What is the Options Market Expecting for Tesla Earnings?

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Chief Strategist

Interactive Brokers

Earnings season has been underway for a few days now, but this afternoon marks the kickoff of the rarified list of megacap tech stocks.  Even though Netflix (NFLX) reported yesterday, it’s status as a “FAANG” stock is largely vestigial.  It is currently the 17th highest weighted stock in the NASDAQ 100 (NDX) and #48 in the S&P 500 (SPX).  To put this into perspective, Johnson & Johnson (JNJ), which reported yesterday, and JPMorgan (JPM), which reported on Friday are #12 and #13 respectively in SPX (they are NYSE-listed, and thus not included in NDX).  Tesla (TSLA), by comparison, is #8 in SPX and NDX. 

Beyond even TSLA’s mathematical importance in key indices is its outsized role in investors’ psyche.  It is perpetually the most active stock and options class at our firm, with many ardently faithful holders. Its founder and Chairman was a lightning rod even before his recent foray into social media mogul-dom.  Even modest blips can create ripples throughout the broader market, as we noted just over two weeks ago.  At that time, TSLA reported deliveries that may or may not have beaten published estimates, but certainly failed to impress investors after a sharp rally ahead of that release.

It is unusual for a company to release major news just prior to earnings, but we all know by now that TSLA is nothing if not unusual.  TSLA announced another round of price cuts this morning – its sixth this year – which has caused a modest decline in the share price.  The move highlights the various moving pieces that investors need to reckon with.  Are the price cuts being rewarded with volume boosts?  How have the price cuts affected their industry-leading margins?  Does it appear that Elon Musk is devoting sufficient time to TSLA, or is his attention being compromised by his active Twitter ownership, the recent attempted SpaceX launch, and his proposed foray into artificial intelligence?  And of course, are they meeting revenue and earnings expectations?

As of this morning, options traders do not seem particularly concerned that TSLA will disappoint – despite the very mixed responses to its past few earnings reports.  The stock’s average post-earnings move is 7.41%, which is roughly what at-money, near-term options are currently pricing.  But the last five moves were +10.97%, -6.65%, +9.78%, +3.23%, and -11.55%.   In short, we’ve alternated between larger and smaller than average moves.  Perhaps the options market is expected that it’s the turn for a smaller move. 

Volatility Term Structure for TSLA Options

Volatility Term Structure for TSLA Options

Source: Interactive Brokers

As is customary, we see the highest probability place on outcomes that are around the current price of the stock, but TSLA is unusual in that the cumulative probability of an upward move outweighs that of a downward move.  We typically see a bias to the downside as holders purchase protective puts ahead of an earnings report.  But remember, there is little that is typical about TSLA.

IBKR Probability Lab for TSLA Options Expiring April 21, 2023

IBKR Probability Lab for TSLA Options Expiring April 21, 2023

Source: Interactive Brokers

The skews for coming expiration cycles certainly show the lopsided “Elvis smile”, with below market options showing higher implied volatilities than their above market counterparts with similar moneyness.  That reflects normal caution and hedging activity, but as noted above, the cumulative probabilities are actually greater to the upside.

TSLA Options Skews, April 21 (yellow), April 28 (purple), May 19 (orange)

TSLA Options Skews, April 21 (yellow), April 28 (purple), May 19 (orange)

Source: Interactive Brokers

One might expect a bit more risk aversion for a stock that is closer to the high end of its year-to-date trading range.  Perhaps the faithful view the recent 15% pullback from the highs to be a sufficiently low level from which to launch a new rally.  We will know soon enough if that faith will be rewarded – again.

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Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the “Characteristics and Risks of Standardized Options” also known as the options disclosure document (ODD) or visit ibkr.com/occ