Invest: Tesla is volatile, thanks to Elon Musk

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The basic promise of financial markets is that if enough people want something badly enough, the market will provide it, though it may turn out not to be exactly what they want. If people are clamoring for safe assets, the market will dutifully make a ton of risky mortgages and tranche them into safe assets, which will eventually blow up. If people are clamoring for electric-vehicle investments, a bunch of pre-revenue electric-vehicle companies will go public at huge valuations. And if the thing that people want in life more than anything else is Tesla Inc. volatility, well, Tesla will be volatile:

One of Tesla’s oddest quirks is the fuel that has helped power its rocketing stock market value. Although its stock is wildly popular with many ordinary retail investors, the swelling size and hyperactivity of Tesla “options” – popular derivatives contracts that allow investors to bet both on and against a stock and magnify any gains and losses – has also flabbergasted many market veterans.

The nominal trading value of Tesla options has averaged $241bn a day in recent weeks, according to Goldman Sachs. That compares with $138bn a day for Amazon, the second most active single-stock option market, and $112bn a day for the rest of the S&P 500 index combined. This makes Tesla’s stock more prone to whipsaw movements, because of the “leverage” inherent in using options to trade.

The value of options depend on what the underlying shares do, but due to their complex mechanics analysts say the option tail can occasionally wag the equity dog if there is enough activity in them, and even bleed into the broader stock market – adding to its churn and making it harder to navigate for many investors.

It’s unprecedented to have such a huge stock that is also so volatile, and moves to the beat of its own drum.

The basic deal with options is that when you buy an option from a dealer, the dealer will hedge the option by buying or selling the underlying stock; in particular the dealer will adjust its hedge by buying the stock when it goes up and selling it when it goes down. This makes the stock more volatile: when it goes up, options dealers are buying and pushing it up more; when it goes down, they’re selling and pushing it down more. Dealers who sell options are said to be “selling volatility.” They produce volatility with their trading and sell it to customers. Customers want a lot of Tesla volatility. So a lot of Tesla volatility is produced and delivered to them. The market gives people what they want.

The block quote is from a story from Robin Wigglesworth in the Financial Times about some of the weird stuff loathing around Tesla:

The real importance and wider footprint of what might be called the “Tesla-financial complex” far outstrips the company’s market capitalisation. This is thanks to a vast, tangled web of dependent investment vehicles, corporate emulators and an enormous associated derivatives market of unparalleled breadth, depth and hyperactivity.

Combined, these factors mean Tesla’s influence over the ebb and flow of the stock market is far greater than even its size would imply. It may even be historically unrivalled in its wider impact.

Again, Elon Musk is fueling Tesla’s volatility. Some analysts even half joked about “Elon Markets Hypothesis,” where the way finance works now is that things are valuable not based on their cash flows, but on their proximity to Elon Musk. 

Musk’s public statements about Tesla’s stock can move the stock, but his public statement about Bitcoin can move Bitcoin, and his public statements about other cryptocurrencies can really move those cryptocurrencies, and his public statements about messaging apps can move the stocks of totally unrelated companies with similar names to those messaging apps, and Hertz Global Holdings Inc. now trades on Tesla hype, and there is a vibrant secondary market in Tesla-branded satin short shorts, and on and on…

If you want weird financial instruments that are obscurely correlated to public perceptions of Tesla, Tesla call options are beginner stuff. Short the short shorts! Do DOGE/SHIB relative-value traders! Buy stock in some unrelated retailer and put out a press release asking it to open charging stations for Teslas!

Basically the point is that there is an entire global financial system and you can just arbitrarily pick any part of it and say “what does Tesla mean for this?” and generate some plausible answers that could inform your trading. The Tesla-financial complex is the financial complex.

For interested investors, you can measure this Musk proximity by examining the degrees of separation between different companies’ Twitter accounts and @elonmusk. (Obviously, this is a joke, but jokes tend to work fine these days.)