What is the reason behind the surge in Tesla's stock price?
On October 26th local time, Tesla's stock price rose to a maximum of 1094.94/share, setting a new record high, with a total market value exceeding US$1 trillion. This is another stock in the history of US stocks with a market value of more than US$1 trillion after Microsoft, Apple, Google and Facebook, and Tesla has become the fifth largest listed company in the world. In just 11 years, Tesla completed the process from listing to market value of over $1 trillion, and its value-added speed was second only to Facebook.
There are many reasons for this round of support for Tesla's stock price rise, from huge orders from Hertz Global Holdings Inc. to buying passive funds and then suppressing short sellers, one of which is market makers and call options traders who hedge positions.
On Monday, Tesla's call option contracts changed hands more than 2.4 million, setting a 14-month high. To make quick profits, traders scramble to make speculative bets. Call options dominate all options contract trading, with 9 of the 10 most active contracts. The $1,000 call option expired on on Friday became the most active contract, soaring from $1.60 to $39.34, a single-day increase of about 2,360%.
According to Nomura Securities, the market spent $5.11 billion on Tesla's stock price call options and only $279 million on put options, this 18-to-1 ratio is "unheard of." The surge in call options means option traders need to start buying stocks in order to avoid risks. "This is an incredible phenomenon, and we found that there is a clear lack of consideration for options costs. As a large amount of money flows into the stock, traders selling call options buy hedge stocks to hedge the delta value, which will keep the stock price higher," Chris Weston, head of research at Pepperstone Financial Pty, wrote in a client note. The interaction between the stock market and the options market can be complicated. To clarify their relationship, Brent Kochuba, founder of SpotGamma Analytics Services, drew a comparison chart of Tesla's stock and delta, which is used to measure the extent to which changes in stock prices affect options value.
The simplest form is that when someone buys a call option, the trader must buy Tesla's stock to hedge the delta risk arising from option trading. If the stock continues to rise, traders are forced to buy more stocks, a process known as gamma hedging.
According to Kochuba's analysis, traders began selling call options on Monday, causing the delta index to be slightly negative. These bullish sellers were forced to restock when New York stocks began to rise around 10 a.m. Meanwhile, Tesla's stock price also rose to $980.
At noon, traders began buying call options, which triggered a surge in delta hedging trading, as Tesla shares climbed to $1,000. In the following two hours, another wave of buying hit the market again. Tesla's stock price peaked around $1,045, and then the delta hedge began to gradually weaken.
Half of the call options will expire on Friday, while the Tesla $1,050 stock price call contract that expired on the same day soared from 71 cents to $18.19, a 25-fold increase. "The short-term traders' move to enter the call option market is incredible, which may force market makers to go long."
, a trading focused on short-term options, can be seen as a strategy, which some traders call "gamma squeeze." The market believes that as Tesla's stock price approaches the strike price of options, dealers will have to buy more and more target stocks.
To some extent, this may help explain why Tesla's stock price movements look disconnected from business fundamentals. At the close of Monday, the stock closed at $1,025, which is already 38% higher than analysts’ forecasts in 12 months.
Of course, not all option buyers ignore Tesla's fundamentals, and it may be that analysts underestimate the company's potential. However, regardless of Tesla's operating prospects, many traders may be attracted by the current game of chasing momentum.
It is worth noting that open positions were open on Monday. While call options traded twice as much as the previous day, open positions rose by only about 5%. In other words, a large portion of the volume comes from day traders.
Chris Weston, head of research at Pepperstone Group in Melbourne, said: "The fluctuations in Tesla's stock price continue to provoke analysts' valuation models, and the essence of trading is to buy high and sell high."
In SpotGamma's Kochuba's view, although options activity on Monday helped push up the stock price, the boost is becoming unstable. First, options cost becomes more expensive. In addition, more than 30% of traders’ gamma exposure is expected to decrease when expiry on Friday, meaning hedge funds will be forced to adjust quickly in the coming days. He said: "I think this lays risks for higher but unstable stock prices."
This article is derived from Jinshi Data
