Tesla stock is in a rut as investors await more progress on artificial-intelligence businesses such as robo-taxis and robots.
With shares struggling to regain $400, stock options might be a better bet.
Susquehanna derivatives analyst Christopher Jacobson screened for stocks in which a pickup in volatility could move stock options prices. One stock that looks attractive: Tesla.
Derivatives are securities, such as stock options, where the value is derived from another asset. In the case of options, the price depends in part on the underlying stock. A call option gives the holder the right to buy the underlying stock at a fixed price in the future. A put option gives the holder the right to sell at a fixed price in the future. Options prices depend on several factors, including the price at which the stock can be purchased, the date in the future, and the volatility of the underlying shares.
Volatile stocks move a lot, making options more valuable. (Why buy options in a stock that never moves)?
There are myriad call options and trading strategies; one is to own stock options for increasing volatility. The value of options, in that instance, can rise, independent of what the underlying stock does.
Jacobson noted in a report Monday that Tesla stock implies less volatility than in the past. Tesla, however, is still a controversial stock with the potential to swing widely.
Recently, “we pointed to the wide variance when it came to Street price targets as reflective of the uncertainty in the name, and thus incrementally supportive of owning the volatility,” wrote Jacobson.
About 60 analysts cover the stock. The average analyst price target on Bloomberg is about $408, with a 35% standard deviation, he added. The standard deviation of targets for the other Magnificent Seven stock ranges from 10% to 16%. “Put differently, the Street implies a much wider range of potential outcomes when it comes to Tesla’s stock price.”
Owning stock options is a way to play the wide range of outcomes. And right now, the Tesla options are implying a limited range of outcomes.
To be sure, stock options aren’t stock. They can expire worthless, and investors inexperienced with trading them should treat them with caution.
For investors interested only in the stock, Jacobson’s report is another example of someone noticing that Tesla’s stock has been stuck lately, though investors probably already knew that.
Tesla stock rose 0.4% Monday, closing at $392.56, while the S&P 500 and fell 0.4% and 1.1%, respectively.
Coming into Monday, Tesla stock had fallen 13% this year but had risen 36% over the past 12 months.
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