Tuesday, February 25, 2014

Tesla (TSLA) - How We Already Knew The Stock Could Explode Today. A Full History of Skew in a Remarkable Company.

TSLA is trading $254.12, up 16.8% with IV30™ up 10.2%. The Symbol Summary is included below.

Provided by Livevol

I have written extensively about TSLA and watched as the option market priced in the risk of a stock rise when the general temperature was the opposite. But today, I'm going to discuss how the option market totally blew it on earnings and the huge move today... It's all in the skew...

First, the most recent posts on TSLA are included below:

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

Tesla Motors (TSLA) - Not a Bubble, But Stability. How TSLA popped Today, But We Already Knew That in November.

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

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

The symbol summary from the day before earnings (i.e. 2-19-204) is include below.

Provided by Livevol

As we can see, in the last 6 calendar days, the stock has risen $60 or 30%+.

Let's start with some snapshots of the skew chart from the past: August 2013

Provided by Livevol

Stock Price: $156.83

Note that the skew shape across the front three months; it was "normal"; the Out-of-the-money (OTM) puts were 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 11-18-2013, below.

Provided by Livevol

Stock Price: $124.76

So the stock was $30 lower, but...

Note how we saw a change:

A parabolic skew shape in November formed, which meant that the option market reflected equally elevated risk to the upside and the downside. So, while the stock had been collapsing, the option market still read "upside has potential."

December 2013:

Provided by Livevol

Stock Price: $151.41

The stock popped back up ~$25, realizing the upside risk that was reflected in the option market. Although it's all just probabilities, we can loosely (very loosely) say that the skew shape change reflected in November was in fact correct.  While the stock was dropping, upside potential was indicated and realized.

Now, let's turn to the skew on 2-10-2014:

Provided by Livevol

 Stock Price: $196.56

The option market was "right" again.  That January upside tilt (parabolic skew) was realized again.  The stock rose another $40 in a month (ish).

In fact, the title of that blog read: Not a Bubble, But Stability. How TSLA popped Today, But We Already Knew That in November.

We "knew it" b/c of the upside skew in Nov.

But... Compare the skew above in February to the skew from August 2013 -- they look nearly identical. That upside tilt had gone away. TSLA had earnings on 2-19-2014 and the skew looked the same -- non parabolic.

And what happened?... TSLA crushed earnings and popped.  The option market was "wrong." But...

Post earnings, the skew looked like this:

Provided by Livevol

Stock Price: $209.97

Even though the stock realized a stock rise off of earnings, the skew changed from flat, back to one that reflected upside potential.

And what do you know...; Today happened...

The stock $45 from just six days ago...And here's the scary part...

The Skew as of today...

Provided by Livevol

Stock Price: $254.12

Uh oh... There it is again... An upside skew tilt.  While it may have been hard to follow all of the changes, one thing was consistent (so far)... When TSLA skew shifts up (or parabolic), the stock tends to rise in the short to intermediate term.

Now that's a hard one to swallow given that the stock is now trading at a market cap of $32 billion, is up 700% in two-years and is trading at a multiple to book of 40:1... But that doesn't mean it isn't true.

But it's just the option skew... just a reflection of the risk by the option market. It was dead wrong into earnings.  Now...

What happens next?

This is trade analysis, not a recommendation.

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