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Trading Articles

Why does Tesla keep going up?

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Tesla makes cars, people like their cars, and that explains why Tesla is worth more than every other auto firm combined.

It’s all about those strong fundamentals.

If you believe that, wait until you hear about these magic beans...

Right, there isn’t a single traditional investing metric that justifies Tesla’s current valuation.

Even trying to justify it misses the point.

Tesla is still all about the company it might one day become...

And gamma squeezes.

Sounds a bit technical, but it’s not really.

Basically, massive volumes of short dated call options are bought.

In everyday terms, that means lots of people are betting that the price of Tesla will be higher within a short period of time.

Why does it matter?

Because this is happening in the options market, it means that option dealers receive the bet and then immediately buy actual shares in Tesla to hedge their risk.

You see, dealers try to be directionally neutral

In an ideal world, dealers would write (and sell) an identical amount of call and put options to achieve this balance. There’s minimal hedging required and they make their money from the spreads/commissions rather than stock price movements.

However, the ideal world doesn’t exist!

So, when demand for call options vastly outpaces demand for put options, dealers have to actively hedge that directional exposure. If they can’t balance their book, they’re forced to buy the underlying stock to ensure they have it available to ‘pay out’ if the price rises, which creates a self-reinforcing loop of buying pressure.

What else happens as Tesla stock heads higher?

Index-trackers/ETF’s have to buy the stock in order to accurately track the price movements, which adds more fuel to the fire! Now, this kind of rebalancing happens in every single stock.

Why is Tesla special?

Because the options market is the tail wagging the dog, and the volumes are ENORMOUS. Data from OptionMetrics/FT showed how Tesla dominates in the options market. Three crazy stats:

  • Almost twice as much outstanding volume of Tesla options than Nasdaq index options
  • More volume in Tesla than in Amazon, Apple and Facebook combined

And the third stat?

Well… What a difference a year makes!

Picture 1

From less than 400 to almost 1200 in a year. IN-SANE!

There’s rarely a dull day for Tesla so whatever the future holds, it’s sure to be exciting!

*Not trading advice. Past performance not indicative of future results.

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