1) At Tesla the huge options market (Calls on 105 million shares, Puts on 135m) is a very powerful feedback loop for the stock price.
Higher prices force option market makers to buy more shares to delta hedge their positions, and these purchases themselves drive the price higher.
Higher prices force option market makers to buy more shares to delta hedge their positions, and these purchases themselves drive the price higher.
2) Tesla Calls open interest (on 105m shares):
Current market value of all call options is $3.6bn ($1.8bn expiring <3 months). $3.1bn are in the money.
Delta hedging requirement for these call options is 38 million Tesla shares, worth $14.5bn.
Current market value of all call options is $3.6bn ($1.8bn expiring <3 months). $3.1bn are in the money.
Delta hedging requirement for these call options is 38 million Tesla shares, worth $14.5bn.
3) So if all Tesla calls 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 bought by market makers to hedge the option position. In reality some of this is cancelled by Put options.
4) Tesla Puts (on 135 million shares):
The current market value of all put options is now only $0.4bn with $82m expiring within the next 3 months.
Delta hedging requirement for these put options is 5.5 million Tesla shares sold short, worth $2.1bn.
The current market value of all put options is now only $0.4bn with $82m expiring within the next 3 months.
Delta hedging requirement for these put options is 5.5 million Tesla shares sold short, worth $2.1bn.
5) Convert hedges owned by Tesla:
Tesla bought calls & sold warrants to limit dilution from its 21, 22 & 24 convert bonds. Tesla owns Tesla calls worth $1.7bn & the Warrants it sold are worth $0.8bn. For banks to delta hedge the net calls & warrants requires +4m Tesla shares.
Tesla bought calls & sold warrants to limit dilution from its 21, 22 & 24 convert bonds. Tesla owns Tesla calls worth $1.7bn & the Warrants it sold are worth $0.8bn. For banks to delta hedge the net calls & warrants requires +4m Tesla shares.
6) Net delta exposure from options market:
The gross delta exposure from Calls, Puts & Convert Hedges can be netted out. 38.1m long from Calls, 5.5m short from Puts, 4.0m long from convert options hedging. This nets out at 36.6 million Tesla share long, currently worth $14.0bn.
The gross delta exposure from Calls, Puts & Convert Hedges can be netted out. 38.1m long from Calls, 5.5m short from Puts, 4.0m long from convert options hedging. This nets out at 36.6 million Tesla share long, currently worth $14.0bn.
7) Note that while individual market makers can delta hedge with other options rather than shares (but they mostly use shares), this is only passing on delta exposure to a different market participant and not hedging exposure of the overall options market net exposure.
8) In reality some calls will be sold unhedged by people like Mark Spiegel etc and some puts are likely sold by Tesla retail longs, but I expect the vast majority of the market is delta hedged most of the time.
9) So this means delta hedging accounts for ownership of towards 37 million Tesla shares currently. This is relative to 209 million total Tesla shares long (180 million real shares outstanding, 29 million virtual/duplicated shares sold by shorts).
10) Many market makers likely loan their long shares to shorts so they may not disclose ownership anywhere close to their real economic ownership of stock.
11) Convertible bonds:
Most converts will be held by funds who delta hedge their exposure to equity. This would require selling 9.3 million Tesla shares short. These are held by different investors to the options so can't be netted out with the options delta hedging requirement.
Most converts will be held by funds who delta hedge their exposure to equity. This would require selling 9.3 million Tesla shares short. These are held by different investors to the options so can't be netted out with the options delta hedging requirement.
12) Outright short equity:
Short interest is currently 28.7 million shares sold short or c.$14bn. About 20 million of these shares or c.$7.4bn are likely sold by real shorts and not from convert hedging.
Short interest is currently 28.7 million shares sold short or c.$14bn. About 20 million of these shares or c.$7.4bn are likely sold by real shorts and not from convert hedging.
13) What is the delta exposure to a +$10 move in Tesla share price?
For +$10 the net change in delta hedging requirement from the options market and convert hedging is + 3.6 million shares or $1.4bn of Tesla stock purchases. This is an incredibly powerful feedback mechanism.
For +$10 the net change in delta hedging requirement from the options market and convert hedging is + 3.6 million shares or $1.4bn of Tesla stock purchases. This is an incredibly powerful feedback mechanism.
14) There is also a feedback loop for short equity. For +$10 share price, Tesla shorts would have to buy 0.7 million shares to maintain the same $ size of their Tesla short position.
15) These feedback loops also work in reverse. If the stock price goes down, delta hedging requirement from options reduces and delta hedge shares will be sold. Shorts can also short more shares while maintaining the same $ position.
16) Note: All these numbers are approximations and use a $381 share price & fixed 45% volatility for all contracts. I don’t have a data source with volatility or option price for every option - these approximations makes it much easier to make quick options pricing calculations.
Typo here: $14bn should be $11bn
