Tesla Bulls Bet Big Ahead of Stock Split -- Update
August 28 2020 - 4:23PM
Dow Jones News
By Gunjan Banerji
A dizzying rally in Tesla Inc.'s shares has unleashed a burst of
options activity tied to the stock jumping even higher.
Tesla recently said it would enact a 5-for-1 stock split, making
its wildly popular stock even more accessible to individual
investors. Trading on a split-adjusted basis will go into effect
Monday.
The company said stockholders would receive four additional
shares for each one held as a dividend after the market closed
Friday. Trading on a split-adjusted basis would go into effect
Monday. Though Tesla investors will see more shares in their
brokerage accounts, the split doesn't alter the overall value of
their holdings.
So far, though, access to Tesla stock doesn't appear to be a
problem. Since Aug. 11 when the company unveiled plans for the
split, shares have jumped 61%, building on an already impressive
surge this year and bringing its market value to more than $400
billion. Tesla shares have more than quintupled this year and
closed at $2238.75 Thursday, a record. They inched lower Friday by
1.1%.
Investors have been scooping up call options tied to the shares'
continued advance. The ratio of put options bought relative to call
options on Tesla hit a record low on Aug. 21, according to Garrett
DeSimone, head of quantitative research at data provider
OptionMetrics. Mr. DeSimone analyzed Tesla options that are
out-of-the-money, or far from the current stock levels.
Some of the most actively traded options contracts in recent
days have been bullish calls tied to the shares jumping even
higher, to $2400 or $2500, Trade Alert data show.
And some rare dynamics have emerged in the market for Tesla
derivatives. Lately, bullish call options tied to the stock have
been more expensive than bearish put options, according to
Susquehanna Financial Group. Typically, bearish put options are
more expensive than calls because of their use as a hedge.
"The options are pricing in the potential for more violent moves
to the upside compared to the downside," said Chris Murphy, co-head
of derivative strategy at Susquehanna. "It's a combination of
euphoria, greed and a little bit of FOMO," he said, using the
acronym for the fear of missing out.
The electric-car maker is now worth more than auto makers around
the world and many giants of American industry. Tesla recently
reported its fourth consecutive quarter of profits, making it
eligible for inclusion in the S&P 500 index and further
boosting optimism about the company's trajectory. If Tesla were in
the index, it would be the eighth most valuable company, recently
passing Johnson & Johnson and Walmart Inc.
Analysts say the frenzied options activity can also contribute
to stock moves. As the shares jump, trading firms must hedge their
positions, potentially buying more of Tesla stock and driving the
price even higher.
"These record high levels of call buying are continuing to
support [Tesla's] tremendous momentum," Mr. DeSimone said in an
email.
Similar dynamics have emerged in options on Apple Inc. and the
broader technology sector, which has outperformed other groups for
much of the year. Apple also recently announced a stock split,
which typically gives a boost to a company's shares.
The Cboe Nasdaq-100 Volatility Index, a measure of expected
volatility in the tech-heavy gauge, rose in August even as the
Nasdaq-100 index advanced to fresh highs. Typically, volatility
recedes as the stock index rallies.
This highlights how investors are girding for sharp moves,
potentially even higher, for the index.
The Nasdaq-100 index, which includes Tesla shares, is up 37%
this year.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
August 28, 2020 17:08 ET (21:08 GMT)
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