Prepare yourselves, friends, because tonight Tesla Motors (TSLA) — the momentum stock of the year — is delivering up a fireworks show that can’t be missed. Market participants, from the momentum enthusiast to the degenerate gambler, will be watching tonight’s Tesla earnings release with wonder as the revolutionary auto company is injected with a massive dose of volatility.
Heading into the main event, Tesla stock is up a barn-burning 430% for the year. After falling as much as 21% thanks to profit taking, the latest three-day rise in TSLA has brought the volatile stock back from the brink and within striking distance of its all-time highs.
And speaking of volatility, it has been on the rise.
To see just how much of a mover Tesla stock has been, we can look to its Average True Range, which measures how much the stock has been moving on average per day.
For the past month, Tesla’s ATR has hovered in the $9 range, which means TSLA has been experiencing 5% daily moves. A 5% jump on occasion is probably acceptable to most stock traders … but to move 5% every day for months is downright gut-wrenching for all but the most extreme volatility addicts.
But, such has been the norm for TSLA’s roller coaster ride.
Interestingly, the implied volatility for TSLA options isn’t running as high as it was heading into the last two Tesla earnings announcements (see the last two blue “E” icons in the accompanying chart).
In sizing up the magnitude of the earnings jump, we can use the price of the Nov 2 weekly straddle, which expires on Friday. Buying the at-the-money 175 call and 175 put costs around $20.60, which means option traders are pricing in about a 12% move up or down by end of day Friday. Given that Tesla stock has been moving some 5% per day without earnings, a 12% move over four days with earnings doesn’t seem all that much.
In sum, I don’t think TSLA is a slam-dunk trade for selling volatility. The compensation and potential risk-reward doesn’t seem appealing enough to step in front of tonight’s Tesla earnings announcement and bet the stock will jump less than expected.
On the other hand, those willing to bet Tesla stock will move more than expected could consider buying the Nov 2 weekly straddle. With TSLA around $175 as of this writing, buy the Nov 2 weekly 175 call and 175 put. The max risk is limited to the initial debit paid and the max reward is unlimited. Best-case scenario, TSLA experiences some type of Google-esque (GOOG) earnings jump. Worst-case scenario, it behaves like Apple (AAPL) did early this month and barely budges.
If TSLA settles in or starts to fill its earnings gap on Wednesday or Thursday, I suggest exiting the trade quickly as time decay will really start kicking in on these short-term options.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.