TSLA Market Action: 2018 Investor Roundtable

[jhm]

a Question for you MaxPain folks: Do I understand this correctly, and are the points of my thesis then sound?

• MaxPain demonstrates where MarketMakers will most easily (cheaply) satisfy the expiring puts and calls (T/F?)
• Therefore, it behooves them to Make The Market as close to the MaxPain point as possible, right at 4pm Friday (T/F?)

AND THEREFORE -

• That closing stamp is "artificial", in that it does not truly represent what buying and selling investors consider a market-clearing price (T/F?)
  • And to test whether or not the preceding is correct, then
    • Once we're into AfterMarket trading, the price naturally will tend to shift upwards or downwards to a "true" market-clearing price. (T/F?)

As I write this, today's chart shows a consistent rise upwards from that Close-to-MaxPain level. I've not gone back to other Fridays to see other examples.


??????????

What I'm thinking is that it is not just the market makers that move the price toward max pain. But if option holders close their positions as if the price will converge to max pain, then that too removes the hedge that option writers would hold. Suppose you held an a call option with $375 yesterday while max pain was $360. The hedge option writer would have been holding about ~ 55 shares against your call option. If you sold your option to such an option write, they would in turn sell the hedge of 55 shares. So the sell of your call option would have cascaded into downward selling pressure. If enough of this is going on in aggregate, then the net selling pressure pushes the price closer to max pain. This linkage has little do with a market maker trying to minimize pay out; rather it is triggered by the desire of option holders not to lose value under the belief that the price will settle near max pain.

But to be clear, I am not a MaxPain folk. I'm just trying to understand the market mechanisms at work around it.

 

[AlexS]

n

Options expire at 4pm Fridays. They can only be sold or executed during market hours

not true
read this Options Expiration: Options Don’t Expire On The Third Friday

edit: saturday noon in some cases, if you don't want to read the article

 

[tivoboy]

Might have been posted already, might not - Now official: China in fact will roll back tariffs from 40% to 15%.

China agrees to lower import tariff on US cars for three months

Well, starting on 1/1/19 and for 90 days only - at least for now.

 

[oneday]

Options expire at 4pm Fridays. They can only be sold or executed during market hours

The last day to trade an option is the third Friday of the expiration month, but the actual expiration time is not until the next day (Saturday). A public holder of an option usually must declare their notice to exercise by 5:00 p.m. (or 5:30 p.m. according to Nasdaq) on Friday.
Expiration Time

Edit: I think the important thing here is that brokers will automatically execute and/or let options expire worthless if you don't notify them. I would say this applies to 99.9% of all options, so I think the big thing here is for MM's to close the day as close to max-pain as possible.

 

[AlexS]

so I think the big thing here is for MM's to close the day as close to max-pain as possible.

don't get too obsessed with Max, it works sometimes, until it doesn't, it is not a rule.

 

[EVNow]

I would say this applies to 99.9% of all options, so I think the big thing here is for MM's to close the day as close to max-pain as possible.

Not sure why MM's are blamed - and not some big players who hold positions. What MMs can and can't do is much more strictly regulated compared to your friendly neighborhood Wall St hedge fund. For MMs to do market manipulation in such a brazen way - week after week - is not likely.

 

[Artful Dodger]

Dan Ives (Wedbush analyst) currently on CNBC. “Does not think capital raise on the horizon. This has been a dark cloud on the stock.” Regarding a question on production of Model 3 - “In all of our checks, it is about 6,500-7,000 per week.” “As an auto, it is overvalued. But, we view this as a disruptive company.” Overall, of course, he was very positive.

Here's the segment on YouTube:

 

[Krugerrand]

Inverted cat you say? Perhaps @Kruggerand can tell us what that means.

Now that the day is over, I think self-explanatory.

 

[AlexS]

So Nasdaq is under 7000 now, S&P under 2600 only Dow is 24000 holding

We are now on the edge if we bounce or brake - check the Nasdaq chart

 

[ZsoZso]

What I'm thinking is that it is not just the market makers that move the price toward max pain. But if option holders close their positions as if the price will converge to max pain, then that too removes the hedge that option writers would hold. Suppose you held an a call option with $375 yesterday while max pain was $360. The hedge option writer would have been holding about ~ 55 shares against your call option. If you sold your option to such an option write, they would in turn sell the hedge of 55 shares. So the sell of your call option would have cascaded into downward selling pressure. If enough of this is going on in aggregate, then the net selling pressure pushes the price closer to max pain. This linkage has little do with a market maker trying to minimize pay out; rather it is triggered by the desire of option holders not to lose value under the belief that the price will settle near max pain.

But to be clear, I am not a MaxPain folk. I'm just trying to understand the market mechanisms at work around it.

First of all, sorry about posting the chart with incorrect expiry date (next week's instead of today's). To my defense, there was a bug on the max-pain site, usually it gives you the closest expiry date by default, and I assumed that was the case, but for some reason it skipped today's date for TSLA. I re-checked it today and simply could not get the max-pain displayed for today at all. It worked for other tickers, e.g. AAPL but not for TSLA.

Your theory about hedging effects sounds plausible and helps to explain the magical "magnet" effect without blatant level of manipulation. Also important to note, that manipulating the price to bring it to the desired value also has some cost. So it only makes sense for the Market Makers to force the SP by selling/buying if the associated trading cost is lower than the cost of covering the options at the given delta. For this reason, the "optimal" value for the MMs may not actually be the exact max-pain but it could be a few slots off. E.g. today it may have been better for them to close at $365, rather than spend the extra money to push it further down to $360. It all depends on how shallow the graph is and what is the structure of the bid/ask spread with volumes just before closing.

 

[BioSehnsucht]

About 90% of the trolls I see all around the web are of two types:

• People with obvious ICE car industry background,
• people with obvious U.S. financial industry background,
• cargo cult idiots emulating the former two.

Reminds me of a programming joke: There's two hard problems in computer science: cache invalidation, naming things, and off-by-1 errors.

 

[Krugerrand]

Anyone else looking to deleverage a bit over the upcoming holiday?

Nope.

 

[KarenRei]

Edit: I think the important thing here is that brokers will automatically execute and/or let options expire worthless if you don't notify them. I would say this applies to 99.9% of all options, so I think the big thing here is for MM's to close the day as close to max-pain as possible.

Interesting (I've not read much about how expiring options are handled as I've never had interest in holding them to expiry). But this seems to match up with what IB says:

Delivery, Exercise and Corporate Actions | Interactive Brokers

"To avoid deliveries in expiring option and future option contracts, customers must roll forward or close out positions prior to the close of the last trading day."

The page also clarifies something I'd been wondering about, how they'd execute options if you didn't have liquidity to purchase the underlying security:

"Accounts determined to violate the broker's margin requirement due to the projected effect of settlement may be subject to a series of protective actions on the part of broker, including: liquidation of expiring positions on the last trade date; lapsing (non-exercise) of long in-the-money options; immediate liquidation of underlying positions subject to delivery on/after the option last trade date; liquidation of positions necessary to resolve a post-expiration margin deficit; and restricting the account to closing transactions."

Most possibilities sound reasonable, but the boldfaced possibility sounds pretty terrible. It'd be nice to know under what conditions they'd do that... but I don't see it specified anywhere. Again, not that I have an interest in holding options to expiry.

 

[EVNow]

Still looking to reinvest my sales of the Dec 21 375 calls from yesterday. It's interesting we are seeing the exact same pattern as last week with a big drop on Friday (perhaps due to market makers). Last week seemed like a no brainer to buy 2 week out calls on a quick dip, this week those 2 week out calls expire during a holiday week, historically not TSLA strong area.

I'm thinking of buying a couple Dec 28 400's ($2.6 now) as lottos, and the rest in Feb 15 380's ($30.75 now). Just thinking out loud.

Anyone else looking to deleverage a bit over the upcoming holiday? My other consideration is going just ITM Feb 15 365 ($38.55).

Every day TSLA goes up/down by about $10. If you get the high & low points right - or even if not exactly right, directionally correct, you can just buy & sell short term calls the same day (or may be hold for couple of days).

Anyway, The holiday thing is something I'm wondering about as well. Whether to buy the calls next week or wait for the Holiday week. The other option is to buy next week - and if the SP dips on Christmas week - buy more ;-)

 

[riverFox]

I know little about NMVTIS (and I imagine that the exact same thing applies to them) - e.g. how long it takes for VINs to show up after a sale (some quick searching shows that it's pretty laggy, and then there's the fact that Tesla can take weeks to get registration packets out to people), etc. But even ignoring that sort of stuff, there's one gigantic glaring problem:

Not All Model 3s Sold Thusfar Have Been In The US.

Unless Canadian VINs go into it or something...

It took me over 2 months to get my paperwork. Delivery was on 9/29 in Colorado[end of qtr madness]. So there's some definite lag with Tesla's growing pains.

 

[MarcusMaximus]

Oh, hey, Mark BS Piegel is claiming fuel savings calculator is fraudulent because it cites electricity cost of $0.13/kWh and most owners are on PG&E in CA.....

PG&E nightly TOU rate in CA is... wait for it... $0.125/kWh.

 

[30seconds]

Tesla Prepares $837 Million Sale of Car-Lease Debt

Didn't see anyone post this before. Sorry if it's a repost.

Good one. The bears are claiming that Elon lied because this is debt, or because the rate is higher than last time, or that there isn't demand for this or that Elon is a mushroom. or something, its hard to follow.

 

[M3Rider]

Other thing is - what will happen during the Christmas week. Will there be a $30 drop on low volume like it happened during the Thanksgiving week ? This is what is preventing me from building my position now for Jan/Feb.

Might be a good opportunity to load up on shares/calls then. The last carriage of the leaving train, so to speak.

 

[KarenRei]

Good one. The bears are claiming that Elon lied because this is debt, or because the rate is higher than last time, or that there isn't demand for this or that Elon is a mushroom. or something, its hard to follow.

I don't know where they got this idea that Elon promised (they always use the word "promised") to not raise money through debt. He stated that they expect (oops, sorry, "promised") to not raise money through equity. The whole plan for the China plant, for example, from day one has been debt. E.g., from the Q2 call:

Elon Reeve Musk - Tesla, Inc.

We do not – we will not be raising any equity at any point, at least that's – I have no expectation of doing so, do not plan to do so. For China, I think, our default plan will be to use essentially a loan from the local banks in China and fund the Gigafactory in Shanghai with local debt, essentially. And we certainly could raise money, but I think we don't need to and we – yeah, I think, it's better to – it is better discipline not to.

 

[jhm]

Not sure why MM's are blamed - and not some big players who hold positions. What MMs can and can't do is much more strictly regulated compared to your friendly neighborhood Wall St hedge fund. For MMs to do market manipulation in such a brazen way - week after week - is not likely.

Indeed, if we are talking about a bank, Dodd-Frank would apply. This would rule out any sort of speculative trading. Hedging would be appropriate, but not taking substantial one-sided bets or doing anything manipulative. This is why I focused in on how an option writer would close a hedge when they close an option position.