Monday, June 16, 2014

* Tesla Motors (TSLA) - Stock Rips, Risk Rises; Has the Correlation Trade Broken Down or Is this a One-day Phenomenon?

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Original Publication Date Monday, June 16, 2014

TSLA is trading $218.59, up 5.9% with IV30™ up 13.0%. The Symbol Summary is included below.

Provided by Livevol

UPDATE 6-17-2014

Provided by Livevol

While TSLA has moved in a correlation with the S&P 500 in terms of forward looking risk, today the stock price has broken out to the upside and the implied volatility (forward looking risk) has broken to the upside. While we can ask if this is  a paradigm shift, or a one-day phenomenon, the truth is, the option market has been dead wrong about volatility. Lest we forget that upside moves are volatile too.

Further, on 5-24-2014, I wrote:
5-24-2014: TSLA - Unprecedented: Divergence - Option Market Reflects Less Risk
Now Than Any point in Last Year.

The option market is just wrong, and has been in many names (see NFLX as an example)..

This is a stock and volatility note on TSLA, with the stock moving on rather big news, and here it is (2):
NEW YORK (TheStreet) --Shares of Tesla Motors Inc.  (TSLA) are higher by 3.19% to $213 on Monday as the market continues to react positively to Thursday's announcement the company will share its technology patents.

Tesla acquired patents to protect itself from larger automotive manufactures but decided to share its technology in the hopes it will increase the development of electric cars, Zacks Equity Research reports.

The company believes it will see a gain off its decision to share its patents as the move could cause a charging infrastructure resulting in a boost in sales, Zacks said.

Source: via Yahoo! Finance: Why Tesla Motors (TSLA) Stock Is Gaining Today, written by Amanda Schiavo.


Tesla Motors Inc. shares hit their highest level in months following a news report about a possible collaboration with competitors Nissan Motor Co. Ltd. and BMW AG on expanding the network of charging stations for electric cars.

Source: Marketwatch via Yahoo! Finance Tesla shares reach highest price in months on ‘supercharger’ report

I have written extensively on TSLA in the past and about Elon Musk, a man I believe to be a "once in a generation" type innovator (of course, there are many in a generation, but you get the point).  You can read my prior posts on TSLA, below.

Perusing the titles may be good enough.  I have highlighted a few in yellow which really stand out.

In particular, note the one written on 5-24-2014 and how the option market appears to be dead wrong.

5-24-2014: TSLA - Unprecedented: Divergence - Option Market Reflects Less Risk
Now Than Any point in Last Year.

5-8-2014: TSLA - Earnings Postmortem: 7 Things the Numbers Really Read; How the Option Market Was Right & Wrong.

5-5-2014: TSLA - Earnings Preview: Is the Downside Risk Priced too High, or Can TSLA Implode?

4-30-2014: TSLA - Earnings Preview; How The Last Two Abrupt Earnings Moves Look to Today's Risk

4-1-2014: NFLX, TSLA - Correlation of MOMO's May Point to Bubble Pop; 3 Things We Should Know

3-27-2014: TSLA - Risk Profile Changes; Momentum Stocks are Deflating... Right Now.

2-25-2014: TSLA - How We Already Knew The Stock Could Explode Today. A Full History of Skew in a Remarkable Company.

2-19-2014: TSLA - Earnings Preview and an Incredible Downside Bet

2-10-2014: TSLA - Risk Paradigm Shifts Again; Get Ready for Earnings, Risk is On.

1-14-2014: TSLA - Not a Bubble, But Stability. How TSLA popped Today, But We Already Knew That in November.

12-25-2013:TSLA - The Option Market: "This Isn't a Bubble, It's Equilibrium With Upside"

11-18-2013: TSLA - Stock Collapsing, Volatility Rising, but the Paradigm Has Not Shifted... Yet

11-6-2013: TSLA - Earnings Happened; Stock Falls Hard... But Do You Know The Facts About this Company?

8-8-2013: TSLA - Now a $20B Firm Off of Earnings Blow Out; How Wall St. Absolutely Blew It; But I didn't... And I'm Just a Guy...

5-9-2013: TSLA - Earnings Explosion Spectacle Hides Vol Shift -- This is a New Company -- A Paradigm Shift is Complete

5-15-2013: TSLA - May Skew Stays Parabolic; Vol Diff Opens... And Some Stuff You May Not Have Known...

5-29-2013: TSLA - This is a New Company; The Paradigm Shift Continues; Part 3 of 3.

Let's start with a 5-year stock chart, then really dig into the options and this news.

Provided by Charles Schwab optionsXpress

Over the last 5-years TSLA stock has risen 809.63%, so ya know, HUGE.  It's also worth noting that Elon Musk has created a new US auto manufacturer which until he did it, was basically considered impossible.

The stock rose unabated until September 2013, then dropped, re-rallied to new all-time highs ($265) in late February of 2014, then faded again on the momentum bubble deflation, and now... is rising again from a low of $177.22. Both that recent high and recent low occurred immediately following earnings releases.

Now the question lingers: Is TSLA going to make new highs again, or is it going to head back down?

I have no idea, but I do know that the option market has one. Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

So why does this chart matter?
The option market was reflecting an annual low in risk in TSLA just a few days ago, and the drop in the forward looking risk (see the yellow arrow pointing down) occurred as the stock has been rising.  That second part is pretty normal (stock up, implied volatility down).

The first part, "[the] option market was reflecting an annual low in risk in TSLA just a few days ago," is both weird for TSLA but normal given a high correlation reality.

Finally, note the rise today.  Now, TSLA as stock rises, the risk is rising as well.  Is this a paradigm shift, or a one-day phenomenon?

OK, what did that mean?
The entire market implied volatility has been dipping to multi-year lows.  In fact, last week the VIX hit a 7-year low.  You can read details about that here:
VIX - 7-year Lows Breached. The Calm Priced into the Market is Stunning. But Did You Know This?

TSLA is behaving the same as the market; that is, the implied volatility (forward looking risk) is dipping (had dipped) to annual lows.  When one measures mimics the behavior of another measure in a linear high, that's called high correlation... and that is in fact what we have with TSLA and the S&P 500 in terms of risk.

But... take TSLA by itself... Is the firm in fact less risky now than it was a year ago?  Is the firm less risky now than at any point in the last year? I dunno, but the option market reads: YES.

There's more... The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

We can see a parabolic skew which means the option market reflects equal likelihood of a tail move up or down.  That's actually "abnormal" in general but for TSLA is quite the status quo.

So we do have a bit of a conundrum, which is: Overall risk for TSLA is moving with the market (new lows), but the tail risk to both sides is elevated.  Hmm...

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle in July we can see that the option market reflects a price range of [$198, $242] by the end of trading on July 18th.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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