Wednesday, August 6, 2014

* Tesla Motors (TSLA) - Risk Mis-priced Again; Stock Booms on New Model. And Now, What?

Share on StockTwits

TSLA is trading $251.24, up 5.4% IV30™ up 2.6%. The Symbol Summary is included below.

Provided by Livevol

Update 8-11-2014

Provided by Livevol

TSLA stock continues to rip, this time on news:
Tesla Motors Inc. (TSLA) rose to the highest in more than five months after a Deutsche Bank AG analyst raised his target price for the company’s shares, citing his expectation for faster growth from the electric-car maker.

Source: Bloomberg via Yahoo! Finance Tesla Reaches 5-Month High as Deutsche Raises Forecast

This is a stock and volatility note as well as an earnings recap note.  Lots to cover, let's get into it.

With the gap up today (news below) TSLA stock has moved more than the option market reflected before earnings in Aug expiry.  The volatility priced into that earnings release was actually the lowest it had ever been (ahead of earnings). So much so, that I had to put it in red font!  Now that's exciting.  The stock price range priced by the options was [$205.50, $249.50].

The option pricing in TSLA continues to confound, and  be totally wrong.

TSLA - Earnings Preview: TSLA Shows Less Risk than Ever Before into Earnings

Now the company finds itself with relatively low volatility to its history, not just for earnings, but overall, and so we must again ask if the risk in TSLA reflected by the option market is too low.

There's also this post

6-17-2014: NFLX, TSLA, TWTR - How the Option Market is Totally Wrong;
Proof that Market Volatility Has Lost Its Mind

The two-year stock chart is included below, and it's wonderfully active.

Provided by Charles Schwab optionsXpress

1. The stock is up 781% in two-years.
Since then:
2. The stock rose 610% in the fourteen-months from 7/30-2012 to 9/30-2013.
3. The stock, dropped ~40% the two-months after that 620% rise (ending ~11-18-2013)
4. The stock rose 110% from that November lows through 3-4-3014.
5. The stock dropped 30% in the next two-months (ending 5-9-2014).
6. The stock is up 39% since then until today.

Here's a bar chart of those swings we see in the line chart above.

Provided by Charles Schwab optionsXpress

I mean, at some point, we must stand up and say, "hey, this stock moves like crazy, the risk in the option market should reflect that."

But... it doesn't...

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

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement. I have circled the current level of the risk in yellow and drawn a line back to give us some relative view of how this compares to the past.  The conclusion is: "low."

Here's what's moving the stock today:
Tesla is experiencing a mid-week jolt thanks in part to Morgan Stanley analyst Adam Jonas, who said in a Wednesday note that the cool factor of company’s still-in-development Model X  SUV gives it the potential to exceed the Model S in value and success.


Though the Model X isn’t scheduled to go into production until 2015, the company said it expects to have operational Alpha prototypes ready this week and Beta prototypes later in the year.

Source: StockTwits via Yahoo! Finance - Tesla Traders Buy on Model X Hype, written by Jennifer Van Grove

So, what now?... I dunno, but the option market has a clear reflection of risk (it always does). The Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$237, $263] by the end of August monthly expiration (Aug15th).

We can also see a price range of [$222.50, 277.50] by Sep monthly expiration (Sep 19th).

  • 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.

This is trade analysis, not a recommendation.

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