Extreme bearish options on Tesla making money as stock dives

NEW YORK (Reuters) - The sharp slump in Tesla Inc’s shares this month could unlock massive gains on equity option bets investors placed over the last several months that pay when the electric car maker’s stock slides.

A Tesla showroom is seen in Santa Monica, California, U.S., January 4, 2018. REUTERS/Lucy Nicholson

Tesla stock is down close to 27 percent this month, within striking distance of its worst month on record. Shares fell 7.7 percent to $257.78 on Wednesday, a day after tumbling 8.2 percent to their lowest close in almost a year.

Tesla was hit by federal probes of a fatal crash on March 23 in California involving one of its vehicles and a downgrade of its credit position by Moody’s Investors Service that cited liquidity pressures and a significant shortfall in Model 3 production.

As the shares sank, put options that convey the right to sell shares at a certain price in the future have jumped in value. With Tesla shares, put options betting on declines below $50, $100 and $200, by mid-January 2019, account for the three largest blocks of open contracts.

While Tesla’s shares remain far above these strike prices, recent losses have boosted the value of the put options.

Put options betting on the shares slipping below $50, changed hands on Wednesday for $1.93 a contract, up from 43 cents, a month ago. The $50, $100 and $200 puts are all trading at more than double their average trading price over the last three months, according to Thomson Reuters data.

“These puts have actually become something of a running joke on my network with many different people weighing in on why someone would trade a seemingly worthless option,” said Mark Longo of The Options Insider, an options commentary website.

One explanation could be that firms selling credit default swaps on Tesla may be using these puts as a hedge against Tesla going bankrupt, Longo said.

Ophir Gottlieb, chief executive of Los Angeles-based Capital Market Laboratories, said he thinks the position is unlikely to be a hedge against a position in the stock, given how far the strike prices are from where Tesla shares are trading.

“It would be like having a garden hose after a fire has already burnt the house,” Gottlieb said.

“The distance between the strikes is very particular. Half of $200 is $100, half of $100 is $50. That sounds like an aggressive put spreader,” he said.

A bear put spread involves buying one set of put contracts and selling another set with the same expiration but at a much lower strike, as a way to offset some of the cost.

“If it is a speculator, they are looking for the stock to go well below $200, but not a lot below $100. They are looking for disaster, but not bankruptcy,” Gottlieb said.

It was not clear if the position was initiated by one trader or several, but Thomson Reuters data showed that the contracts have steadily grown in number starting around the beginning of 2017.

For Tesla options in general, elevated levels of volatility and skew - a measure of relative demand for puts versus calls - suggest that options market participants see a rough road ahead for Tesla shares, said Henry Schwartz, president at options analytics firm Trade Alert in New York.

Reporting by Saqib Iqbal Ahmed; Editing by Daniel Bases and David Gregorio