Tesla's Stock Options Are Hot on Wall Street

Investors love to bet on Tesla Inc. TSLA 10.97%. The company's stock is highly volatile, which makes it perfect for speculation. Tesla is one of the most watched stocks on the market, and investors are always looking for an opportunity to make a quick profit.

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Elon Musk's electric-vehicle company has seen a surge in popularity on Wall Street, with investors clamoring to get in on the action. Tesla's stock has been on a tear lately, and options traders are betting that the rally will continue.

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Tesla options trading has surged in recent months, with nearly three million contracts now changing hands on an average day, according to Cboe Global Markets data. That is up from 1.5 million a year ago and more than any other stock. Only wagers on the SPDR S&P 500 ETF outpace those on Tesla. Tesla's share of options trading has been growing steadily, and now the company accounts for an average of 7% of all options trading on any given day. On January 6th - the busiest day on record - more than 5.2 million contracts were traded, representing nearly 10% of all options trading for the day.

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In December, trading activity in Tesla options surpassed volumes tied to the Invesco QQQ exchange-traded fund, which tracks Nasdaq-100 stocks. This was the first time in nearly two years that Tesla's options trading activity had topped the QQQ. In July, Tesla's options trading also edged out Apple's on a sustained basis. This is a notable feat, considering that Tesla is now the sixth-largest company by market cap in the S&P 500, leapfrogging the leader.

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Many of the biggest options bets on Tesla are high-risk, high-reward trades that would require an improbable surge in the stock price to pay off. For instance, the most popular bet is for Tesla shares to double within 12 months from their previous record high of $409.97. That would require a more than fivefold increase from Thursday’s close of $160.27.

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According to Steve Sosnick, chief strategist at Interactive Brokers Group Inc., traders who buy Tesla contracts are very bullish on the company and its technology. He attributes this to Tesla's cultlike following, which is unique among publicly traded companies. Tesla shares have lost 61% of their value since late 2021, when the Federal Reserve began raising interest rates. Competition from other auto makers, Elon Musk's split-brained focus on Twitter, and waning Chinese demand have all contributed to the decline in confidence. Musk's sale of tens of billions of dollars of shares has also been a factor.

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Tesla has become one of the most polarizing stocks on Wall Street, attracting equal numbers of enthusiastic supporters and outspoken critics. Both sides have turned to derivatives in droves to express their views: bulls who say the company is a game-changer are betting on extreme upside scenarios, while bears who say the stock is wildly overvalued are betting that the share price will plunge.

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"Tesla is always the most active single-stock option at our firm," said Mr. Sosnick. Since the start of 2022, traders have invested nearly $700 billion in options tied to Tesla, more than any other stock or exchange-traded fund. This is more than any other investment besides index-level bets on the S&P 500.

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Call options that are bullish give traders the right to buy shares at a set price by a certain date, but they are not obligated to do so. Bearish put options, on the other hand, grant the right to sell shares. The options market has seen a lot of growth in recent years. In fact, trading activity set a new record last year, with an average of over 41 million contracts changing hands each day.

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Fervor for Tesla remains strong among investors, even as individual investors have largely lost their appetite for buying tech stocks. The stock has rallied 30% in January, though it is still down sharply from its high.

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Investors were betting heavily on Tesla ahead of the company's fourth-quarter earnings report, which was released after Wednesday's market close.
Options traders are predicting a big swing in Tesla's stock price following the company's latest earnings report. Some analysts are expecting a move of 13% or more, which would be the biggest one-day move in over a year. However, it's worth noting that similar swings have become fairly common after Tesla releases its earnings.
Tesla's stock rose 11% on Thursday after the company posted record profit. However, Tesla missed Wall Street expectations in other areas such as revenue. Even after the stock bump, the most ambitious options bettors are still far from being able to cash in.