How Large Option Traders Are Playing Tesla Ahead Of Q3 Earnings

Tesla Inc TSLA were up 2.1% on Wednesday and are now up 737% in the past year ahead of the company’s third-quarter earnings report on Wednesday afternoon.

While some large option traders are speculating Tesla’s third-quarter numbers can’t possibly live up to expectations, others are betting Tesla’s fairytale 2020 will continue through the end of the year.

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The Tesla Trades: On Wednesday morning, Benzinga Pro subscribers received 18 alerts related to unusually large Tesla option trades. Here are the largest:

• At 10:29 a.m. ET, a trader bought 405 Tesla call options with a $520 strike price expiring Dec. 18. The contracts were purchased near the ask price at $21 and represented an $850,500 bullish bet.
• At 11:24 a.m. ET, a trader sold 300 Tesla put options with a $300 strike price expiring on July 16, 2021. The contracts were sold at the bid price of $34,201 and represented a $1.02 million bullish bet.
• At 11:41 a.m. ET, a trader sold 308 Tesla put options with a $427.50 strike price expiring on Friday. The contracts were sold near the bid price at $15.099 and represented a $469,700 bullish bet.
• At 12:30 p.m. ET, a trader sold 2,000 Tesla put options with a $240 strike price expiring on Jan. 15. The contracts were sold at the bid price of $3.30 and represented a $660,000 bullish bet.

Of the 18 total large Tesla option trades on Wednesday morning, 10 represented calls purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish. Eight trades were calls sold at the near the bid or puts purchases at or near the ask, trades typically seen as bearish. The four largest trades of the day were all bullish.

Why It's Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader. Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest Tesla option trades, there’s certainly a possibility they could be an institutional hedge on a large position in Tesla stock.

Tesla Earnings Beat Coming? Wednesday’s big option trades comes after Tesla reported a record 139,300 vehicle deliveries in the third quarter, up 53.6% compared to the second quarter. That number exceeded analyst estimates of 137,000 vehicles.

Analysts are expecting Tesla to report third-quarter EPS of 56 cents on revenue of $8.26 billion, up 31% from a year ago. Tesla bulls highlight the fact that growth of any kind is impressive given the difficult 2020 environment, while bears point out that Tesla’s 700%-plus increase in market cap isn’t exactly in-line with a 30% increase in revenue.

On Tuesday, CEO Elon Musk said on Twitter the company is rolling out a beta version of its full self-driving software in a “slow” and “cautious” manner, starting with a limited number of people who are “expert careful drivers.”

Tesla’s rollout comes after Alphabet, Inc. GOOG GOOGL subsidiary Waymo announced earlier this month its fully autonomous robotaxi services are now available to the public in the Phoenix area. General Motors Company GM also announced it was granted regulatory approval to begin testing its fully autonomous vehicles on public roads in San Francisco before the end of 2020.

Benzinga’s Take: The majority of the large option trades on Wednesday morning were bullish, including the largest four trades of the day. The largest call purchase has a break-even price of $541, suggesting about 25.5% upside for the stock in the next two months.