Tesla Option Trader Bets $3M On 29% Upside From Here

Tesla Inc TSLA dropped 3% on Tuesday and has made virtually no progress in the past month despite recently reporting better-than-expected third-quarter delivery numbers.

But while some traders are speculating Tesla’s insane 800% one-year rally has finally run out of steam, one deep-pocketed option trader made a big bet on Tuesday that Tesla will be making new highs by January.

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The Tesla Trades: On Tuesday morning, Benzinga Pro subscribers received 10 alerts related to unusually large Tesla option trades. Here are the largest:

• At 9:46 a.m. ET, a trader bought 316 Tesla call options with a $400 strike price expiring on Friday. The contracts were purchased near the ask price at $25.168 and represented a $795,308 bullish bet.
• At 10:10 a.m. ET, a trader sold 556 Tesla put options with a $310 strike price expiring on March 19, 2021. The contracts were sold at the bid price of $31.49 and represented a $1.75 million bullish bet.
• At 10:26 a.m. ET, a trader bought 775 Tesla call options with a $500 strike price expiring on Jan. 15, 2021. The contracts were purchased near the ask price at $43.369 and represented a $3.36 million bullish bet.
• At 10:47 a.m. ET, a trader bought 2,000 Tesla put options with a $200 strike price expiring on Jan. 15, 2021. The contracts were purchased at the ask price of $3.30 and represented a $660,000 bearish bet.

Of the 10 total large Tesla option trades on Tuesday morning, six represented calls purchased near the ask or puts sold at or near the bid, trades typically seen as bullish. Three trades were calls sold at the near the bid or puts purchases at or near the ask, trades typically seen as bearish. One trade was executed near the midpoint of the bid-ask spread, which is typically considered neutral.

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 Rally Recharging? Tuesday’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.

Through the first three quarters of 2020, Tesla has delivered 318,350 vehicles, up 24.7% compared to the first three quarters of 2019. Tesla bulls highlight the fact that growth of any kind is impressive given the difficult 2020 environment, while bears pint out that Tesla’s 800% increase in market cap isn’t exactly in-line with its 24% increase in deliveries.

Tesla has previously said it will “comfortably exceed” 500,000 vehicle deliveries in 2020, which means the company will need to increase deliveries by another 30.4% in the fourth quarter to 181,650 vehicles.

Tesla investors are hoping the company’s recently announced Model 3 price cut in China will help stimulate demand without eating into margins.

Benzinga’s Take: The majority of the large option trades on Tuesday morning were bullish, including the largest trade of the day. The $3.3 million call purchase has a break-even price of $543.37, suggesting about 29% upside for the stock in the next three-plus months.