(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)
Watching Tesla Inc. (TSLA) trade is never dull, and it doesn’t seem as though things will get boring anytime. Options pricing suggests Tesla shares will stay very volatile over the next several months. The market is currently pricing in a nearly 18 percent move in the stock price by the time January rolls around. Whether it will be higher or lower from its current price of $350 remains the question. The technicals suggest there is further downside risk over the short term, but over the long term, shares still have positive momentum.
According to the latest option pricing, Tesla shares could rise by nearly 18 percent using the options that are set to expire on January 19, 2018, using the $360 strike price. The technicals of the chart show there is a robust long-term trend in place, which dates back to March – around the time of the stock’s secondary offering. That’s also when investors found out that Chinese internet giant Tencent Holdings had purchased a stake in Tesla. (See more: What The Market Thinks About The TSLA Secondary.)
High Levels of Volatility Priced In
The January long put call straddle using the $360 strike price suggests that Tesla shares could surge to $422 or fall as low as $295 by expiration. The implied volatility in the options is currently at 40 percent, versus the S&P 500’s implied volatility of 10 percent for the expiration period.
The amount of volatility that’s priced in the stock is very high. A one standard deviation move in the stock based on the implied volatility is a range of $161.42, from low to high about $279 to $440. It is worth noting that the $360 Tesla calls have 5,680 contracts of open interest compared to just 996 contracts for the puts.
The trend in the stock is directionally bullish based on the upward sloping green trend line denoted in the chart below. The chart is also exhibiting a pattern called a symmetrical triangle, which is a continuation pattern, suggesting the stock could rise over the long term.
Looking even further back, we can see that Tesla stock broke out of a three-year period of consolidation that started in 2014. Additionally, when the stock was rising from March through July 2017, trading volume surged higher. Since July, we have seen volume begin to return toward historically normal rates. This suggests that the downward pressure we see in the stock is coming with less conviction.
There is no doubt that Tesla stock will always be highly volatile, and that is not likely to wane anytime soon.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.
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