Market Insights

Political drama shook Tesla yesterday, and options traders were active.

One large transaction in particular stood out. These two blocks changed hands at exactly the same time about two hours into the session:

• 26,410 July 340 calls traded for $1.18.
• 26,410 September 250 calls traded for $32.40

Volume was below open interest in the July contracts but not the Septembers. That suggests an existing position was closed in the near-dated options and rolled forward in time.

Calls fix the price where investors can purchase a security. They can gain value rapidly to the upside but also expire worthless when a stock fails to close above a certain level.

There are two possible explanations for yesterday’s activity, depending on which call was bought and which was sold.

Rolling Calls

The potentially bullish possibility is that the investor entered the session owning the July 340 calls hoping for upside in TSLA shares. When it fell, he or she unloaded the position and moved to the September 250 calls. They would have paid $31.22 to make the adjustment. In return, they now have an additional two months for the electric carmaker to rebound. They also increased their delta from 5 to 60, which means the new position stands to track the stock more closely.

Alternately, the trader might have entered Monday’s session short the July 340 calls, which lost 71 percent of their value as the stock fell. He or she might have closed their short position and sold the September 250s, expecting limited upside in the stock price. They would have collected a credit of $31.22. In return, they have an additional two months of risk and lowered price where there’s upside risk. Such a transaction may have been married to stock in a covered-call strategy.

Tesla (TSLA), daily chart, with 200-day moving average.

TSLA had the biggest decline in the S&P 500 yesterday, dropping 6.8 percent to $294.01. The slide came after CEO Elon Musk announced plans to launch a new political party that would compete with President Trump’s Republicans. The move triggered worries politics will hurt business and distract from the company’s core operations. Earnings are due after the closing bell on July 23.

TSLA traded more than 2.3 million calls and puts yesterday. That made it the busiest single stock in the options market yesterday, according to TradeStation data.

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