Wednesday, December 25, 2013

Tesla (TSLA) - The Option Market: "This Isn't a Bubble, It's Equilibrium With Upside"

TSLA closed Tuesday trading at $151.41, up 5.5% with IV30™ down another 1.0%. 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 (compulsively?), and have included the articles, below.  You can click on a title to read the posts.

Before getting into the details I do make one quick note.  In the post on 11-18-2013 I wrote that the skew in TSLA still showed a likelihood of an upside move (parabolic skew -- details below in the article).  In the last month the stock went from $124.76 (see symbol summary below) to now $151.41 with volatility dropping.

The option market totally blew it with TWTR (you can read that post by clicking the title here: Twitter (TWTR) - How the Option Market Totally Blew It, And We Knew it Two-Weeks Ago. ), but it was spot on with TSLA.

Further, 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: 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...) below for an actual real-time example.

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

Provided by Livevol

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.

Time Machine: Back to 11-18-1013
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.

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.

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:

Time Machine: Back to 11-6-1013
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

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 11-18-2013, 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.

Back to real-time

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

Provided by Livevol

We can see how the stock his risen rather abruptly from that dip off of highs.  But, there's information in the volatility as well.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

This is pretty awesome -- we can see that both as the stock has been rising recently, and even as the stock was dropping prior (see the blue "E' icon that represents an earnings date), the volatility has been dipping.  The option market reads that TSLA is falling quite comfortably into this valuation.  Note that, as we see with other stocks quite the opposite (like TWTR).

And what what about that skew?... Check out the Skew Tab below.

Provided by Livevol

Hey, there it is again... A parabolic skew that reflects both upside and downside risk for the Jan'14 options (it shows a similar shape for Feb'14).

So what?  The option market does not read that TSLA is a bubble, it reads that it is actually quite stable and that there is still "abnormal" skew reflecting two-sided risk.

Finally, the Options Tab is included below.

Provided by Livevol

Across the top we can see the monthly vols.  Note how depressed Jan'14 is.  That elevation to Feb'14 reflects an earnings release.  The implied should breach 60% and may rise above 80% as earnings get closer.

This is trade analysis, not a recommendation.

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