Unusual Activity in Tesla Call Options Shows Bullish Outlook

An institutional investor has taken a significant stake in Tesla Inc (TSLA) call options that expire in 7 months on November 15. The call options are well out-of-the-money (OTM). However, the investor likely feels that they are worth the price as they assume TSLA stock, trading at $181.86 today (April 19), will be well over the strike price of $212 by then. 

This trade can be seen in the Barchart Unusual Stock Options Activity Report today. It shows a large tranche of over 4,000 call options expiring 212 days from now at the $212 strike price traded for $19.45 per call option.

That means that the investor shelled out $7.78 million to purchase these calls (i.e., 4,000 x 100 x $19.45 per call option). I suspect that this trade was initiated by the long call investor mainly because the expiration period is so far away. Why would they do that? Let’s look into that carefully.

TSLA Calls – Barchart Unusual Stock Options Report – April 19

What the Trade Means for TSLA Stock

First of all, the breakeven price for the investor is over 27% over today’s price. That is seen by adding $19.45 to the strike price of $212, or $231.45, or 27% over $181.86 today. That means the investor expects in 7 months or earlier that the intrinsic value of the call option will be worth $19.45 if the stock closes at $231.45.

But second, that is not likely what the investor is actually doing. They know that the extrinsic value of the option could rise significantly if TSLA stock continues to move higher. After all, YTD the stock is up 67%, including up 0.7% in the last month.

So, for example, if TSLA stock rises to $200 sometime in the next 7 months, that represents a gain of $18.14 per share or +10%. But, it is also highly likely, given how volatile TSLA stock has been, that the call option price could rise by at least $18.14 to $37.59. That would represent an unrealized capital gain of 93%.

So, in other words, the investor sees that a 10% gain in TSLA stock could lead to a 93% gain in the call option price. Simply put, that is a more efficient way to invest $7.78 million, assuming the investor believes that TSLA stock is likely to move higher.

That shows the huge leverage effect in call options. Moreover, the investor has given themselves plenty of time for this trade to work out, over 7 months.

Why TSLA Stock Could Move Higher

This investor is obviously bullish on TSLA stock. They see that the company is continuing to grow its volumes, revenue, free cash flow, and market penetration. For example, the company recently announced a new plant will be built in Mexico, expanding its ability to produce EVs in North America.

Granted, the valuation is not cheap. For example, earnings forecasts for this year are $3.95 per share. That puts TSLA stock on a forward multiple of 46x. However, there are reasons that the investor might not be too concerned.

First, Morningstar’s valuation page shows that in the past five years, TSLA stock has averaged well over 100x forward earnings. Today, the forward average is 118x over the last 5 years. Second, the same analysts also project that earnings next year will rise at least 39% to $5.50 per share. This lowers the expected P/E multiple to just 33x by the end of next year. 

And third, keep in mind, that 2024 multiple will start to become embedded into the market’s expectations by the end of this year. This makes it very possible that the high extrinsic value of TSLA stock will keep moving higher in the next 7 months, as long as Tesla keeps producing significant earnings growth and free cash flow generation.

The bottom line is that the long-call investor in TSLA stock has a good shot of making a significant return, despite the fact that the call option are well out-of-the-money.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.