Investors have recently bid up the share prices of Tesla, Inc. (TSLA) to an above average range. The stock has gained 2% in the past week and nearly 7% in the past month. This is no small feat for a company with a market cap over $727 billion. As the stock has moved higher, option activity has elevated. At first glance, it appears that option traders are positioned for the share price to move lower in the future.

Traders and investors have bid up the share price of Tesla recently; however, option trading activity indicates that investor confidence in Tesla's share price going forward is waning. That's because while the share price has risen to a nearly extreme range, option activity and the open interest implies that traders are selling call options and buying puts.

Key Takeaways

  • Traders and investors have bid up the share price of Tesla recently as the stock has gained nearly 7% in the last month.
  • The share price of Tesla has recently been closing well above its 20-day moving average.
  • Put and call option activity appears to be positioned for the share price to decline in the future.
  • The volatility-based support and resistance levels allow for a stronger move to the downside. 
  • This setup creates an opportunity for traders to profit from a reversal in the recent share price increase.

Option trading is a literal bet on the probabilities of the market—a bet made by traders that are, on average, better informed than most investors. The key to maximizing insight into option trading is to understand the context in which the price movement took place. The chart below illustrates the price action for Tesla as of Sept. 10, illustrating the unusual option activity setup.

Earnings pricing for Tesla (TSLA)

Current Trends

The one-month trend of Tesla saw the share price falling below the 20-day moving average in mid-August before rising to the top third of the volatility range depicted by the technical studies on this chart.

These studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has risen to the top third of the volatility range. This price move from Tesla shares implies that investors are gaining confidence in the share price of Tesla going forward.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

Chart watchers can recognize that traders were expressing optimism recently, based on the price trend for Tesla closing above the 20-day moving average. Chart watchers can also form an opinion of investor expectations by paying attention to option trading details. Recently, option traders have favored puts over calls.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

The recent activity of option traders implies that they consider Tesla shares overvalued and have been buying puts and selling calls. Over the past five trading days, put option open interest has increased 5.9%, while call option open interest has risen 0.3% in the same span. It is important to note that open interest on Friday featured over 3 million put options compared to 2.6 million calls, demonstrating the bias that option traders have.

Friday's option volumes also featured over 766,000 puts compared to 677,000 calls. While there are still a large number of call options in the open interest, the implied volatility for these options has been falling, indicating that these options are being sold more than they are being purchased. This reflects a bearish sentiment toward the Tesla share price.

Tesla (TSLA) Open Interest Rank

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These gauges represent the relative level of open interest over the past 52 weeks. The higher these gauges read, the more expensive options on Tesla are currently priced compared to the past year. The gauge reading currently shows that Tesla options are relatively inexpensive, suggesting that put buyers can make this trade with a comparatively lower risk amount.

The purple lines on the chart are generated by a 10-day Keltner Channel study set at 4 times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such disparity with plenty of space to run downwards. This suggests that option buyers have a stronger conviction of the price moving lower in the weeks ahead.

Volatility pattern for Tesla (TSLA)

These support and resistance levels show a large range of support and resistance for prices. As a result of this, it is possible that there can be a large move in either direction in the near future. With lots of room in the volatility range, share prices could rise or fall more than expected in the near term. However, there is more room in the volatility range to support a move to the upside.

Wrapping Up

While investors have recently bid up the share prices of Tesla to an above average range, option traders appear to be positioned for the price to move lower in the future. The share price has recently been closing above the 20-day moving average. Option traders seem to be selling calls and buying puts, which translates into a bearish outlook. This activity, however, does provide more room in the volatility range for a downward move in the share price in the future.