacing for weekly wins
Stocks Touch All-Time Highs Ahead of Tax Bill
The Dow is up more than 150 points

Partnercenter


NEW! Explore Schaeffer’s Partners' deals and get connected to top online brokerages with deals tailored exclusively for our readers.  Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services.

TRADING SERVICES | FEATUREDproducts


By MG 2016
In March of 2016, I was introduced to Expiration Week Countdown.  The results are better than words!
Options trading made simple.
Schaeffer's Investment Research, Inc. is dedicated to providing subscribers advantages in options trading and investing.  Our independent market research services create profitable opportunities for investors at every level.