$Tesla Motors(TSLA)$ is set to announce its Q2 earnings after hours on July 23rd.
Market expectations are that Tesla's Q2 revenue is likely to reach $24.695 billion, a 0.93% decrease year-over-year, with earnings per share at $0.49, down 37.46%.
Following strong Q2 delivery data and high market expectations for its autonomous Robotaxi business, Tesla's stock has surged by 33% since June 25th, erasing its six-month decline. Looking ahead to Q2 earnings, the market is focused on automotive revenue, Robotaxi, and the Model 2.
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In Q1 2024, Tesla's automotive revenue declined by 13% y-o-y to $17.4 billion due to a 9% drop in deliveries and lower average selling prices. This resulted in a 9% decrease in total revenue to $21.3 billion. Tesla cited seasonal factors, macroeconomic headwinds, halted production at the German factory, and supply disruptions from the Red Sea conflict but expects improvement in Q2 with continued delivery improvements.
$Tesla Motors(TSLA)$ 's gross margin remains a key focus, expected to be 17.42% for Q2, with automotive gross margin at 17.97%.
The previously scheduled Robotaxi launch event in August has been postponed to October. Elon Musk explained the delay was due to design changes needed for the front of the Robotaxi and hinted at showcasing additional features.
Analysts suggest the delay might mean Tesla will unveil its low-cost next-generation electric vehicle, the Model 2. While the Model 2 may not debut until early 2025, investors have yet to see a prototype.
1. How are options markets pricing Tesla's performance?
According to Market Chameleon, Tesla has a historical 58% probability of declining on earnings day, with an average price swing of ±8.4%, ranging from -12.1% to +12.1%.
Currently, Tesla's implied move is ±9.8%, indicating options markets expect a single-day price swing of up to 9.8%. Compared to the last four quarters, Tesla's average post-earnings price swing was ±10.8%.
Considering options volatility skew, market sentiment leans bullish on Tesla. For the upcoming event, investors may consider trading Tesla's volatility, either by betting on increased volatility or betting against it.
2. What is a "Straddle" ?
A Straddle is a neutral options strategy involving simultaneously buying a call option and a put option with the same strike price and expiration date.
Traders profit from a Straddle when the options' price moves significantly beyond the total cost of the premiums paid. It is particularly profitable when the underlying asset experiences substantial volatility, with virtually unlimited profit potential.
A short Straddle involves selling both a call option and a put option with the same strike price and expiration date. It's used when the trader believes the underlying asset will not significantly rise or fall within the option's contract period. While the maximum profit is the premium collected from selling the options, potential losses can be unlimited.
Straddle provides two key insights for traders: expectations of volatility in the underlying security and the expected trading range before the expiration date.
Straddle are typically employed ahead of major corporate events, such as quarterly earnings reports, when uncertainty about market direction is high. However, they may not succeed in stable market conditions.
3. Tesla Short Straddle Case Study
Step1: Taking Tesla options with a strike price of $240 and expiration date of July 26th. Selling a call option at an opening price of $10.95,for a premium of $1,095.
Step2: Taking Tesla's option with a strike price of 240 and an expiration date of July 26, sells a put option at the opening price of 10.95 for a premium of $1,155.
In this trade, the investor collects a total premium of $2,250. However, this comes with obligations: firstly, from the put option where the buyer can sell Tesla at $240 anytime; secondly, from the call option where the investor must deliver Tesla at $240 whenever demanded.
To profit, $Tesla Motors(TSLA)$’s closing price must fall between $217.5 and $262.5 (excluding commissions), with a maximum profit of $2,250.
If the investor engages in a bullish straddle, betting on volatility, they would reverse the selling actions to buying. Tesla's closing price needs to be below $217.5 or above $262.5 (excluding commissions) to make a profit.
The essence of a volatility trading strategy lies in constructing an options strategy that hedges away other factors affecting option prices, leaving only volatility's impact. This way, traders aim to profit from fluctuations in stock options.
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