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TSLA Option Traders Trust in Musk After Earnings

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After Tesla, Inc. (TSLA) reported that it had beaten analysts’ predictions for its second quarter earnings results, option traders are taking actions that imply that they think the share price will drift higher in the future. This may come as a surprise considering the TSLA share price fell less than 1% the day the report was announced.

Tesla reported earnings per share (EPS) of $1.45 and revenue of $11.96 billion, exceeding analysts’ expectations calling for EPS of $0.98 and revenue of $11.30 billion Notably, the company record its first ever quarter with over $1 billion in income and saw a 97% year-over-year increase in automotive revenue growth. Prior to the announcement, investors had kept the share prices of TSLA range bound, with a sizable number of put options in the open interest.

Option trading volumes indicated that traders had been selling calls and buying puts; however, option activity after earnings suggests that traders are optimistic about TSLA’s share price after demonstrably beating analysts’ expectations. That’s because the price action has recently drifted higher, while option activity implies that traders are buying calls and selling puts.

Comparing the price action between option trading activity and stock prices on the days following earnings shows some evidence to suggest that option traders may be optimistic. This should be surprising considering TSLA’s share price fell 2% the day after earnings, closing below its 20-day moving average. Additionally, call option activity increased while put option activity decreased. This could happen because option traders believe that TSLA is undervalued at current levels and will trend higher in the near term.

Key Takeaways

  • Traders and investors bought shares in TSLA after the earnings announcement, as the stock gained less than 1% the day of earnings before falling 2% the day after.
  • The share price of TSLA closed below its 20-day moving average.
  • Put and call option activity appears to be positioned for the price to rise.
  • The volatility-based support and resistance levels allow for a stronger move upward than downward.
  • This setup creates an opportunity for traders to profit from a reversal in the earnings-based share price movement.

Option trading represents the activities of investors looking to protect their positions or speculators who wish to profit from correctly predicting unexpected movement in an underlying stock or index. The actions of these investors and speculators imply a forecast for the weeks ahead, because option trading is a literal bet on market probabilities—a bet made by traders that are, on average, better informed than most investors. The key to taking advantage of this insight is to understand the context in which the price behavior took place. The chart below depicts the price action for TSLA’s shares on Thursday, July 29, illustrating the setup after the earnings report.

Current Trend

Over the course of the past month, the trend of the stock saw shares moving in a wide range, floating above and below the 20-day moving average, before falling 2% the day after the announcement. The price closed in the middle region depicted by the technical studies on this chart.

The 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 remained bound in the middle range. This price move from TSLA shares implies that investors are ambivalent in the stock’s share price 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 10-20 time periods, which includes two to four weeks of trading on a daily chart.

Chart watchers can recognize that traders were expressing pessimism going into earnings, based on the price trend for TSLA falling below the 20-day moving average the week before the announcement. Chart watchers can also form an opinion of investor expectations by paying attention to option trading details. Prior to the announcement, traders appeared to be expecting that TSLA would move downwards after earnings.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines calculated from the base of a 20-day simple moving average. 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 TSLA shares undervalued and have purchased call options as a bet that the stock will close within the box depicted in the chart between today and Aug. 20, the next monthly expiration date for options. The green-framed box represents the pricing that the call option sellers are offering. It implies a 70% chance that TLSA shares will close inside this range or higher by Aug. 20. So sellers are only mildly bullish. However, buyers are snapping up this pricing, suggesting that buyers consider these options underpriced. Since the pricing implies only a 30% chance that prices could close above this green box, it appears that buyers are willing to take those long odds.  

It is important to note that open interest on Thursday featured over 1.1 million call options compared to over 773,000 put options, demonstrating the bias that option buyers had, as traders favored calls over puts. This normally implies that option traders expect upwards price movement. After earnings, the volatility has decreased dramatically, but the number of put options in the open interest remain elevated, and the number of call options is increasing. This signals that put options are being sold, rather than bought, creating a bullish sentiment.

For the strikes at the money and one step either direction, the call open interest far outweighs the put open interest. Out-of-the-money put option volume declines at a much faster rate than out-of-the-money call volume, signifying that more traders believe that TSLA share prices will rise than those who believe share prices will fall.

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four 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 a close range with plenty of space to run lower. This suggests that option buyers believe there is a greater probability for the share price to move higher in the weeks following the report. Although investors and option traders expected negative movement from the report, the share price moved a smaller distance than it did after the last earnings report.

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that there could be a large move in either direction in the near future. After the previous earnings announcement, TSLA shares fell 0.5% in the day following and continued to fall the following week. Investors may not be expecting the same kind of move in price in the week after this announcement. 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

Tesla smashed analysts’ EPS and revenue expectations. The company recorded its first ever quarter with over $1 billion in income and saw a 97% year-over-year increase in automotive revenue growth. Investors expressed confidence in the company, buying shares the day of the report, before the price retreated a little the following day. Option traders appear to be buying calls and selling puts, expressing a bullish outlook. The share price activity provides more room in the volatility range for an upward move in the share price going forward.

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