Monday, May 5, 2014

Tesla Motors (TSLA) - Earnings Preview: Is the Downside Risk Priced too High, or Can TSLA Implode?

TSLA is trading $215.68, up 2.3% with IV30™ up 0.7%. The Symbol Summary is included below.

Provided by Livevol

This is a pre-earnings note and a follow up to a note I posted on 4-30-2014.

4-30-2014: TSLA - Earnings Preview; How The Last Two Abrupt Earnings Moves Look to Today's Risk

My prior posts on TSLA (and there a lot of them) are included below as well for reference.

4-1-2014: NFLX, TSLA - Correlation of MOMO's May Point to Bubble Pop; 3 Things We Should Know

3-27-2014: TSLA - Risk Profile Changes; Momentum Stocks are Deflating... Right Now.

2-25-2014: TSLA - How We Already Knew The Stock Could Explode Today. A Full History of Skew in a Remarkable Company.

2-19-2014: TSLA - Earnings Preview and an Incredible Downside Bet

2-10-2014: TSLA - Risk Paradigm Shifts Again; Get Ready for Earnings, Risk is On.

1-14-2014: TSLA - Not a Bubble, But Stability. How TSLA popped Today, But We Already Knew That in November.

12-25-2013:TSLA - The Option Market: "This Isn't a Bubble, It's Equilibrium With Upside"

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

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

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

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

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

Let's turn to to day, or more apropos, earnings coming out in two days from now. 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

The TSLA stock story has been told and re-told, and that chart above does it again.  An explosion in company value, then an abrupt correction / deflation that had a high correlation to other growth tech stocks, and now a sort of quiet period, soft recovery.

The other tech stocks that faced this wave of deflation include NFLX, AMZN, YELP and LNKD to name just a few.  LNKD, YELP and NFLX didn't move a huge amount on earnings.  AMZN certainly did (as did AAPL, although AAPL is not a momentum technology stock).

The question of course is simply, will TSLA move a lot on this earnings release?  Risk in the option market is called implied volatility, so let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

As of right now, TSLA implied volatility is in the 50th percentile on an annual basis, so right in the middle.  That measure is a little skewed b/c of the the huge volatility it showed going into earnings last summer.

Let's look at just the last seven earnings cycles and the vol today, below.

Provided by Livevol

I note two phenomena:

1. The volatility into earnings has been going down for each of the last four cycles (including this one).
2. The volatility going into this earnings cycle is right about the level of the prior two.

So , as I said prior, the risk into this earnings as reflected by the option market is, "so-so".

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

Provided by Livevol

Although that skew shape looks parabolic, it's really not... We have to go all the way out to the $290 strike calls to see a rise in volatility, and those are $0.10 options.  The skew is in fact "normal," which, as I have said several times before, seems abnormal going into earnings.

The option market does not reflect two-tail risk in TSLA, rather it reflects greater downside stock move probability than upside.  So far that skew shape has proven correct for the MOMOs.   That doesn't mean it's correct for TSLA, but ya know, all we got is the past.

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

So, here we go.  The option market prices a range of [$192.50,$237.50] for TSLA stock by the end of trading on May 9th.
  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.
What do I think?

I don't believe I will trade this one, but IMHO the downside risk feels a bit elevated... for example the $170 strike puts are priced at ~$0.40.

Can TSLA go down $45 from here?  Yeah, definitely... it can go down much more than that.

Do I think it will go down that much?  Not really...

Am I betting (trading) on it?  Probably not.  I'll update if I do.

If I do bet on it, will I sell naked options?  No. I will spread.

This is trade analysis, not a recommendation.

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