Tesla Stock: Elevated Trading of Deep-In-the-Money Call Options Ahead of Earnings


Tesla (NASDAQ:TSLA) is drawing attention as a significant volume of deep-in-the-money (ITM) call options was traded in anticipation of the company’s third-quarter earnings, which are scheduled to be released after the market closes. The surge in ITM call options activity suggests bullish sentiment among investors.

On the morning of Wednesday, October 18, TSLA stock was trading at $248.12. However, the Barchart Unusual Stock Options Activity Report for the day indicates that more than 15,000 call options were traded with a strike price of $190.00, expiring on November 17. This trading volume is over 28 times the number of existing contracts already outstanding, as indicated in the Vol/OI (Volume/Open Interest) column in the report.

These call options are considered deep in the money, with an intrinsic value of at least $58.12 per share ($248.12 – $190.00). The midpoint price of these calls was $59.95 per share, which reflects a premium of $1.83 over the intrinsic value ($59.95 – $58.12), equivalent to a 3.5% premium over the current stock price. In other words, some significant investors were willing to pay a 3.5% premium for these call options, which will expire in 30 days.

One reason investors might be willing to pay this premium is their belief that TSLA stock will increase by more than 3.5% in the next 30 days. By doing so, the call options would become profitable to exercise, allowing them to purchase more shares at a lower price.

Another reason for choosing call options over the underlying stock is the cost and flexibility they offer. For instance, with $1 million to allocate, an investor can gain exposure to 16,680 shares through calls expiring on November 17, compared to only 4,030 shares if they were to buy TSLA stock. Additionally, call options can increase in value before their expiration date if TSLA’s stock price rises, especially since these calls are deep in the money.

However, it’s crucial to note that these call options are not without risks. Analysts are anticipating that TSLA’s adjusted non-GAAP earnings per share (EPS) for Q3 will be 73 cents, down from $1.05 in the same quarter of the previous year. This is despite an expected increase in revenue. Estimates suggest a Q3 2023 total revenue of $24.14 billion, up from $21.454 billion in the previous year, representing a projected year-over-year sales growth of 12.5%.

The decrease in earnings could be due to downtime at two plants during Q3 2023 and higher expenses associated with the upcoming Cybertruck rollout. Moreover, free cash flow (FCF) may also decline in comparison to the previous quarter, as last quarter’s FCF stood at $1.0 billion, while it was $3.297 billion in Q3 2022.

Given TSLA’s high valuation, with a P/E multiple of 76x 2023 EPS estimates and 55x 2024 forecasts, any further downward revisions in EPS estimates by analysts could lead to a contraction in the P/E multiple, potentially putting downward pressure on TSLA stock.

In summary, these deep-in-the-money call options may offer a relatively safe way to play TSLA if the stock rises. However, they come with increased downside risk if the stock experiences a decline.

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