“Tesla Financial Complex”: “Financial Times” detailed the crazy speculation on Tesla options


Robin Wigglesworth of the Financial Times has done an impressive job of recording a major factor in Tesla’s stratospheric valuation, if not: Huge derivatives trading in Tesla stockEven in this informative article, Wigglesworth only touches on the largest part of the picture, that is, the net notional value of daily options transactions reaches an incredible $241 billion. The following diagram explains a lot:

Reader HighlySuspect explains how options trading can increase stock prices:

Market makers are happy to sell call options to retail investors and make huge profits-this is complicated, but in essence, the busy options market means that call options are inherently overvalued and expensive, so market makers will sell these Expensive options, hedging the position by actually buying Tesla stock, accumulate the premium of the option, and then sell Tesla stock when the option position is closed. Market makers who hedge by buying Tesla shares are actually one of the biggest factors behind Tesla’s rapid and huge rebound-it is a huge source of purchases.

Pink paper readers disputed the statement in the article, “Ordinary retail investors have always been the main force behind the Tesla options boom.” There is a giant whale in Tesla. Billionaire Leo KoGuan claimed that he bought nearly 7.2 million shares were mainly through the exercise of call options. This makes him the third largest Tesla investor after Elon Musk and Larry Ellison. But no one would think that he is an “ordinary retail investor, even if he encourages individual investors on the Reddit forum.” Reader Dave Hedgehog believes that retail buyers cannot be the driving force:

The typical premium for ATM Tesla options is currently about 7% of the nominal value. I have no idea what the strike distribution of transactions is, but if we assume ATM is an average, then the premium for daily transactions is $17 billion.

In other words, every U.S. investment account trades $42,000 in options on this stock every year.

But there is no doubt that professionals like a lot of retail activities. Each reader log:

Thanks for this article… So it sounds like this street is a real bearish gamma… explains the dramatic price fluctuations. The purchase of options by retail investors makes me laugh as a former trader… We know that they will not hedge any gamma, only lose theta (but they don’t even know what any of these terms mean).

Exchange-traded options are not the only part of the Tesla stock frenzy:

Tesla’s reputation and the volatility of its stocks have also begun to make it part of some structured investment products, such as “automatic redemption”, which further integrates its stocks into the fate of the broader financial ecosystem.

Automatic redemptions are complex savings tools—especially popular with Asian investors—bankers sell stock options to build attractive, bond-like fixed returns. Historically, they are mainly options on broad stock market indexes such as the S&P 500, Hang Seng or Nikkei. However, due to the decline in market volatility, some bankers have begun to construct them with more volatile individual stock options. Tesla has become a popular choice.

“Tesla is considered safe because of its size and technological leadership, but its profits are very substantial. [for investors] Invest in structured products because it is very unstable,” Simplify’s Green said.

In my childhood, when investment products with embedded options were first developed, options would be traded over-the-counter by professional traders, such as mutual funds. Traders’ risks will be hedged in various ways, which may include the use of exchange-traded options.

The Financial Times pointed out that fund managers felt the need to increase their holdings in Tesla, because the underperformance of the general stock fund was partly due to insufficient holdings of the automaker:

Wells Fargo analysts said that for the entire U.S. mutual fund manager, Tesla alone reduced its relative performance in October by 0.46 percentage points, which will help turn the decent year into a stock pick. It has been another mediocre year for the readers.

So many famous short sellers bet on Tesla because of low short interest rates.

Tesla is also a typical representative of options trading dominating stock trading trends:

People have to wonder what that chart will look like, former Tesla. However, leverage is the cause of systemic risks in financial markets. The British “Financial Times” pointed out that Tesla’s stock price fell by nearly 18% in November and did not relax, but this decline only made the October gains take back.

Stock derivatives are traded on exchanges, or if they are over-the-counter transactions, they should be cleared by a central counterparty. The dirty secret of derivatives exchanges and clearers is that the margin they are required to provide is not enough to cover the risk of default (a large enough deposit will make most derivatives unattractive). Recall that in 2018, Single defaulting Norwegian counterparty The bank of Nasdaq Clearing AB uses its own collateral, the capital of the central counterparty, and then the donation fund of non-defaulting members, as well as all general funds cleared by Nasdaq. Experts worry that the central counterparty may go bankrupt, so it is actually a “too big to fail” entity. I want to know where Tesla options and other derivatives are liquidated, and more importantly, how significant Tesla’s activities are for these centers.

It goes without saying that Tesla is overvalued, but being overvalued does not prevent it from being overvalued. Rivian, an electric car enthusiast, is valued at $110 billion, mainly relying on Tesla’s tailgating. Although Tesla has always been a technological pioneer, surveys by JD Powers and Consumer Reports show that these cars are not well made and the cost is high! It is unclear why the major automakers have not made more progress (perhaps because they are unwilling to cannibalize their traditional cars), but the Koreans are catching up, and the Chinese are also targeting this area. At some point, the show will end, and Tesla will be valued like a car company. But don’t ask me when the book will be published.

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