Tesla’s the latest example of options underpricing the possibility of big moves

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Tesla shares surged last week when it released surprisingly strong delivery figures — so much so that the stock-price gain was nearly twice as large as its straddle cost.

An option straddle involves the purchase, or sale, of both a call and put at the same strike price and expiration date, which pay off when the price moves by a large amount in either direction.

10.2% surge on Tuesday was nearly 4 times its trailing one-month realized volatility, according to options strategists at Bank of America.

That, the analysts say, is only the most recent outlier in large-cap tech, with companies including Apple
and Alphabet
also seeing close to their most extreme moves, adjusted for volatility, over the last five years.

“The continuation of unstable price action underscores a key observation we have made in recent weeks: single stock fragility is rising, particularly around earnings and other events that provide some degree of forward guidance,” say strategists led by Benjamin Bowler.

According to Bank of America, tech companies in the Top 50 largest stocks of the S&P have realized bigger moves on earnings than the cost of their respective weekly straddles more than 60% of the time this year, with the 10 largest tech companies seeing this hit rate reach 70%.

With earnings season approaching, they recommend using options to navigate single stock risk.

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