Tesla Beats on a Key Metric / What Expiration?

In yesterday’s piece, we noted how the options market seemed to be pricing in a fairly typical 7.4% move for Tesla (TSLA) after its earnings report, though there was a slight bias to the upside.  Well, the market was half-right.  We got a reaction of about that magnitude – though the stock is down about -9% as I type this.  I can’t imagine that holders are happy to see the company move down by a larger amount than the market was anticipating.

On the surface, the results didn’t seem all that bad.  Adjusted per-share earnings matched the consensus $0.85 and revenues of $23.33 billion roughly matched the $23.36 billion estimate.  Results like that shouldn’t have caused a big reaction to the stock.  But as with so many things TSLA, there is much more than the superficial.  Cash flow – which can’t be easily “adjusted” like earnings — fell to $440 million, miles away from the consensus of $3.2 billion.  Unsurprisingly, gross margin fell from 18.3% from 25%.  Cutting prices will do that. 

It probably didn’t help that today’s SpaceX launch didn’t go as planned.  Investors didn’t need another reminder that Elon Musk is spread very thin.  It is remarkable that one person can found an auto company, a space company and run a social media network.  The problem is that only one of those is public, and it is the publicly traded TSLA that is taking the hit.  It is not wonderful for shareholders that the only metric that TSLA is exceeding today is its average post-earnings downside move.

Meanwhile, one other thing that might normally concern options traders is tomorrow’s monthly expiration.  Even as weekly and daily expirations have captured most of the market’s attention, we continue to assert that monthly and quarterly expirations still matter.  The key reason is the relatively unique set of AM-expiring index options.  These options are generally harder to hedge, and much of the open interest has been in place for weeks.

Yet this month we see little reason for concern.  Quite frankly, the open interest in expiring SPX options is rather anemic. The roughly 50,000 contracts on the 4150 line that expire tomorrow is quite light for an at-money option ahead of a monthly expiration.  It is not unusual to see open interest of 100,000 or more on the most popular expiring options. 

It is common for options with high open interest to act as either magnets or slingshots around expiry.  All things being equal, lines with large open interest tend to attract indices or stock prices to that level, and a strong push through an expiring strike can accelerate a product through that strike – sometimes violently.  There simply aren’t the levels of open interest tomorrow that are likely to cause a volatile opening tomorrow.

Then again, that fits with the overall lack of volatility that we have been seeing in major indices.  Even with TSLA acting as a drag, we still see major indices -0.25-0.5% after a weaker opening.  VIX is a bit higher, but still trading with a 16 handle.  Perhaps the biggest bull market right now is in complacency, even with the bulk of earnings season and an FOMC meeting lurking over the coming weeks.