Options market signals bumpy ride for Tesla shares

FILE PHOTO: Logo of Tesla is seen at a branch office in Bern

LONDON (Reuters) – Tesla <TSLA.O> shares edged up on Thursday in U.S. premarket trade, extending a recovery from this week’s drop, but analysts see a bumpy ride ahead as an extreme build-up in derivative positions caps the stock and precludes a full rebound.

The electric-car maker’s shares were up roughly 2% at $373.50 in premarket trading, set for the second straight day of gains to follow the previous session’s 11% rally.

Tesla shares shed 21% on Tuesday – their biggest one-day percentage drop on record – after the stock’s surprise exclusion from the S&P 500 <.SPX>.

The selloff early this week wiped out $75 billion dollars off the company’s market value, exacerbated by the hedges built around massive betting on Tesla options by retail and institutional traders during the stock’s four-fold rise since March.

“All the excess buying in call options suddenly hit a critical mass and you had this inflection point last week,” said Peter Garnry, head of equity strategy at Saxo Bank.

The implied volatility on near-term Tesla options is ranging around 100%, luring a lot of speculators into cashing in through spread structures and potentially implying massive buying and selling of the stock in coming days.

More than 1 million Tesla call options — contracts that entitle buyers to buy the stock – have traded on average in the past three sessions, which is a more than 30% jump over volumes in recent weeks, a London-based trader said.

Yet, the sudden surge in borrowing of Tesla shares by short sellers with 7% of outstanding shares being shorted suggests a tug of war between bulls and bears is in store.

“I think they (short sellers) are definitely smelling blood,” Garnry said.

Tesla is not alone. Apple <AAPL.O> and other major technology stocks have also seen their options volumes skyrocket and stock prices fall this week, with investors pointing to the massive options purchases by retail traders and the SoftBank Group Corp <9984.T> as reasons for the August euphoria and the September pullback.

“It was a lesson learnt in risk management (for retail traders)… I think also the U.S. election now will be pulled into the arena as sort of the centre focus in terms of risk,” Garnry added.

He believes U.S. stocks could trade sideways from here.

Wall Street’s biggest players, however, are viewing the tech-led selloff as a bout of turbulence rather than the start of a longer slide, and they don’t see it as a reason to run for the door.

(Reporting by Thyagaraju Adinarayan)