(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)
Tesla Inc.'s (TSLA) stock has already been on a rollercoaster ride over the past year. Investors better keep those seatbelts fastened and get ready for even more gut-wrenching volatility. The options market is suggesting Tesla may rise or fall by as much as 17% over the next two months while placing the stock in a massive trading range. (For more, see also: Tesla Stock Begins 2018 in Bear Market Territory.)
The electric automaker's stock has already traded in a broad range in 2018 between $252 to $370 from April through June. The volatility stems from a slew of concerns, starting with the production of its newest car—the 4-door sedan Model 3. Investors have focused on the company's ability to reach mass production levels of the vehicle. Additionally, concerns about the company's massive cash burn and its need to raise more capital for the funding of future operations are also an issue. All these concerns have weighed heavily on the stock.
The long straddle options strategy for expiration on September 18 suggest that the stock may rise or fall by roughly 17% from the $320 strike price. It places Tesla's stock in a massive trading range over the next 65 days between $265 to $375, $110 apart. The cost of buying one call and one put is approximately $55, and a buyer of the straddle would need the stock to rise or fall by $55 for the strategy to be profitable.
Implied volatility is also extremely high for Tesla's September options, at roughly 50 percent. That is almost five times greater than the S&P 500 implied volatility of only 10%. Another stock with big price swings at times is Amazon.com, and its implied volatility is nearly half that of Tesla, at just 27%, also for expiration in September.
Much of the uncertainty reflects in analysts’ estimates. Analysts have reduced revenue estimates for the second quarter by about 2%. But, at the same time, analysts have upped their revenue outlook for 2019 by nearly 2%.
The same can be said of earnings, with analysts leaving the current quarter's earnings estimates unchanged, while seeing losses widen for the full year by 2%. (For more, see also: Is Elon Musk Making Things Worse for Tesla?)
It seems apparent there are still plenty of questions surrounding Tesla and its stock in the future. The earnings results that come in a few weeks’ time will likely be vital in determining if the stock rises or falls and if the big price swings are likely to continue or not.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.