TSLA Tumbles Into Red After Opening Surge As ‘Mysterious Options Trick’ Fails Again Tyler Durden Tue, 07/14/2020 – 10:29
In a replay of yesterday’s price action, TSLA shares soared at the cash open only to give up significant gains and tumble into the red.
One topic that is occasionally brought up by Tesla skeptics, but rarely examined in depth, has been a litany of out of the money call buying in the name that appears to be occurring, relatively aggressively, on a weekly basis.
While the buying could be attributed to normal market forces, a new article by Dan Stringer looks into the specifics of one such trade that took place last week, where it appeared that over $ 2.5 million was deployed in a very short term, very out of the money options buy.
The author then lays out that OCC rules dictate that the clearing house must have a certain percentage of this stock on hand to deal with the calls should they move into the money. He estimates a 20% ratio:
The broker-dealers need to have some margin level (per Rule 601 of the OCC rules); this can vary by broker-dealer and is subject to calculations with these rules. I have heard a typical ratio is roughly 20% on hand, so for the purpose of this exercise, I will use that.
From there, he determines that the options buy would trigger a purchase of 716,000 Tesla shares to cover the trade. He also notes the timing of the transaction, pointing out that “broker-dealer margin requirements are sent out by 10:00 am EST, or within the first ½ hour of trading” and arguing that this could cause a spike at the cash open.
This would create a potential spike in buying at the open, causing shares to spike. The following 12,800 options would then require a further 256,000 shares to be purchased using the same margin requirement methodology.
The author concludes by stating that the options buy could be a “relatively inexpensive” way to generate some forced buying in Tesla.
For a large-cap company like Tesla with the volume of shares that have been trading over the last several months, this option position would be a relatively in expensive cost to generate some forced buying, at a cost of just 5% of the open position.
Recall, the topic of strange call buying was also brought up in a podcast with well known Tesla skeptic, @TeslaCharts, in May. Though the buys were discussed, neither the host nor the guest could speculate as to why these buys might be taking place. Thanks to Dan Stringer’s article, they may be on their way to an answer.
And we note that today – just as yesterday – massive volume was seen in extreme OTM calls at the open (as @evdefender notes):
20 minutes into the session: 5,000 $ 2500 strike calls expiring Friday and 2,000 $ 3500 strike calls expiring Friday
But for now it’s not working.