Tesla Bulls Bet Big Ahead of Stock Split - The Wall Street Journal

Updated Aug. 28, 2020 4:53 pm ET

A dizzying rally in Tesla Inc.’s TSLA -1.13% shares has unleashed a burst of options activity tied to the stock jumping even higher.

Tesla recently said it would enact a 5-for-1 stock split, making its wildly popular stock even more accessible to individual investors. Trading on a split-adjusted basis will go into effect Monday.

The company said stockholders would receive four additional shares for each one held as a dividend after the market closed Friday. Trading on a split-adjusted basis would go into effect Monday. Though Tesla investors will see more shares in their brokerage accounts, the split doesn’t alter the overall value of their holdings.

So far, though, access to Tesla stock doesn’t appear to be a problem. Since Aug. 11 when the company unveiled plans for the split, shares have jumped 61%, building on an already impressive surge this year and bringing its market value to more than $400 billion. Tesla shares have more than quintupled this year and closed at $2238.75 Thursday, a record. They inched lower Friday by 1.1%.

Investors have been scooping up call options tied to the shares’ continued advance. The ratio of put options bought relative to call options on Tesla hit a record low on Aug. 21, according to Garrett DeSimone, head of quantitative research at data provider OptionMetrics. Mr. DeSimone analyzed Tesla options that are out-of-the-money, or far from the current stock levels.

Some of the most actively traded options contracts in recent days have been bullish calls tied to the shares jumping even higher, to $2400 or $2500, Trade Alert data show.

Call options give investors the right, but not the obligation, to buy shares at a specific price later in time. Puts confer the right to sell.

Options are derivatives contracts that can be used to make directional bets on individual stocks and indexes, or to hedge portfolios from declines.

And some rare dynamics have emerged in the market for Tesla derivatives. Lately, bullish call options tied to the stock have been more expensive than bearish put options, according to Susquehanna Financial Group. Typically, bearish put options are more expensive than calls because of their use as a hedge.

“The options are pricing in the potential for more violent moves to the upside compared to the downside,” said Chris Murphy, co-head of derivative strategy at Susquehanna. “It’s a combination of euphoria, greed and a little bit of FOMO,” he said, using the acronym for the fear of missing out.

The electric-car maker is now worth more than auto makers around the world and many giants of American industry. Tesla recently reported its fourth consecutive quarter of profits, making it eligible for inclusion in the S&P 500 index and further boosting optimism about the company’s trajectory. If Tesla were in the index, it would be the eighth most valuable company, recently passing Johnson & Johnson and Walmart Inc.

Many didn’t see the winning streak for Tesla shares coming. Despite the advance this year, Tesla has been one of the most popular bearish bets in the market. Such short investors have lost about $25 billion this year as the stock has skyrocketed, according to S3 Partners data as of Monday.

Short sellers borrow shares and sell them with the hope of profiting by buying the shares back at a lower price later and pocketing the difference.  Tesla’s gains have been driven in part by short sellers’ pain—a “short squeeze,” in which rising prices force short sellers to purchase shares and close out losing wagers.

Analysts say the frenzied options activity can also contribute to stock moves. As the shares jump, trading firms must hedge their positions, potentially buying more of Tesla stock and driving the price even higher.

“These record high levels of call buying are continuing to support [Tesla’s] tremendous momentum,” Mr. DeSimone said in an email.

Similar dynamics have emerged in options on Apple Inc. and the broader technology sector, which has outperformed other groups for much of the year. Apple also recently announced a stock split, which typically gives a boost to a company’s shares.

The Cboe Nasdaq-100 Volatility Index, a measure of expected volatility in the tech-heavy gauge, rose in August even as the Nasdaq-100 index advanced to fresh highs. Typically, volatility recedes as the stock index rallies.