(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)
The drama of another Tesla Inc. (TSLA) earnings release will occur on February 7 after the close of trading. And with the volatility in the equity market, Tesla's fourth-quarter earnings could have an exaggerated impact on the stock.
Options traders appear poised for a period of instability after Tesla reports its 4Q results, and seem placed for a decline in the shares, perhaps as much as 8 percent, followed by a rebound in the weeks that follow.
Despite the recent volatility in the broader stock market which has seen the S&P 500 fall by nearly 8 percent since January 26, Tesla shares have only declined by roughly 3.5 percent over the same time.
This comes as a surprise, given the volatility the stock has seen since mid-September, when it peaked at roughly $380 before falling 21 percent to around $300 by the beginning of November. The steep decline was driven by production delays of the Model 3 electric sedan and concerns over the company's cash burn rate.
First A Decline...
Options traders are betting that volatility previously seen in TSLA stock remains after the company reports its 4Q results, with the options set to expire on February 16 indicating the stock could rise or fall by about 8 percent using the $330 long straddle options strategy. The cost to buy one put and call is roughly $26.70, and would imply a trading range for the stock of $300 to $360.
The number of puts outweighs the number of calls by a 3-to-1 ratio, with approximately 2,300 puts with an open interest, to only 800 call contracts. This equates to a notional value of about $3 million, which is a relatively small wager.
...Then The Rebound
Interestingly, the $330 strike price for expiration on March 16 is the opposite, with nearly 2,900 call contracts of open interest to only 1,300 put contracts. Based on the number of calls at that level, and the price of roughly $20 per contract, Tesla's stock price would need to rise by nearly 6 percent to $350 just for them to break even, while the notional value is nearly double, at $5.7 million.
Big Price Swings
This suggests traders are betting Tesla stock will experience a decline in the days immediately following its fourth-quarter financial results, with the stock rising in the weeks that follow. (See also: Tesla Raises $546M in First Asset-Backed Deal.)
The outcome of the results will rely on a positive or negative update on the Model 3 production ramp-up, Tesla's capital expenditures, and cash burn. What the company says regarding those three variables will likely determine which way the stock goes in the days and weeks ahead.
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.