TSLA has been on an incredible +50% move for the month following the 11/6 elections.
SpotGamma wrote extensively about the very bullish setup we saw on 11/7 – a setup that was more bullish than general market expectations, and why we thought TSLA stock would reach previous all-time-highs of 400.
Along that path, we called for an interim pause on 11/11 as the stock went “to far too fast” into 350.
We then flagged the removal of overbought conditions on 11/25.
Today we are back to “gearing down” in our TSLA long view due to lack of call open interest above, very rich call skews, and heavy short dated flow.
Options Landscape: Resistance at 420
As we write this on 12/11/24, TSLA is currently testing the 420 level – an iconic level that is sure to be noted on social media – and probably my Elon himself.
Through our options analysis, we can see that there is significance at 420 through massive call gamma at that strike (orange bars), which sets up 420 as a resistance zone. We note above that level relative call size shrinks dramatically, which we think serves to stall upside momentum. The idea is that options dealers have less flow to hedge if the stock rises >420.
To the downside, we can see that 400 is the biggest strike on the board, and likely to be a major strike into 12/20 options expiration. This level, we think, should therefore serve as major support over the next week.
Catalysts for Renewed Bullish Momentum
What would make us pause on this call for an interim TSLA top would be if new, longer dated call positions were being added to TSLA stock. However, SpotGamma’s proprietary tools show us that most of the flow trading today (12/11) is tied to Friday’s options expiration.
Take, for example, our HIRO signal which shows the real-time delta hedging estimate for all of today’s trades. The purple line measures the delta notional value of trades from all expirations, while the teal line measures the delta impact of trades done for just Friday’s expiration.
As you can see, the two largely track each other, which is a signal that the major gains today (+5%) are primarily driven by short dated options traders – not people with long term views.
If longer dated options traders were active, it could present larger hedging obligations for dealers that would expand over time.
When flow is predominantly next-expiration positions (12/13 in this case), those flows can reverse or be removed quickly, which could, in turn, reverse any bullish hedging flows.
This Friday’s (12/13) Expiration: A Local Top?
We can take this analysis a step further by using SpotGamma’s new Tape tool, which reveals real time options activity by contract.
What you see is that the vast majority of major volume strikes are all tied to 12/13 expiration calls – another signal that its primarily short dated momentum style traders that are active in TSLA.
To some extent it makes sense that longer dated call buyers are on the sidelines, as TSLA call IV’s have risen dramatically over the last week, as shown with 1-month skew (teal).
While these IV levels are not quite to the level of the initial election-thrust (gray, 11/11 expiration), they are still presenting as an elevated, 99th percentile ranked call skew which can be a topping signal.
Further, IV Rank is 65%, which is unique to see during a bull run (generally high IV rank is associated with stocks crashing). “Stock up, vol up” is another signal of short term tops.
From a hedging flows perspective, the stock price rising may force options dealers to buy the underlying stock. This is because they are ostensibly short call options, and need to buy stock as a hedge (gamma). Additionally, when the IV of TSLA options rises at the same time , it further can increase the amount of buying that dealers need to do (vanna).
This high implied volatility presents another issue for long call holders: the cost of carry.
Lets take, for example, a 1-month 25 delta call. As you can see in the chart below from Bloomberg, these calls have an elevated implied volatility (blue line).
As we approach the end of the year, there are several holidays which can increase time decay, and can also serve to stall momentum in the stock, which can reduce volatility. If time simply advances through Christmas, we see the value of high IV options decay rapidly.
Lets consider the price shift in a 1-month 25 delta call, as time advances:
1/10/25 exp, 490 Strike calls are currently priced at ~$11.1, with an IV of 69%.
~2 weeks from now (i.e. through Christmas), that option (all else equal) will be worth ~$5.
That’s a heavy burden for long options holders.
But, what happens if the stock price simply stalls out, ignoring time advancing?
If we reduce the IV of 1/20 exp calls to the level at which 25 delta calls were holding as of 1 week ago (50% vs 69%), the value of that call drops to ~$4.9.
This dynamic suggests that as time advances, and if volatility simply retreats, dealers may have to start selling the stock as call values drop.
We argue that this creates a headwind for this stock.
The SpotGamma View on TSLA
For the time being, we see 12/13/24 expiration as the expiration with the most total gamma, which informs us that a large amount of options positions are set to expire on Friday.
Additionally, per our HIRO & Tape data above, we believe many of these short dated calls are long positions.
As these short dated calls decay, it may lead to short term consolidation back into strikes with large amounts of open interest – namely 400.
This short term stalling in TSLA’s price can lead to the rapid decay of longer dated options – invoking dealer flows which serve to suppress the stock’s price.
Should call skews flatten/normalize, and call positions start to build at higher strikes, we would likely shift back to a bullish stance in TSLA.
