Tuesday, July 29, 2014

* Tesla (TSLA) - Earnings Preview: TSLA Shows Less Risk than Ever Before into Earnings

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TSLA is trading $226.87, up 0.9% with IV30™ up 0.5%. The Symbol Summary is included below.

Provided by Livevol

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Update 8-1-2014 (day after earnings)

Provided by Livevol

TSLA stock did not move as much as the option market reflected in the immediate-term; the low risk was in fact priced correctly.
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Update 8-6-2014 (a week after earnings)

Provided by Livevol

TSLA stock has moved more than the option market reflected in the monthly options; the low risk was in fact priced incorrectly. The option pricing in TSLA continues to confound.
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Back to original post:
This is an earnings preview, volatility and stock note surrounding a firm that I have written compulsively about over the years.



Conclusion
TSLA risk into earnings is the lowest it has been ever, and that's worth standing up and taking note of.



TSLA confounds me a little. I mean, it's absolutely amazing that Elon Musk has created a new US car manufacturer. He actually did it.

But... he also said the stock was overvalued at the current time (Oct 2013, $170). Context is necessary as he also said "We're going to do our best to fulfill the expectations of investors, and I think in the long term that stock price is going to seem fair. It's difficult to predict where it goes in the short to medium term, but I do feel good about the company achieving that value and more in the long term."

I have no strong opinion on the way the stock will move off of earnings. I am surprised that the risk is priced so low, but this may not be a TWTR, AMZN, HLF. It might be a NFLX (little move) or a FB (perfectly priced). The probabilities I have calculated (which are less science and more art) simply indicate there is a better chance TSLA moves more than the option market reads (but no great conviction at all).

Here is a list of older articles -- just reading the headlines may do the trick (it's like reading the chapter titles to a short story).

6-17-2014: NFLX, TSLA, TWTR - How the Option Market is Totally Wrong;
Proof that Market Volatility Has Lost Its Mind

6-16-2014: TSLA - Stock Rips, Risk Rises; Has the Correlation Trade Broken Down or Is this a One-day Phenomenon?

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.

The two-year stock chart is included below, and it's remarkable.

Provided by Charles Schwab optionsXpress

Several phenomena:

1. The stock is up 729% in two-years.
2. The stock rose 610% in the fourteen-months from 7/30-2012 to 9/30-2013.
3. The stock, dropped ~40% the two-months after that 620% rise (ending ~11-18-2013)
4. The stock rose 110% from that November lows through 3-4-3014.
5. The stock dropped 30% in the next two-months (ending 5-9-2014).
6. The stock is up 25% since then until today.

Excluding that huge 610% rise, here's how the swings look.


So the point is, this stock moves a lot.

Now, 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). In English, the red curve is the risk in future stock price movement.

The blue "E" icons represent earnings dates and I have circled them in yellow. Note how low the current level of risk is for this earnings event relative to the past.  Now, this is not a new phenomenon, we saw it in NFLX, FB, HLF and AMZN.

  1. NFLX didn't move that much (the options were too expensive).
  2. FB moved exactly as much as the option market priced. 
  3. HLF has moved more than the option market priced (today).
  4. AMZN moved huge.
  5. TWTR moved huge.

Finally, the Options Tab for TSLA is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle in the Aug1 weekly options we can see that the option market reflects a price range of [$210, $245].

Using the Aug monthly options we can see that the option market reflects a price range of [$205.50, $249.50].

  • 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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