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 (Ticker: 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, 2014 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 (Ticker: 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.



About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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