Is Tesla's Stock Surge a 'Major' Options Gamma Squeeze? - GLJ Research
Investing.com -- Tesla's recent stock price surge is under scrutiny. GLJ Research analyst Gordon Johnson questions whether this increase is due to improving fundamentals or a gamma squeeze in options. Since Tesla reported third-quarter results on October 23, 2024, which slightly surpassed expectations, the stock has risen 116.7%. This rise has been attributed to factors such as the election victory of President Trump and Elon Musk's close relationship with the new administration.
However, Johnson suggests that the stock's performance may have been influenced by changes in the options market, particularly through products offered by CBOE Global Markets Inc. He notes that these products, such as weekly options and 0DTE options, have significantly altered the market and may have driven the stock's movement.
Data indicates that Tesla's stock price movements are primarily a result of activities in the options market rather than the company's fundamentals. Since 2020, Tesla's put option volumes have generally exceeded call option volumes by nearly 4:1. However, after Tesla's third-quarter earnings report on October 24, 2024, and Trump's electoral victory on November 5, 2024, there has been a significant increase in demand for call options.
The increased demand for call options forces market makers to purchase Tesla stocks to hedge their risk of selling these options, which in turn leads to a rise in the underlying stock price. Nevertheless, Johnson warns that Tesla's stock price rise may not last indefinitely. Citing a 71.4961% implied volatility in Tesla's 1-month 25-delta call option volume, he notes that daily transactions by individual investors and hedge funds in these options have become very costly.
On December 20, 2024, Tesla's most active options were $500 strike call options priced at $3.95. For holders of these options to be profitable, Tesla's stock price needs to rise to $503.95 by Friday, representing an 8.8% increase. If Tesla's stock does not reach this level, all 116,483 of the $500 call options purchased that day will expire worthless, likely leading to a reversal in Tesla's stock price as call traders close their positions.
Johnson also presents evidence showing a correlation between significant changes in stock price and option volumes of other stocks, like Nvidia.
Looking at Tesla's fundamentals, Johnson suggests that the company is facing challenges in various markets. In China, while discounts have boosted demand for Tesla vehicles, these sales are likely made with gross profit margins close to zero. In the U.S., Tesla is struggling with demand, particularly for the Model Y and Cybertruck. In Europe, although fourth-quarter sales are expected to be stronger than in the third quarter, annual sales are anticipated to decline compared to the previous year.
Johnson concludes that these dynamics may indicate that a reversal in Tesla's stock could be near, as call traders begin to close their positions. This situation may force market makers to adjust their delta hedges downward, potentially leading to a significant decline in Tesla's stock price.
The analyst gives a sell recommendation for Tesla with a target price of $24.86.