Monday, November 18, 2013

Tesla Motors (TSLA) - Stock Collapsing, Volatility Rising, but the Paradigm Has Not Shifted... Yet

TSLA is trading $124.76, down 7.9% with IV30™ up 15.7%. The Symbol Summary is included below.

Provided by Livevol

Tesla Motors, Inc. (Tesla) designs, develops, manufactures and sells electric vehicles and advanced electric vehicle powertrain components.

I have written about TSLA extensively, and have included the articles, below.  You can click on a title to read the posts.  I do note that walking into a TSLA dealership and speaking with a salesman (they are shareholders) has been a perfect indicator of earnings well ahead of anything Wall St. has projected.  Read the post from 8-8-2013) below for an actual real-time example.

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

Provided by Livevol

8-8-2013: Tesla (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: Tesla (TSLA) - Earnings Explosion Spectacle Hides Vol Shift -- This is a New Company -- A Paradigm Shift is Complete

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

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

So we have seen a paradigm shift, a stock exploding and now imploding (sort of).  Let's take inventory of where we are right now.

Let's start with the Charts Tab (two-years) below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we see price moving from ~$25 to $194.50 and now back down to $128. The stock has dropped nearly $70 since its intra-day high on 9-30-2013.  That's an abrupt move in about six weeks.  The downward momentum is evident today along with a volatility spike reflecting greater risk in the share price in the next 30-days.

What's the news today? Well, it's sort of a summary of what the issue has been since 9-30-2013:

Shares slumped Monday and showed little sign of stemming the downside momentum that has picked up steam over the past six weeks.

From car fires to a sour outlook to valuation concerns, the stock has lost more than 35% of its value since hitting a record high of $194.50 on Sept. 30.

Tesla shares on Monday fell more than 9% to $123.11, a four-month low. The stock is still up 265% this year despite the recent drop, although it had risen as much as 478%.

Last week at the DealBook conference, CEO Elon Musk tried to give assurances that there was no reason to recall the Model S despite three car fires that have prompted questions about the car’s safety.

He also addressed the company’s valuation, saying the high stock price has been a distraction and that the recent decline made the value a better deal for potential investors. His comments came after he said in October that the stock had “quite a high valuation, a higher valuation than we have any right to deserve.”

Source: The Wall St. Journal via Yahoo! Finance; Tesla Troubles Mount: Shares Tumble to Four-Month Low, written by Steven Russolillo.

There you have it. I wrote earlier this month:

TSLA shares are down b/c while the demand for their product is high, they can't keep up with production.

That's it... They didn't hit some weird rumor numbers that were floating around the internet, but that's just... well, rumors and speculation. Now the stock did benefit from those rumors (maybe), and thus the stock drop could make sense. But let's not lose sight of the bigger picture:

This is a firm with demand outpacing production for a $70,000 - $100,000 per unit product.

But I'm off that story and on to a volatility story. Let's look at the two year IV30™ chart in isolation, below.

Provided by Livevol

Note that during this stock drop the implied volatility has actually been falling.  That's very unusual and could be seen by some (like me) that the firm is in fact closer to "proper" valuation now than it was pre-stock collapse.

Here's the thing though, there is something in the Skew that changed a while ago and has NOT changed recently in TSLA and this is quite interesting.

First, let's turn to the Skew Tab for TSLA in August of this year (2013).

Provided by Livevol

Note the skew shape across the front three months; it's "normal"  The Out-of-the-money (OTM) puts are priced to higher volatility than the at-the-money (ATM) option and the OTM calls.  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.

While TSLA had normal skew back then (with the stock price at $135), the skew shape shifted dramatically as the long interest grew.  Let's turn to the Skew Tab as of today, below.

Provided by Livevol

Now we can see a parabolic skew shape, which means that the option market reflects equally elevated risk to the upside and the downside.  So, while the stock has been collapsing, the option market still reads "upside has potential."  Watch this skew shape, if it turns back to the "old shape" (which is really a normal shape), then that would mean the option market no longer reflects that upside potential and that would in fact be a paradigm shift (again) for TSLA.

This is trade analysis, not a recommendation.

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