(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA)
After plunging by over 30% from their peak in September of 2017, shares of Tesla Inc. (TSLA) have come roaring back. Shares of the electric-automaker have surged by nearly 40% since the beginning of April, bringing the stock to within 11% of its all-time closing high of $385 on September 18, 2017. Now options traders are betting shares of the stock continue to rise with shares reaching about $395, a climb of about 15% from its price of roughly $343. (For more, see also: Tesla Stock Begins 2018 in Bear Market Territory.)
Short-sellers have been piling into the stock betting shares would fall, as the company battles production problems for the launch of its new Model 3 four-door electric sedan. But that short thesis has been melting away, and now signs are pointing to the pace of the production getting faster. Additionally, the company also noted it would be cutting its workforce by 9% in a push to become more profitable.
A 15% Gain
Options traders are betting shares of Tesla rise about 15% by expiration on January 18, 2019, using the $350 strike call options. The number of call contracts outweighs the number of put contracts by about 1.5 to 1. There are currently 12,700 open call contracts to roughly 8,200 open puts. Those call options have seen increasing levels of activity over the past several days.
The long straddle options strategy is pricing in a massive amount of volatility for the stock over the next several months. It would suggest a rise or fall in the shares of nearly 28%, placing the stock in a trading range of approximately $252 to $447, a roughly $200 trading range. That is because the cost to buy one put and one call at that strike is about $97. Not only that but the level of implied volatility is exceptionally high at 45%, almost five times greater than the S&P 500 implied volatility of only 13%.
Analysts have been slowly upping their revenue, and earnings outlook for the company since the middle of May in yet another bullish indication. Additionally, if production of the Model 3 is increasing, it is likely to only push those estimates even higher over time, while potentially eliminating the company's need for an equity raise due to high levels of cash burn, further deflating the bear case.
Optimism Never Fades
In a sign of just how optimistic Tesla investors and traders can get, some traders are betting that shares of the stock will rise to over $600 by January expiration, with nearly 16,500 open call contracts at the $600 strike price—what seems like an outlandish bet. (For more, see also: Is Elon Musk Making Things Worse for Tesla?)
Whatever the case may be, nobody can deny that the bull/bear story continues to be one of the most talked about topics in the stock market.
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.