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Tesla Options Analysis

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Tesla (TSLA) shares have been on fire this year- lifting from the $40 to $195 level in just six months as market participants debated the future of the fully electric car maker led by the charismatic visionary Elon Musk.

TSLA Options rank 7th among all listed single stocks for total volume over the past month- with average daily volume near 130,000 contracts and more than 700,000 contracts of open interest outstanding.

Yesterday TSLA literally caught fire -- with a video showing the battery compartment of a model S on fire hitting youtube before 2pm and becoming widely noted in the early afternoon. Shares sold off violently from $185 to 175 in about 30minutes and TSLA quickly issued a press release explaining the fire was caused by an accident, but the volatility has persisted as traders both pro and retail began to jump in and out of the stock.

Option flow caught fire as well in the last 90mins of the day- with nearly 300,000 contract trading by end of session--the 5th busiest day ever for the name.

The volume and volatility chart shows ends in a clear X where the vol and p/c skew spike as shares decline, and current implied volatility is well over 65% in all terms- which implies daily moves near 3% for the forseeable future.

Is this the end of the bubble-like run for TSLA shares? Or is this simply a pause for a company that is revolutionizing and set to dominate the auto market. That's the $64,000 question here. My feeling is that shares will continue to whip- but that the fire issue will be extinguished quickly. For traders who like the fast lane (ok, sorry, no more auto puns) I'd consider the one-day Oct 4 160-165 put spread sale. Bid about $0.70 on the screen, the trade might require a strong stomach, but present a pretty simple 6:1 risk/reward that will play out over the next 36 hours, or so.

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At the time of publication, Henry Schwartz held no positions in the stocks or issues mentioned.

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