Market Events
Monday, April 29th 2024
Trading TSLA’s lowest slope in three years
TSLA’s sharp decline in slope today presents new trading opportunities for those looking to maximize a change in options skew.
Summary
Tesla's stock soared after news broke of the potential introduction of full self-driving (FSD) in China. The article discusses the effect on TSLA's slope and presents trading opportunities, such as a short risk reversal or a long put diagonal. The current slope is the cheapest seen in three years, and while stocks typically revert to a positive slope, the article raises the question of whether this could be the start of a new beginning for TSLA.
News broke overnight that Tesla’s full self-driving (FSD) could soon make an appearance in China: https://theweek.com/business/elon-musk-tesla-china-self-driving-cars
Elon’s surprise visit to Beijing caused the stock to soar early Monday morning, up over 15% by the end of the day. In this article, we take a look at the effect on TSLA’s slope and how you can trade based on the recent announcement.
The outlook tab in the analyzer shows TSLA’s slope today as significantly undervalued, based on comparisons to it’s closest SPDR sector ETF (XLY), to the ORATS forecast of slope, and to it’s 1-year percentile.
An undervalued (or cheap) slope indicates that the higher strike calls are more expensive, or overvalued, compared to the lower strike puts (https://orats.com/university/stock-scanning#put-call-skew-cheap). Looking at the IV skew for the week of May 17th, we see that the five delta calls have an IV of 84, while the 5 delta puts have an IV of 62.
This disparity is especially unique for TSLA, which typically has a positive slope (lower strike puts are more expensive than higher strike calls). TSLA’s high volatility and bearish price trends over the past two years have contributed the positive slope. You can see in the following months that the slope begins to level off.
In fact, it’s worth pointing out that this is the cheapest slope we’ve seen on TSLA in three years.
Stocks typically don’t see a negative slope for long. Slope tends to revert to the positive side because stocks normally drop faster than they go up, causing the implied volatility of the lower strike puts to be higher than the higher strike calls.
The sharp decrease in slope today presents some interesting trading opportunities for TSLA. A short risk reversal trade maximizes the change in slope by selling the higher IV call and buying the lower IV put. However, this would mean being short delta, which might not be a good idea if TSLA stock continues to see good news.
An alternative trade is one Matt demonstrated on a recent episode of Driven by Data - our live webinar series. A long put diagonal, when set up correctly, can minimize your exposure to the Greeks while maximizing the profit potential from the change in slope. You’re buying the lower strike put at a further expiration while selling the higher strike put at a closer expiration. This trade is also long delta, meaning you’d be profitable if the stock continues to go up.
If you’re considering trading the above spreads, please first try our paper trading platform. These are not trade recommendations, and we encourage you to try out strategies in a paper trading environment before investing real money.
Do you think this is the start of a new beginning for TSLA, or just a one-time fall in the slope? Leave your thoughts on the trades in the new Community tab in the dashboard.
Disclaimer:
The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.
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Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.
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