{"id":63608,"date":"2020-10-22T12:29:13","date_gmt":"2020-10-22T16:29:13","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=63608"},"modified":"2023-02-10T13:33:36","modified_gmt":"2023-02-10T18:33:36","slug":"tesla-options-bulls-were-right-and-very-wrong","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/options\/tesla-options-bulls-were-right-and-very-wrong\/","title":{"rendered":"Tesla Options Bulls Were Right \u2013 And Very Wrong"},"content":{"rendered":"\n<p>Options traders were quite bullish about Tesla (TSLA) heading into last night\u2019s earnings.&nbsp; I noted <a href=\"\/campus\/traders-insight\/securities\/stocks\/earnings-euphoria-expected-in-netflix-and-tesla\/\"><strong>here<\/strong><\/a> on Monday and <a href=\"\/campus\/traders-insight\/securities\/options\/tesla-options-traders-still-showing-faith\/\"><strong>here<\/strong><\/a> last Thursday that implied volatilities for above-market options were higher than those for their below-market counterparts.&nbsp; That meant that traders were expressing optimism about a rally after a well-received earnings report.&nbsp; Their enthusiasm was well placed, with TSLA opening about 3% higher after some stronger gains in the post- and pre-market.<\/p>\n\n\n\n<p>But options math is inescapable.&nbsp; Those bullish call buyers found themselves with substantial losses despite the stock\u2019s rise.&nbsp; They got it right, but ended up wrong.<\/p>\n\n\n\n<p>Consider the following graph.&nbsp; It shows the skews for TSLA options expiring this Friday at different times.&nbsp; I created the graph using the \u201cTime Lapse Skew\u201d function on my TWS.&nbsp; The top line is from yesterday\u2019s close, the middle is from a week ago, and the bottom line is from this morning.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"624\" height=\"390\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/10\/image-60.png\" alt=\"TSLA\" class=\"wp-image-63787 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/10\/image-60.png 624w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/10\/image-60-300x188.png 300w\" data-sizes=\"(max-width: 624px) 100vw, 624px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 624px; aspect-ratio: 624\/390;\" \/><\/figure>\n\n\n\n<p>Source: Trader Workstation<\/p>\n\n\n\n<p>We can see that a week ago, when I wrote <a href=\"\/campus\/traders-insight\/securities\/options\/tesla-options-traders-still-showing-faith\/\"><strong>this<\/strong><\/a>, the skew curve was essentially an upward sloping line.&nbsp; Traders were willing to pay higher prices (in volatility terms) to speculate on a bounce than they were to hedge against a loss.&nbsp; That is highly unusual, which is why I brought it to readers\u2019 attention.&nbsp; Ahead of earnings, most stocks have skew curves that look similar to the bottom.&nbsp; That bottom displays a mix of risk aversion along with some speculation.&nbsp;&nbsp; By yesterday the level of overall volatility had increased, and the slope of the skew had inverted.&nbsp; That meant that some risk aversion had belatedly crept into the skew on a relative basis, but the implied volatility for all options had increased markedly.&nbsp; It is not unusual to see implied volatilities peak immediately before an earnings release.&nbsp; The market punishes latecomers, so those who demand protection or want to speculate at the last minute often need to pay up to do that. <\/p>\n\n\n\n<p>Bear in mind the space between the top and bottom lines in the graph above when you look at the table below.&nbsp; That displays the TWS Options Trader page for the 20 strikes closest to the money with the nearest expiration for TSLA.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"624\" height=\"390\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/10\/image-61.png\" alt=\"the TWS Options Trader page for the 20 strikes closest to the money with the nearest expiration for TSLA.\" class=\"wp-image-63788 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/10\/image-61.png 624w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/10\/image-61-300x188.png 300w\" data-sizes=\"(max-width: 624px) 100vw, 624px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 624px; aspect-ratio: 624\/390;\" \/><\/figure>\n\n\n\n<p>Source: Trader Workstation<\/p>\n\n\n\n<p>Note the bright red CHNG and CHG % columns.&nbsp; The losses for both puts and calls are substantial.&nbsp; The substantial change in volatility (Vega) combined with the high level of decay (Theta) that we see for short-term, high-price options account for the bulk of the declines.&nbsp; To be fair, this is much more about the relative lack of movement in TSLA shares than it is about the directional nature of the trading.&nbsp; Yet that is another important facet about understanding options pricing ahead of earnings.<\/p>\n\n\n\n<p>We see from the top graph that the implied volatility for TSLA at-money options was about 127% yesterday.&nbsp; Using the <strong><a href=\"\/campus\/traders-insight\/securities\/options\/understand-the-rule-of-16\/\">rule of 16<\/a>,<\/strong> we realize that converts to about an 8% daily volatility.&nbsp; According to Bloomberg data, the average post-earnings price change for TSLA was about 9%.&nbsp; Based upon that history, the pricing was not particularly unreasonable.&nbsp; Yes, it was slightly below the historical average, but not appreciably so.&nbsp; &nbsp;But if the market is pricing in an 8% move and the stock moves 1-2%, long holders of both puts and calls will likely find themselves underwater.<\/p>\n\n\n\n<p>Experienced options understand that profitable trading around earnings is often less about getting direction right than it is about pricing in the proper overall move.&nbsp; I don\u2019t want to oversimplify, but it is reasonable to expect that professionals were more likely to be selling risky options ahead of earnings than buying them.&nbsp; Those who routinely sell options understand that there is often more to be consistently gained by selling high priced options as long as they are strict about managing risk exposures.&nbsp;<\/p>\n\n\n\n<p>Putting it back in to Greek letter terms, speculators tend to focus on delta: the change in an options price for a given change in the price of the underlaying.&nbsp; That is particularly true for inexperienced traders.&nbsp; Speculators learned an important lesson today \u2013 that the other Greeks like Vega and Theta, can influence prices just as much, if not more.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Options traders were quite bullish about Tesla (TSLA) heading into last night\u2019s earnings.  As I have noted in other posts, implied volatilities for above-market options were higher than those for their below-market counterparts.<\/p>\n","protected":false},"author":4,"featured_media":47192,"comment_status":"closed","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[14700,6,19,8,9,26,3],"tags":[645,161],"contributors-categories":[13576],"class_list":{"0":"post-63608","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-ibkr-market-insights","8":"category-north-america","9":"category-options","10":"category-region","11":"category-securities","12":"category-text-articles","13":"category-traders-insight","14":"tag-bullish","15":"tag-tesla","16":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.3) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Tesla Options Bulls Were Right \u2013 And Very Wrong<\/title>\n<meta name=\"description\" content=\"Options traders were quite bullish about Tesla (TSLA) heading into last night\u2019s earnings. 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As I have noted in other posts, implied volatilities for above-market options were higher than those for their below-market counterparts.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/tesla-options-bulls-were-right-and-very-wrong\/\" \/>\n<meta property=\"og:site_name\" content=\"IBKR Campus US\" \/>\n<meta property=\"article:published_time\" content=\"2020-10-22T16:29:13+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-02-10T18:33:36+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/06\/bull-bear-market.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"900\" \/>\n\t<meta property=\"og:image:height\" content=\"540\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Steve Sosnick\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Steve Sosnick\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"4 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\n\t    \"@context\": \"https:\\\/\\\/schema.org\",\n\t    \"@graph\": [\n\t        {\n\t            \"@type\": \"NewsArticle\",\n\t            \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/traders-insight\\\/tesla-options-bulls-were-right-and-very-wrong\\\/#article\",\n\t            \"isPartOf\": {\n\t                \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/traders-insight\\\/tesla-options-bulls-were-right-and-very-wrong\\\/\"\n\t            },\n\t            \"author\": {\n\t                \"name\": \"Steve Sosnick\",\n\t                \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/#\\\/schema\\\/person\\\/31988d9596575a63ddc53e92049a2549\"\n\t            },\n\t            \"headline\": \"Tesla Options Bulls Were Right \u2013 And Very Wrong\",\n\t            \"datePublished\": \"2020-10-22T16:29:13+00:00\",\n\t            \"dateModified\": \"2023-02-10T18:33:36+00:00\",\n\t            \"mainEntityOfPage\": {\n\t                \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/traders-insight\\\/tesla-options-bulls-were-right-and-very-wrong\\\/\"\n\t            },\n\t            \"wordCount\": 723,\n\t            \"publisher\": {\n\t                \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/#organization\"\n\t            },\n\t            \"image\": {\n\t                \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/traders-insight\\\/tesla-options-bulls-were-right-and-very-wrong\\\/#primaryimage\"\n\t            },\n\t            \"thumbnailUrl\": \"https:\\\/\\\/www.interactivebrokers.com\\\/campus\\\/wp-content\\\/uploads\\\/sites\\\/2\\\/2020\\\/06\\\/bull-bear-market.jpg\",\n\t            \"keywords\": [\n\t                \"bullish\",\n\t                \"Tesla\"\n\t            ],\n\t            \"articleSection\": [\n\t                \"IBKR Insights\",\n\t                \"North America\",\n\t                \"Options\",\n\t                \"Region\",\n\t                \"Securities\",\n\t                \"Text Articles\",\n\t                \"Traders' Insight\"\n\t            ],\n\t            \"inLanguage\": \"en-US\"\n\t        },\n\t        {\n\t            \"@type\": \"WebPage\",\n\t            \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/traders-insight\\\/tesla-options-bulls-were-right-and-very-wrong\\\/\",\n\t            \"url\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/traders-insight\\\/tesla-options-bulls-were-right-and-very-wrong\\\/\",\n\t            \"name\": \"Tesla Options Bulls Were Right \u2013 And Very Wrong | IBKR Campus US\",\n\t            \"isPartOf\": {\n\t                \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/#website\"\n\t            },\n\t            \"primaryImageOfPage\": {\n\t                \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/traders-insight\\\/tesla-options-bulls-were-right-and-very-wrong\\\/#primaryimage\"\n\t            },\n\t            \"image\": {\n\t                \"@id\": \"https:\\\/\\\/ibkrcampus.com\\\/campus\\\/traders-insight\\\/tesla-options-bulls-were-right-and-very-wrong\\\/#primaryimage\"\n\t            },\n\t            \"thumbnailUrl\": \"https:\\\/\\\/www.interactivebrokers.com\\\/campus\\\/wp-content\\\/uploads\\\/sites\\\/2\\\/2020\\\/06\\\/bull-bear-market.jpg\",\n\t            \"datePublished\": \"2020-10-22T16:29:13+00:00\",\n\t            \"dateModified\": \"2023-02-10T18:33:36+00:00\",\n\t            \"description\": \"Options traders were quite bullish about Tesla (TSLA) heading into last night\u2019s earnings. 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Prior to joining Interactive Brokers, Sosnick held senior trading roles at Morgan Stanley, Lehman Brothers, and Salomon Brothers, where he completed the firm\u2019s famed training program.","sameAs":["https:\/\/ibkr.com"],"url":"https:\/\/www.interactivebrokers.com\/campus\/author\/steve-sosnick\/"}]}},"jetpack_featured_media_url":"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/06\/bull-bear-market.jpg","_links":{"self":[{"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/posts\/63608","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/comments?post=63608"}],"version-history":[{"count":0,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/posts\/63608\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/media\/47192"}],"wp:attachment":[{"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/media?parent=63608"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/categories?post=63608"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/tags?post=63608"},{"taxonomy":"contributors-categories","embeddable":true,"href":"https:\/\/ibkrcampus.com\/campus\/wp-json\/wp\/v2\/contributors-categories?post=63608"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}