Bloomberg’s Lu Wang reports on options activity that boosted shares of Tesla in recent trading, writing:
There were plenty of reasons for Tesla Inc. to rally Monday. Everything from Hertz Global Holdings Inc.’s blockbuster order to buying by passive funds and a squeeze on short sellers.
But other forces were at play in goosing the gain: options traders who piled on bullish bets, and market makers who were forced to purchase shares to hedge their positions as the stock surged.
In other words, the tail wagging the dog. It’s a narrative that’s come up repeatedly in explaining mysterious moves, such as the big-tech rally in the summer of 2020 and this year’s mid-month market swoons.
More than 2.4 million bullish contracts on Tesla changed hands Monday, a 14-month high, as traders rushed into speculative wagers to reap quick gains.
The most-active contract, the $1,000 call expiring Friday, soared to $39.34 from $1.60 — for a single-session gain of about 2,360%.
Investors spent $5.11 billion on call options, compared with a total of $279 million on puts, according to an estimate by Nomura Securities. The firm calls the 18-to-1 ratio “unheard of.” And all the spike in calls means options dealers needed to snap up shares to avoid unwanted risk.
“This is incredible activity,” Chris Weston, head of research at Pepperstone Financial Pty, wrote in a client note. “We’ve seen a clear lack of regard for the cost of the options,” he added. “The stock subsequently goes in the money and dealers (who sold the calls) have to hedge their delta –- that means buying the underlying –- again this perpetuates the stock higher.”
Read more here.