The Unbelievable Options Premiums of Tesla

Tesla logo in a showroom.  Red background.  The year is 2018.If you want to make a long-term wager on Tesla using options, please be warned - it'll cost you. Dearly.

Has there ever been a more polarizing company than Tesla in the history of the stock market? The company's bulls believe that Tesla will one day be the most valuable company in the world, led by a visionary CEO in Elon Musk. Tesla's bulls believe that the company will lead the world into a future that contains self-driving electric vehicles, homes and vehicles powered by solar energy and a rapidly decreasing reliance on fossil fuels.

The company's bears, however, believe that Tesla will eventually run out of money. The bears simply don't think that the numbers add up and that Tesla won't be able to make it.

This article isn't about where I think Tesla will go in the future as a publicly traded company.

This article is about the MASSIVE premiums that are commanded by Tesla's options.

Options premiums are determined by a number of different factors, including intrinsic value, time value and volatility.

The higher the implied volatility, the more expensive the option.

In the case of Tesla, you have a company that has very bullish bulls and very bearish bears. In addition, you have a constant stream of news that is constantly whipsawing the price of the stock all over the place. Who can forget the "funding secured" situation?

This very high implied volatility comes with a price. Let's illustrate this for you.

The price of one share of Tesla as of the time that this article was written was $305.01.

Options for Tesla currently go out until January 17th, 2020 (this article was written on August 28th, 2018).

Let's say that you believe that Tesla will be trading under $100 by January 17th, 2020.

If you wanted to buy $100 puts (on a company that is currently trading at over $300), you would have to pay a premium of roughly $10.20.

So, if Tesla doesn't come anywhere close to trading at $100 by January 17th, 2020, you would lose that $10.20 in premium.

Let's say that you believe that Tesla is going to absolutely crush it over the next couple of years and will more than double in price.

In order for this to happen, Elon Musk would almost certainly have to stay with the company, the production issues with the Model 3 would have to be figured out, Tesla would almost certainly need to avoid raising more money (Musk contends that they won't have to raise more money, though many are doubtful) and the company would need to turn profitable.

If you wanted to bet that Tesla will clear $700/share in less than two years, the premium on a January 17th, 2020 $700 call option would be roughly $5.85.

So, in short, you'd be paying $5.85 x 100 (1 contract is 100 shares) for the right to buy Tesla at $700 between now and January 17th, 2020.


If you want to jump into the Tesla fray but don't want to own or short shares, options is the way to do it, though you are going to pay dearly for the right.

Filed under: General Knowledge

Related Articles