TSLA – Tesla Motors (Last:178.00)

On Wednesday, a chat room denizen suggested using options to take a shot in Telsa ahead of earnings due out after the close.  Turns out the company beat the Street estimate of 0.10 per share by 20%. The stock plummeted anyway, falling $24 to an intraday low of $178.  Go figure. Now take a guess how much you would have made if you had bought a bunch of out-of-the-money strangles the day before.  A big-odds bet with the stock trading for around $201 might have entailed paying $3.50 for some May 9 220 calls and $2.75 for 180 puts at the close on Wednesday, for a total of $6.25.  How could you lose, right?  In fact, you would have lost your shirt, since, even though the puts were $2 in-the-money at the final bell, the strangle was valued at 3.57, having traded no higher than 4.20 intraday. Ahhh, time decay! The Eighth Wonder of the Financial World.

And don’t think you would have done much better if you’d paid up for a strangle that was not so far out-of-the-money. For instance, if you had bought 190/210 strangles for $12.30 on Wednesday’s closing marks, you would have been out 0.30 per strangle at the bell. That’s because the calls fell from $6.56 to 0.05, while the puts gained only $5.96 — not nearly enough to offset the time premium they shed as they went deep-in-the-money a day before expiration. And get this:  Even the $200 straddle would have been a loser.  If you had bought it for $21.00 at Wednesday’s close, you would have made a whopping 0.53 on each straddle, since it settled at $21.53. But you’d have risked 40 times that initially, or $2100 –not exactly great odds.

There are a couple of lessons to take away from this.  One is that we should be glad we’re not privileged to have insider information, since, in this case, and in similar situations, we probably would have assumed the stock would rise on such strong earnings.  The opposite obtains so often that it should be regarded not as an aberration, but as the norm.  Invariably, the dolts and slackers paid to make newsworthy sense of such things tell us that although the earnings were good, the Street evidently was expecting more. This is a load of manure.  The stock fell simply because it was time for it to fall. Which is to imply that good or bad news doesn’t cause stocks to go up and down; rather, the opposite is true:  the ups and downs of stocks color our perceptions of the news.

A second lesson is that puts and calls on big movers like Tesla are priced so exorbitantly that even when the stock does soar or collapse, the options you may have bought in anticipation of this are so adroitly handicapped that you’ll be lucky merely to break even on most trades.