Thursday, March 27, 2014

Tesla Motors (TSLA) - Risk Profile Changes; Momentum Stocks are Deflating... Right Now.

TSLA is trading $207.34, down 2.6% with IV30™ up 6.0%. The Symbol Summary is included below.

Provided by Livevol

I have written extensively about TSLA, one of my favorites is included below:
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...

But the most relevant article to this current post, which surrounds the momentum bubble deflation, was written last week. You can read that post, here:
Netflix (NFLX) - How the Option Market Totally Blew It... And We Knew it a Month Ago. Momentum Stocks are Deflating... Right Now.

The takeaway from that article, other than the remarkable mis-pricing of risk by the option market is included below. In the words of Austin Powers, "Allow myself to introduce... myself."

In my opinion, on March 11 2014, the momentum (or 'MOMO') stock bubble began to deflate and it will continue to deflate a rather large amount in the next six months.

On 3-11-2014, I tweeted:
I wrote a note on the US Bubble (if there is one or not).  You can read that note here:

Is the US in a Bubble? Absolutely Definitive Charts That Will Tell You... Whatever You Want to Believe

OK, TSLA time. 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

Overall, the return from TSLA stock has been astounding.  This was a stock trading in the high $20's less than two-years ago and is ~ 9-fold that price now.

But, the issue is the implication of that rapid stock price appreciation; namely too much too fast means correction.  The stock has dropped from $265 down ~22% in about a month.  In that time, SPX is unchanged.

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

Provided by Livevol

What's absolutely fascinating to me is that the implied volatility is very much "middle of the road" relative to the last two-years.  In English, the option market reads, "risk is middle of the road."  I just don't agree.  I didn't agree with the vol in NFLX, I didn't agree with the vol in TWTR and I don't agree with the vol in TSLA. It's just an opinion.

But there's more going on in the volatility when we look to the skew.

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

As of today, the skew shape is decidedly parabolic.  The option market reflects equally high two-tailed risk (up and down).  That is an unusual or "abnormal" skew shape.

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.

If we look back to TSLA six months ago, we can see a totally different skew shape.

Provided by Livevol

That shape is in fact "normal."  What's interesting is that back then, I wrote that the skew should have been parabolic.  I actually agree with the skew shape today and believe that it is a better reflection of the risk in TSLA shares than we saw six-months ago.  I also believe, however, that the overall level of the volatility is to low.

Finally, the Options Tab is included below.

Provided by Livevol

So here's an easy one for us.  With TSLA trading at ~ $207, the Apr 205/210 strangle is priced at ~$20.  That means the option market reflects a price range for TSLA of [$185, $230] at Apr monthly expiration (Apr 18th).  If at anytime before then the stock moves outside of that range, then the risk (volatility) was under-priced.  If not, it was priced well (or too high).

This is trade analysis, not a recommendation.

Legal Stuff:
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