Bulls Creep Back into Tesla Options After Stock Selloff

Following a severe three-day selloff, bullish optimism returned to Tesla Inc's (TSLA.O) options on Wednesday, as the stock bounced between gains and losses.

Tesla's stock plunged 16 percent through Tuesday this week after Chief Executive Elon Musk asked his followers on Twitter over the weekend if he should sell 10% of his investment in the firm as Washington considers raising taxes on the ultra-rich. Nearly 58 percent of respondents stated they would be in favor of such a transaction.

After dipping early in the day and momentarily sending Tesla's market value below $1 trillion, shares were recently up 3.6 percent on the day at $1,060.75.

According to experts, record purchase of short-term bullish call options on Tesla in recent weeks has aided the stock's recent movements, including a dramatic rise in October that propelled Tesla's valuation beyond $1 trillion.

According to data from options analytics company Trade Alert, the stock's decline moved options bets on Tesla toward the pessimistic side, which puts trading outnumbering calls for the first time in almost two weeks on Tuesday.

Calls provide you the option to buy shares at a certain price in the future, while puts give you the option to sell them.

On Wednesday, upside bets were in popularity again, with call options outnumbering puts by a 1.3-to-1 ratio. Only 0.8 calls were exchanged for every put on Tuesday.

Market participants' fast movements are more likely to represent attempts to benefit from the stock's momentum than set ideas on where shares will go in the long run, according to Brian Overby, senior options analyst at Ally Invest.

"It's the stock's speculative nature," Overby explained.

The most widely traded contracts on Wednesday were call options that would pay out if the price closed over $1,100 and $1,200 by Friday.

While some of these may be closing trades ahead of option expiration, overall sentiment on Wednesday was bullish, according to Trade Alert.

According to a Reuters examination of Trade Alert data, Tesla options accounted for roughly $109 billion in premium changing hands over the previous two weeks, or almost one in every three dollars traded in the US-listed options market, with the majority of it in bullish call contracts.

According to a research from Vanda Research, hedging activity from market makers, who may have taken the opposing side of at least a percentage of these transactions, was likely responsible for worsening the rise and the subsequent drop in Tesla.

With the majority of open Tesla call options slated to expire this week and next, Vanda's analysts believe there is a "not insignificant" chance that more options-driven selling may lead to a greater downturn in the stock.