Not Your Father’s Options Market!

Years ago when savvy investors used talk about a potential moonshot on a stock, they’d talk about making money using the proverbial “cheap option”. Buying out-of-the-money call options for pennies in comparison to laying out even half due to the power of buying stock on margin could lead to a huge payday for those in the know, if and when bull fever took hold. Have those days passed us by? If you look at Tesla Motors (TSLA) where 216,000 options have changed hands in the first three hours of trading Tuesday you might think so.

In order to buy a call option expiring on March 21 ‘14 for less than a dollar, investors would have to look to the 325.0 strike – some 25% above its latest all-time high of nearly $260.00 today. While much of the cost of the premium is due to Tesla’s triple-digit share price, it is also attributable to a lofty implied volatility reading of 55.5% (+8.4%). By comparison if you wanted to spend less than a dollar on similar expiration call options on Facebook (FB), whose shares are trading at $70.00 investors could afford two calls at the 80.0 strike for exactly a dollar. To get there, Facebook’s share price would need to rise only 14% or half the magnitude of the journey needed to reach the goal. Implied volatility on Facebook is 41% by comparison.

The three most actively traded options on Tesla’s stock Tuesday belonged to Friday’s expiring calls. As the stock moved higher, so too did volumes in the 250.0, 255.0 and 260.0 strikes where volume so far stacks up to 30,000 contracts. Decent volume was seen in the March 21 expiration at call strikes of 240.0, 245.0 and 250.0, while the 300.0 strike was also in demand. The most actively traded puts expiring in March were at the 240.0 and 220.0 strikes where around 2,000+ possible bear plays were in action. Pricier options premiums, it appears, are having little effect on options traders’ desire to take part in Tesla’s bull run.

Chart – Tesla’s bull run is not deterring options traders

(click to enlarge)

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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