Investing.com -- Tesla (NASDAQ:TSLA)'s recent stock surge is under scrutiny, with GLG Research analyst Gordon Johnson questioning whether the increase is due to an options gamma squeeze rather than improved fundamentals. Since Tesla's slightly better-than-expected third-quarter results on October 23, 2024, the stock has risen 116.7%. This surge has been attributed to factors such as President-elect Trump's victory and Elon Musk's close relationship with the incoming administration.
However, Johnson raises the possibility that the stock's performance is influenced by changes in the options market, particularly products offered by CBOE Global Markets Inc. He suggests that these products, such as weekly options and 0DTE options, have significantly altered the market and might be causing the stock's movement.
Data suggests that Tesla's stock movement is primarily a result of options market activity rather than the company's fundamentals. Since 2020, Tesla's put option volumes have generally exceeded call option volumes by nearly 4:1. However, after Tesla's third-quarter earnings report on October 24, 2024, and following Trump's election win on November 5, 2024, there was a significant increase in demand for call options.
The increase in demand for call options forces market makers to buy Tesla's stock to hedge the risk of selling these options, causing the underlying stock to surge. However, Johnson warns that the surge in Tesla's stock may not continue indefinitely. He points to the implied volatility in Tesla's 1-month 25-delta call option volume of 71.4961%, suggesting that day trading in these options by retail investors and hedge funds is becoming too costly.
On December 20, 2024, Tesla's most active options were Friday's $500 strike calls, priced at $3.95. For holders of these options to profit, Tesla's stock would need to rise to $503.95 by Friday, or an increase of 8.8%. If Tesla's stock does not reach this level, all 116,483 $500 December 20th Tesla call strikes purchased that day would expire worthless, likely leading to a reversal in Tesla's share price as call traders unwind their positions.
Johnson also points to evidence from other stocks, such as Nvidia (NASDAQ:NVDA), which shows a correlation between surges in options volumes and significant shifts in stock prices.
Looking at Tesla's fundamentals, Johnson suggests that the company is facing challenges in various markets. In China, despite discounts driving demand for Tesla's cars, these sales are likely being done at close to break-even gross margins. In the US, Tesla is struggling with demand, especially for the Model Y and Cybertruck. In Europe, despite stronger fourth-quarter sales compared to the third quarter, annual sales are expected to fall year on year.
Johnson concludes that the dynamics suggest a reversal in Tesla's shares may be imminent as call traders begin to unwind their positions. This would force market makers to adjust their delta hedges lower, potentially leading to a significant drop in Tesla's share price.
The analyst has a sell rating and $24.86 price target on Tesla.
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