Wednesday, February 19, 2014

Tesla (TSLA) - Earnings Preview and an Incredible Downside Bet

TSLA is trading $195.00, down 4.3% with IV30™ up 8.1%. The Symbol Summary is included below.

Provided by Livevol

2-19-2014: Post Earnings UPDATE
TSLA beat earnings and had positive guidance moving forward. In after hours trading the stock closed at ~$218 a share, with a high of over $225.

This is an earnings preview note, with the announcement coming today after the market closes (AMC).  This is also a follow up to an article I posted on 2-10-2014 which discussed a marked risk paradigm shift in TSLA.  You can read that prior post by clicking on the title below.

Tesla Motors (TSLA) - Risk Paradigm Shifts Again; Get Ready for Earnings, Risk is On.

While I have written compulsively about TSLA as the stock moved through different risk paradigms, and even signaled rather clearly that the upside move from ~$125 to over $200 was not a bubble, but in fact an event that was priced into the options, the takeaway from the prior post was pretty sobering:

While the option market nailed this one through January 2014, it has now signaled a new risk paradigm.  Namely, two-tailed risk is off (no upside tilt).

That upside tilt to TSLA skew is gone... been gone, since January.  Before I get the analysis into earnings, here's an eye catching headline and story:

Tesla is set to report earnings after the bell on Wednesday, and the pressure is on. Since hitting a low of $116 in late November, the stock (TSLA) has risen to $200. But one major options player is betting that Tesla shares will not only fall back to that level, but plummet all the way to $50 by January

In one of Tuesday's biggest options trades, a firm bought 2000 January 100/50 one-by-two put spreads in Tesla for $3.50 each. Buying a one-by-two put spread is a bearish bet whereby a trader buys one downside put, then sells two lower-strike puts against it to reduce costs. The maximum loss is the money spent on the trade, while the maximum gain is attained if the stock falls to the level of the two puts that were sold.

Source: CNBC via Yahoo! Finance - The giant bet that Tesla will fall 75 percent, written by Alex Rosenberg.

So, one could say that the risk paradigm shift in TSLA away from that upside tilt has been taken a step further by this trader -- namely, that the stock is headed down.

Let's turn to 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

As of right now, there is no "down" in the story -- TSLA has been ripping, has eclipsed all-time highs in several sessions, and other than the down day right now ahead of earnings, has been a booming performer.

Let's examine the volatility going into earnings and turn to the IV30™ chart in isolation, below.

Provided by Livevol

I've circled the implied volatility going into the last eight earnings cycles, and we can see that the level today is both below the prior three events, but above three of the four before that.  So what?... basically the option market in terms of overall volatility is pricing TSLA earnings on par with the past.

But this isn't about overall volatility.  This is about a skew shift. The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

What we see here is in fact "normal" skew, with the out-of-the-money (OTM) puts priced to higher volatility than the at-the-money (ATM) options.  So, it's normal, why do I bring it up?...

Because it wasn't normal for TSLA during the massive bull run.  Checkout the Skew Tab from November of last year, below:

Provided by Livevol

Note how the skew shape is parabolic -- which reflects both upside and downside tail risk.  In fact, even in December of last year, the skew still looked parabolic (see prior post).

That two-sided skew meant that while TSLA was going down, the option market still reflected upside potential.  That potential was realized as the stock rose from under $124 to over $200.

But we don't have that anymore... The skew is back to showing just one-sided tail risk... And this is the risk paradigm shift...

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

As of this writing the option market is pricing a range of ~ [$172, $218] based on the $195 strike (ATM) straddle values.  We'll see.

My sense is there is two tailed risk, but if bad news comes out, that reaction could be violent and abrupt.  The option market doesn't reflect the same likelihood of an upside event.

I'm agnostic... for now...

This is trade analysis, not a recommendation.

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1 comment:

  1. Very interesting. Curious as to why you are showing November 18th skew? TSLA reported early-November. Would skew ahead of that report make more sense?