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Tesla stock is on another tear for a few reasons, chief among is that CEO Elon Musk is essentially done selling his shares. But there’s another technical factor that appears to be driving shares higher into year-end: options trading.
Tesla (ticker: TSLA) has risen more than 16% since Dec. 21, around the time Musk said his stock selling was winding down. The S&P 500 and Dow Jones Industrial Average have both gained roughly 3% over the same span.
Stocks go up and down in the short run for myriad reasons, both fundamental and technical. The cessation of large block selling—from a CEO or anyone else—is one technical reason for a stock to rise. More options trading is another technical reason that can drive a stock higher.
Options trades can impact stocks in a couple of ways. For starters, options volume can be a bullish or bearish signal to traders. In the case of Tesla, more bullish call options are being traded compared with bearish put options. Call options give the holder the right to buy shares at a fixed price. They are more valuable as the stock price rises. Put options are the opposite. They give the holder the right to sell stock at a fixed price.
What’s more, trading of options contracts can also generate hedging activity which, essentially, turns an options trade into a stock trade. Put it this way: A seller of a call option is, essentially, short the stock. The options seller might not want to be short stock. They might want to earn the commission for selling the option. The seller can buy stock that underlies the option to hedge their risk of the stock rising.
Trading in Tesla options is always, well, epic. Adjusted for market capitalization, Tesla options are traded 10 to 15 times more than Apple (AAPL) options. And Tesla options trading has risen about 30% over the past week, based on the five-day moving averages of total options volume. That’s enough to drive some reaction in the underlying stock.
Of course, there are other fundamental reasons Tesla stock is advancing. Wall Street analysts are getting more bullish. The average analyst price target has gone to $860 from about $840 over the past week. That’s still below where the stock trades—typical for Tesla shares—but still up.
Earnings estimates are helping drive target prices higher. Analysts now expect Tesla to earn about $9 a share in 2022, up from about $8 a share a couple of months ago.
Whatever the reason, Tesla bulls are likely pleased the stock has bounced off its lows. Shares closed below $900 on Dec. 20, down from a 52-week high of more than $1,240 a share set back in early November.
Write to Al Root at email@example.com