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Why Tesla Stock Still Has Big Upside Potential

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Tesla (TSLA) stock closed at $425.25 in Tuesday’s trading session, marking a 1.44% rise from the previous day. This change lagged behind the S&P 500’s (SPY) daily decrease of 0.02%. Meanwhile, the Dow Jones Industrial Average (DIA) lost 0.12%, and the tech-heavy Nasdaq index increased 0.08%. 

We’ve seen a spike of several bullish options transactions for TSLA over recent trading sessions. And these bets suggest the stock could surge in the coming weeks and months.

With that potential in mind, I wanted to discuss Tesla stock’s recent options trades. Let’s also see what they mean for individual investors.

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Options traders are making bullish bets on TSLA stock

The open interest levels for the March 20 $500.00 calls saw some increases in their open interest levels on December 24. Their open contracts increased by 1,826 contracts to approximately 4,321 (according to data from Barchart.com). These Tesla options sold for roughly $15.00 per contract.

So, in my opinion, it’s sufficient to say that this particular trade looks like a huge bullish bet. The trade has a total value of about $6.5 million. Also, for options investors to break even, Tesla stock would need to rise to $515.00 by the March expiration. And that would add up to a gain of around 21.2% from TSLA’s price as of December 24. 

Also, the open interest for the $420.00 calls that expire on January 10 rose by 1,689 contracts during Tuesday’s trading session. This surge came in at a total of 2,130 open contracts. So a buyer of these calls would need Tesla stock to increase up to $429.65 by the expiration date so they could profit.

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How much volatility options traders expect for Tesla stock

At a $425.00 strike price that expires on January 17, the implied volatility levels for the options stand at 28.33% for the stock. For instance, the SPDR S&P 500 Trust ETF’s (SPY) implied volatility level stands at 10.08% for the same expiration date. This number means traders expect the stock to fluctuate around three times more than the overall market. Next, let’s take a closer look at TSLA’s option chain to assess the expected price movements and options traders’ sentiment for the stock. 

Looking at the January 17 options, we can see a bid/ask for the call option with the strike price of $425.00 of $19.50 / $19.70. Also, we can see a bid/ask for the put option with a strike price of $425.00 of $18.90 / $19.05. Keep in mind that the options strike is closest to the TSLA closing price of $425.25 on Tuesday, December 24. And you can calculate the expected price move using the mid-prices of the given options:

18.975 (425.00 put) + 19.60 (425.00 call) = 38.575/425.25 = 9.1%

The options imply that TSLA stock price could increase or decrease by about 9% by the January expirations from the $425.00 strike price. Moreover, our assessment use the long straddle strategy. This estimation would place TSLA stock in a trading range of $386.75–$463.52 by the expiration date.

Also, pay attention to the number of open call and put contracts. In Tesla’s case, the number of open calls at the $425.00 strike price outweigh the open puts by around 17 times. At the moment of this writing, there are 3,459 calls to 203 open puts. A buyer of the $425.00 strike price calls would need the stock to rise to around $444.7 by the expiration date before they could profit. This divergence suggests why options traders are so bullish on Tesla stock right now. 

Want to read more technical analysis stories? Take a look at some of my other Market Realist articles:

 

 

 

 

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