Given this is such a powerful driver of Tesla stock price, I thought it worth trying to quantify all of these options delta hedging and short stock feedback mechanisms. The result is larger than i expected. I believe a +$10 increase in share price would require the purchase of 4.7 million Tesla shares worth $1.6bn. I think much of all stock volume every day is delta hedging related.
Full detail on all Tesla options value and delta exposure from calls, puts and converts below. These are approximations, but I think close enough.
Tesla Calls open interest:
There are call options on 69 million shares outstanding.
The current market value of all call options is $3.3bn with $0.8bn expiring this week and $2.1bn expiring within the next 3 months. $2.8bn of the calls are in the money and $0.5bn out of the money.
It will be interesting to see what call holders do with their profits. Take profit, buy stock or buy OTM calls?
Delta hedge requirement for these call options is 38 million Tesla shares, worth $13bn. So if all Tesla call were sold by market makers (most likely were) and are 100% delta hedged (market makers should be), then 38 million shares would have to be held to hedge the option position. In reality some of this is cancelled by Put options.
Tesla Puts:
There are put options on 144 million shares outstanding.
These have collapsed in price and current market value of all put options is now only $0.4bn with $0.1bn expiring within the next 3 months.
Delta hedge requirement for these put options is 5.5 million Tesla shares sold short, worth $1.9bn.
Convert hedges owned by Tesla:
Tesla bought call options and sold warrants to limit potential dilution from its 2021, 2022 and 2024 convert issuance. The value of the Tesla calls Tesla owns are currently worth $1.4bn and the Warrants it sold worth $0.6bn. For banks to delta hedge their net option exposure to Tesla from the calls & warrants would require purchasing 4 million Tesla shares.
Net delta exposure from options market.
The gross delta exposure from Calls, Puts and Convert Hedges can all be netted out – they are all likely held by the same market makers. So this is 38 million long from Call open interest, 5.5 million short from Put open interest and 4 million long from Tesla’s convert hedging transactions. This nets out at 36.6 million Tesla share long, currently worth $12.6bn.
Note that while individual market makers can delta hedge with other options rather than shares (but they mostly do shares), this is only passing on delta exposure to a different exposure. So this 37 million shares overall options market delta exposure is what is needed if everybody is 100% delta hedged. Some calls will be sold unhedged by people like Mark Spiegel etc, and some puts likely sold by Tesla retail longs, but I expect the vast majority of the market is delta hedged most of the time. So these means delta hedging accounts for ownership of towards 37 million Tesla shares currently. This is relative to 212 million total Tesla shares (180 million real shares outstanding, 32 million virtual/duplicated shares sold by shorts). Many of these market makers likely loan their long shares to shorts so they may not disclose ownership anywhere close to their real economic ownership of stock.
Convertible bonds:
Most convertible bonds will be held by funds who will delta hedge their exposure to Tesla equity. At current prices this would require selling 8.7 million Tesla shares short. So this is a large chunk of the 30 million Tesla short interest. These are held by different investors to the options open interest so can not be netted out.
Outright short equity:
Short interest is currently 32 million shares sold short or c.$11bn. About 23 million of these shares of c.$8bn are likely sold by real shorts and not from convert hedging. These 32 million short shares are shares that are now owned by 2 different long investors. The short borrowed a share from one long, promised to give it back eventually, then sold it to a new long. Two different long investors now have economic ownership of the same share so in effect the share has been duplicated, with a virtual share or repayment obligation now also trading in the market. This means there are now really 180 million real shares outstanding plus 32 million virtual shares owned by Tesla longs, or a total of 212 million shares.
What is the exposure of all of these positions to a +$10 move in Tesla share price?
For +$10 the net change in delta hedging requirement from the whole options market and from the convertible notes hedging is + 4.0 million shares or $1.4bn of Tesla stock purchases. This is an incredibly powerful feedback mechanism to drive the stock higher.
For +$10 share price the size of the Tesla short owned by real shorts will increase in $ terms. To maintain the same $ size of position Tesla short will have to buy Tesla shares to reduce the number of shares short. For $10 this would have to be 0.7 million shares.
So between the two, this is buying pressure for 4.7 million shares due to a $10 increase in share price.
What is the exposure of all of these positions to a -$10 move in Tesla share price?
For $10 the net change in delta hedging requirement from the whole options market and from the convertible notes hedging is - 4.7 million shares or $1.6bn of Tesla stock sales. This is again a powerful feedback mechanism to drive the stock lower. At the moment the mechanism is slightly more powerful in the downward direction – this is because the recent price increase has moved so many Tesla calls into the money and delta to its maximum of 1. There is more room for changing in delta with downward movements currently. This will likely even out as calls mature and people roll calls into more out of the money strikes.
For -$10 share price the size of the Tesla short owned by real shorts will reduced in $ terms. To maintain the same $ value, Tesla shorts will sell a further 0.7 million shares short.
So between the two, this is selling pressure for 5.4 million shares from a -$10 move in stock price.
Note: All these numbers are approximations and use a $345 share price and a fixed 45% volatility for all options/strikes/maturities. I don’t have a data source with volatility or option price for every option matched to open interest, and these approximations makes it much easier to make quick options pricing calculations.
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