What the Options Market is Telling Us About TSLA Earnings

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Chief Strategist

Interactive Brokers

It has been an interesting few months for Tesla (TSLA) and its CEO Elon Musk.  Since the company’s last earnings report, after US markets closed on July 20th, the stock rose about 25% after first beating earnings, then riding a broad market rally into August.  TSLA announced a 3:1 split on August 5th, traded ex-split on the 25th.  Since then, the stock has given back all its gains and then some.  We’re now about 10% below where the stock traded prior to its last report.

TSLA 4-Month Daily Bars, with July 20th Highlighted

TSLA 4-Month Daily Bars, with July 20th Highlighted

Source: Interactive Brokers

We wrote last week about how the vast majority of TSLA’s historically remarkable performance came in two major pushes higher, with the stock plateauing for years after each one.  We are currently in year two of the current plateau, with the prior plateaus lasting three and six years.  We also noted how the stock has so far never meaningfully retraced either of its nearly vertical moves in 2013 and 2019-21.  Even though the stock is currently well below its recent highs, it is up about tenfold since early 2020.  As a result, bulls are likely inclined to see major support in the $200 range, while bears might see it as a precipice.  Let’s see if either of those views are reflected in the options market ahead of this afternoon’s earnings.

As of now, the IBKR Probability Lab shows that the distribution for TSLA options expiring on Friday is rather symmetrical.  The highest probability is around $220, which is about a dollar below where the stock was trading when the snapshot was taken.  This tells us that options traders do not have a strong opinion about TSLA’s post-earnings reaction:

IBKR Probability Lab for TSLA Options Expiring October 21st

IBKR Probability Lab for TSLA Options Expiring October 21st

Source: Interactive Brokers

When we look at options skew for options expiring this Friday, next Friday and next month, we see that at-money options have a relatively typical set of expectations as well.  The implied volatility of at-money weekly options is roughly in line with TSLA’s average post-earnings move of about 7.5%.  Downside skew in this week’s options is quite steep, but not unusually so when compared to last quarter.   We also see that downside skew for options expiring in both a week and a month from now is slightly steeper than what we saw in July, but not appreciably so.

TSLA Skew, Options Expiring October 21st (yellow), 28th (green) and November 18th (orange)

TSLA Skew, Options Expiring October 21st (yellow), 28th (green) and November 18th (orange)

Source: Interactive Brokers

On balance, the options market is relatively sanguine about TSLA’s earnings.  It also appears to be relatively sanguine about the need for Musk to sell additional shares to finance his acquisition of Twitter (TWTR), which is set to close at the end of the month.  It is unlikely that he has been able to sell shares ahead of earnings, which raises the prospect that he might need to do so in the coming week.  If so, it would certainly be helpful if TSLA had a solid pop after earnings and shares could be sold into strength.

Disclosure: Interactive Brokers

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Disclosure: Probability Lab

The projections or other information generated by the Probability Lab tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Please note that results may vary with use of the tool over time.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the “Characteristics and Risks of Standardized Options” also known as the options disclosure document (ODD) or visit ibkr.com/occ