Signs are appearing that investors could begin to build a long position in Tesla
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Tesla has been in a steep downtrend — a decline that began in mid-December. The stock finally had a strong up day on March 12 after announcing a partnership of sorts with Baidu in China. Is the bottom in for Tesla stock? Is the option market giving us any clues?
The first place I would look for a clue from Tesla options is the weighted put-call ratio. That chart is shown below. There was a local minimum at an extremely low level last December. Local minima on the put-call ratio chart at extreme levels are sell-signals for the underlying stock. That was certainly accurate. Not every local maximum or minimum at an extreme level has been such a good signal as the most recent one. Those signals are marked on the chart (red letters indicate successful signals, while blue letters indicate signals that did not pan out).
Currently, Tesla’s put-call ratio is rising rapidly but is only about halfway up the chart. That means the stock is still on a sell signal. A buy signal from this put-call ratio will occur when the ratio reaches levels about equal to those of a year ago, and then rolls over and begins to decline. So, Tesla’s put-call ratio is still bearish and is not in position to generate a buy signal anytime soon.
However, there is another clue that option traders can give us, a sort of panic sign: implied volatility. Just as VIX spikes when there is panic in the broad stock market, so does the implied volatility of individual stocks — especially well-followed stocks like Tesla.
As an example, consider the two charts below. The first chart shows the time period from March 2022 through April 2023. On the chart there are two graphs. The upper graph is the composite implied volatility of Tesla options. A high number means that the options are expensive, while a low number means that the options are relatively cheap. The scale is shown on the right. From that, one can see that Tesla options mostly trade with an implied volatility between about 50% and 80%. The second graph is on the lower half of the chart and is the chart of Tesla’s stock price.
Tesla had been in a downtrend since April of 2022 — and particularly since September 2022 — through early 2023. Then the stock bottomed and began to rise. Coinciding with that bottom was a peak in implied volatility. The vertical red line on the chart shows that point. Tesla options had reached an implied volatility of 100% and then backed off sharply, returning to their “normal” trading range. In a sense, Tesla put buyers were panicking and paying up for Tesla puts.
The second chart shows the same two graphs — composite implied volatility and stock price — for Tesla currently. You can see that Tesla options still trade in a range of implied volatility between 50% and 80% most of the time.
But this week, implied volatility jumped up to almost 100% before backing off on March 12, when Tesla stock rallied. Again, a vertical red line marks this potential peak in implied volatility. I put a question mark by that line because it’s always possible that Tesla’s implied volatility could spike again. But if that implied volatility falls back below 80% — returning to its “normal” trading range — I would say that the peak has been made in implied volatility, at least for now. That peak often corresponds with a bottom in the stock price, as was the case in January 2023.
Based on this, it seems that an investor could begin to establish a long position in Tesla , using a mental stop to sell if the composite implied volatility once again rose above 85%, say. Then, if and when the put-call ratio chimes in with a buy signal of its own, add to the long position.