TSLA Option Traders Trust in Musk After Earnings

After Tesla, Inc. (TSLA) posted second-quarter financial figures that above analysts’ expectations, option traders are taking measures that indicate they believe the stock price will rise in the future. This may come as a surprise given that the TSLA share price plummeted by less than 1% on the day the information was released.

Tesla announced profits per share (EPS) of $1.45 and sales of $11.96 billion, beating analysts’ projections of $0.98 and $11.30 billion, respectively. Notably, the firm reported its first-ever quarter with over $1 billion in sales and achieved a 97% rise in automotive revenue growth year over year. Prior to the announcement, investors kept the TSLA share price range constrained, with a substantial volume of put options in open interest.

Option trading volumes revealed that traders were selling calls and buying puts; but, option activity following results implies that traders are bullish on TSLA’s share price after clearly outperforming analysts’ forecasts. This is because price action has just moved upward, but option activity indicates that traders are buying calls and selling puts.

When the price movement of option trading activity and stock prices on the days after results is compared, there is some indication that option traders may be optimistic. This should come as no surprise given that TSLA’s stock dropped 2% the day following results, dropping below its 20-day moving average. Furthermore, put option activity surged while call option activity declined. This might happen because option traders feel TSLA is cheap at the moment and will rise in value in the near future.

Key Takeaways

• Traders and investors purchased TSLA stock after the results report, as the price climbed less than 1% the day of earnings before sliding 2% the next day.
• TSLA’s share price closed below its 20-day moving average.
• Put and call option activity looks to be geared toward a price increase.
• The volatility-based support and resistance levels allow for a greater upward movement than a negative movement.
• This strategy allows traders to benefit from a reversal in the earnings-based share price trend.

Option trading encapsulates the actions of investors seeking to preserve their holdings as well as speculators seeking to benefit by accurately anticipating unexpected movement in an underlying stock or index. Because option trading is a literal gamble on market probabilities—a wager made by traders who are, on average, more informed than other investors—the activities of these investors and speculators suggest a projection for the weeks ahead. Understanding the environment in which the pricing behavior occurred is critical to capitalizing on this understanding. The chart below displays TSLA’s share price activity on Thursday, July 29, indicating the setup after the earnings release.

Current Trend

Over the previous month, the stock moved in a broad range, bouncing above and below the 20-day moving average, before dropping 2% the day following the news. The price settled in the center of the range shown by the technical studies on this chart.

The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array emphasizes how the pricing has been confined to the middle range. This price movement in TSLA shares suggests that investors are unsure about the stock’s share price in the future.

Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average number of time periods employed in its computation is 10-20, which comprises two to four weeks of trade on a daily chart.

Based on the price trend for TSLA dropping below the 20-day moving average the week before the release, chartists may see that traders were expressing pessimism heading into results. By paying attention to option trading data, chart watchers may generate an opinion on investor expectations. Prior to the release, it looked that traders expected TSLA to fall following results.

Tip

The Keltner Channel indicator shows a series of semi-parallel lines derived from the base of a 20-day simple moving average. Because the higher lines are produced by adding a multiple of ATR to the average price and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator is an ideal visualization tool for displaying historical volatility.

Trading Activity

Option traders’ recent activity suggests that they believe TSLA shares are cheap and have acquired call options in the hope that the stock would close inside the box illustrated in the chart between now and Aug. 20, the next monthly expiry date for options. The price offered by call option sellers is shown by the green-framed box. It means that there is a 70% likelihood that TLSA shares will close inside this range or higher by August 20. As a result, sellers are just modestly optimistic. Buyers, on the other hand, are picking up this pricing, implying that these choices are underpriced. Given that the pricing assumes just a 30% possibility that prices would close above the green box, it suggests that purchasers are ready to accept the long odds.

It is worth noting that open interest on Thursday included over 1.1 million call options vs over 773,000 put options, illustrating the bias that option purchasers exhibited, as traders preferred calls over puts. This usually means that option traders anticipate an increase in price fluctuation. The volatility has lessened substantially after results, but the number of put options in the open interest remains high, while the number of call options is growing. This indicates that put options are being sold rather than purchased, resulting in a positive attitude.

The call open interest vastly outnumbers the put open interest for strikes at the money and one step either way. Out-of-the-money put option volume is declining considerably quicker than out-of-the-money call option volume, indicating that more traders expect TSLA share prices will climb than decrease.

A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric creates closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months.

The levels marked by the turns are noted in the chart below. What stands out in this chart is how close the call and put prices are, with lots of room to move lower. This indicates that option purchasers anticipate the share price is more likely to rise in the weeks following the report. Despite the fact that investors and option traders anticipated the report to be bad, the share price moved less than it did following the last earnings announcement.

These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, a significant shift in either way is probable in the near future. Next the last results report, TSLA shares dropped 0.5% the next day and continued to decrease the following week. Investors may not anticipate the same level of price movement in the week after this news. With so much space in the volatility range, share prices may increase or fall more than anticipated in the short term; but, there is more capacity in the volatility range to support an upward trend.

Wrapping Up

Tesla exceeded analysts’ earnings per share and sales forecasts. The company’s first quarter with more than $1 billion in sales witnessed a 97% year-over-year rise in automotive revenue growth. Investors showed their faith in the firm by purchasing shares on the day of the news, before the price fell somewhat the next day. Option traders seem to be buying calls and selling puts, indicating a positive view. The share price action leaves more opportunity in the volatility range for a future upward surge in the share price.

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