Why did Tesla option prices suddenly surge? Uncovering profit strategies on the eve of financial reports

The Robotaxi launch event has just wrapped up, SpaceX's Starship has launched, and Tesla's financial report is set to be released this week.

Many investors may be puzzled by Tesla's option prices during this time: they are exceptionally high, and the Implied Volatility (IV) is also soaring. Why is that?

Let's take a closer look at this call option expiring on October 25th, priced at $6.75, meaning it would cost $675 to purchase one. Its Implied Volatility (IV) is an impressive 100.91%!

From the Option > Analysis > Volatility Analysis, we can see the IV for Tesla's entire options chain. We find that Tesla's options experienced two IV peaks on September 27th and October 10th. Although the overall options chain's IV has fallen since then, it still remains at a high level.

This situation occurs because significant events happened on these two dates. Usually, around major events, the Implied Volatility (IV) of options tends to stay high, and the prices of options are often more expensive than usual.

Tesla announced Robotaxi on September 27, and the launch event was held on October 10, the previous trading day. If autonomous driving technology is successfully implemented, it will undoubtedly bring significant changes to our lives.

Many investors seized trading opportunities around the launch event. Although the launch event has ended, another major event for Tesla is around the corner: its financial report will be released after the market close on October 23, which may also lead to significant stock price fluctuations.

Next, let's discuss how to seize trading opportunities related to Implied Volatility before and after the earnings report.

Implied Volatility (IV) is not a value that physically exists; it is a theoretical indicator derived by reverse-engineering the option pricing model using inputs such as the option price, the underlying stock price, the risk-free interest rate, and time to expiration.

It can reflect the valuation level of options to a certain extent because under constant conditions:

When the implied volatility is at a high level, the price of the option is more expensive.

When the implied volatility is at a low level, the price of the option is cheaper.

In real options trading, option prices are often influenced by investor expectations in addition to the underlying stock price, strike price, and expiration time.

We know that when stock prices rise sharply, investors in call options receive higher returns; conversely, when stock prices fall sharply, investors in put options receive higher returns.

If investors expect the stock price to fluctuate dramatically, they will buy the corresponding options in advance and wait to profit from significant stock price movements.

For this reason, they are willing to pay a premium over the theoretical price. When the price of an option increases but other factors do not change significantly, it will ultimately be reflected in the rise of Implied Volatility.

Therefore, Implied Volatility often indicates investors' expectations of future stock price fluctuations. If a significant event that could impact the stock price is expected to occur soon, and investors anticipate increased stock price volatility, the IV of the corresponding options will rise accordingly.

Before the event started, investors believed that the results showcased at the launch would greatly affect Tesla's stock price, hence the IV on the option chain was as high as 72.99%.

After the event, the stock price indeed fluctuated significantly as expected. For instance, when the stock price plummeted, holders of the TSLA 241025 220P option could achieve a return of 84.23% for the day.

The importance of accurately forecasting the level of Implied Volatility in option trading is self-evident. Besides product launch events, there's another type of event that occurs more frequently in real situations and often leads to significant stock price fluctuations: the release of financial reports.

If you anticipate that the stock price will surge following the earnings report, you can buy a Call option.

If you expect the stock price to plummet, you can buy a Put option.

Of course, if you only expect significant price volatility but are unsure of the direction, you can also choose to buy both Call and Put options, forming strategies such as a Long Straddle or Long Strangle.

Although this means paying additional premiums for both options, it ensures that you can profit regardless of which direction the stock price moves significantly.

And after the earnings are released, as the uncertainty of the company's performance decreases and larger fluctuations are not expected for a while, the enthusiasm for buying options wanes, leading to a rapid drop in implied volatility. This is what we often refer to as "IV Crush".

Historical data can also validate this phenomenon to some extent: Almost every time before Tesla's earnings are released, the IV tends to peak; after the earnings are announced, IV immediately drops to a lower level.

If the stock price moves sideways after the earnings report, even if other factors remain unchanged, the prices of both Call and Put options will decrease correspondingly due to the drop in IV.

You can go to the Options quote page > Charts > scroll down to the Price Calculator to try it out for yourselves. When other factors are held constant, the smaller the input implied volatility, the lower the theoretical price of the option calculated.

They sell options when the IV is high before the earnings release to capture the premium. If the stock price does not fluctuate as much as expected, the value of the options quickly decreases, allowing the investor to buy back the options at a lower price to close the position and profit.

If you expect that the stock price will not fall, you can sell Put options.

If you expect that the stock price will not rise, you can sell Call options.

Additionally, if you are confident in your judgment, you can also sell both a Call and a Put, forming strategies such as a Short Straddle or Short Strangle. While these strategies allow you to receive premiums from two options at the time of opening the position, there is a potential for loss whether the stock price rises or falls sharply. Therefore, it is crucial to ensure accurate judgment before implementing these strategies.

Alright, that wraps up today's sharing.

If you believe that Tesla's stock price will fluctuate significantly after the earnings release, you can adopt an option buyer strategy. If you think that Tesla's stock price will remain stable after the earnings release, you can use an option seller strategy.

A word of caution: Option sellers face higher risks and potentially larger theoretical losses, so be sure to proceed with caution. If you are not prepared to buy the underlying stock at a lower price, be cautious about selling Puts. If you do not hold the underlying stock, be cautious about selling Calls.

If you have other ideas about implied volatility, feel free to share and discuss them in the comments section.