Big Printin’ – Tesla (TSLA)

by Dan August 31, 2016 3:54 pm • Big Printin'

Shortly after the open today there was a good size roll down in Tesla (TSLA) calls. When the stock was $210.20, a trader sold to close 10,000 of the October 255 calls at 52 cents and bought to open 10,000 of the October 235 calls for $1.97.  The roll resulted in a net debit of $1.45, or $1.45 million in premium. The new position breaks-even on the upside at $236.97 on Oct expiration, up nearly 13% from current levels.

The logical conclusion is that this is a bullish roll, meaning the trader is rolling down strikes so that they may have a higher probability of success, but it’s important to consider that the new position only has about 16 deltas, in other words the options market is only placing a 16% chance that these calls will be in the money on Oct expiration.

Which mean that if this was merely an outright bullish bet, mathematically it is not a good one.  I bring this up because often times when the financial press or pundits highlight this sort of activity they presume bullish. In this case I would presume that it is either a long holder leveraging up their existing position or maybe it is a buy stop for a trader who is short 1 million shares.

Food for thought.

The stock has declined about 11% since the start of August when the company announced they were officially buying SolarCity for $2.4 billion.   And this week’s weakness is likely associated with the market’s worries about further capital raises, following the $400 million pull from Model 3 deposits in April and the massive secondary share sale in May.

From purely an implied volatility standpoint, options prices have never been cheaper. Especially considering this is the same year that TSLA options saw their highest ever implied volatility print.

TSLA 30 day at the money implied volatility since 2010 ipo from Bloomberg
TSLA 30 day at the money implied volatility since 2010 ipo from Bloomberg

The low implied volatility that we see currently allowed this trader to roll down a strike by $20 favorably. But the new strike is still considerably out of the money. The fact that it remains out of the money and that it isn’t spread in any way (for instance, verticals make more sense as leverage or a bullish play than an outright call purchase) which gives credence to the idea this could be a hedge against a short in the stock.