The Hottest Equity Options Class is…

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Chief Strategist

Interactive Brokers

This morning’s Wall Street Journal features an article discussing how Tesla (TSLA) options trading has been surging.  I was honored to have contributed to the reporting, noting:

Traders buying those contracts are “almost evangelical in their belief in Tesla, its technology, and to a certain extent, Elon Musk,” said Steve Sosnick, chief strategist at Interactive Brokers Group Inc. “Tesla is unique—it attracts so many speculators because of its cultlike following.”

“Tesla is perpetually the most active single-stock option at our firm,” said Mr. Sosnick.

We addressed this topic in late December as the stock was plunging.  At the time, we noted that our customers had been relentlessly buying TSLA as it fell.  Quite frankly, I wish I’d been emphatic in noting that much of the selling was clearly the result of tax-loss selling that would likely abate as the calendar turned.  At that time, the volume weighted average price (VWAP) for December was $156.89 versus a then-current stock price of $109.10.  It seemed like a big stretch for those faithful investors to recoup their losses.  (A few more days of selling brought the final December VWAP to $145.61.)

But of course, nothing is truly out of the ordinary with TSLA.  Yesterday’s close, after a well-received earnings report, the stock’s 11% rally took it back above the VWAPs referenced above.  We noted yesterday that the results and the conference call were exactly what growth-seeking investors wanted to hear.  We are currently up over 60% from the stock’s closing low at the start of the month.  We were already amidst a ferocious comeback, one that continues apace today.  With volatility like this, who can blame options traders for focusing on this name?  How about this for some big movement?

TSLA 4-Month Daily Bars (red/green) with Bollinger Bands (20 days, 2 stds)

TSLA 4-Month Daily Bars (red/green) with Bollinger Bands (20 days, 2 stds)

Source: Interactive Brokers.

Prior to earnings, we looked at what the options market was anticipating.  After a couple of relentless up days and furious trading, it remains important to see what options traders might now be anticipating.

For starters, options are pricing a return to a much lower volatility regime.  Implied volatilities fell sharply yesterday, which is typical after earnings, but they have risen once again after today’s move.  Yet by March, options are pricing in a return to daily volatility around 3.75%.  It seems quaintly low after the moves of the past two days, but it is roughly in line with TSLA’s long-term historical volatility:

TSLA Implied Volatility Term Structure, Today (yellow), Yesterday (orange), 1 Week Ago (red), 1 Month Ago (purple)

TSLA Implied Volatility Term Structure, Today (yellow), Yesterday (orange), 1 Week Ago (red), 1 Month Ago (purple)

Source: Interactive Brokers

The WSJ article notes that “many of the biggest options bets on Tesla are lottery-ticket trades.” Those are particularly apparent when we look at long-term expiries, particularly the next two January LEAP expirations, but we see no shortage of extreme bets expressed in nearer-term open interest (and remember, open interest is reported with a one-day lag, so we can’t yet see how the open interest is changing on today’s 10% move).

TSLA Options Open Interest by Strike, February 17th (yellow), March 17th (orange) Expirations

TSLA Options Open Interest by Strike, February 17th (yellow), March 17th (orange) Expirations

Source: Interactive Brokers

TSLA Options Open Interest by Strike, January 2024 (light green), January 2025 (dark green) Expirations

TSLA Options Open Interest by Strike, January 2024 (light green), January 2025 (dark green) Expirations

Source: Interactive Brokers

While it’s quite clear that there is some extraordinary enthusiasm priced into TSLA options, there is no shortage of bearishness too.  TSLA is a stock that inspires extreme views.  Many of them are quite rosy – even rosier after the past two days – but not all.  I have a feeling this will not be the last time that I find myself discussing this stock and its options.

Note: the author has stock and options positions in TSLA.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.