Thread by @ReflexFunds

What has driven the crazy moves in Tesla’s share price this week?
Its is hard to know for sure. I think it is a combination of four main things:

1) Relatively few investors have sold on the run up since Oct-19. The past few years of volatility and media negativity led to a concentration of shares in the hands of investors who firmly believe in the long term case and think the company is already worth far over $1,000.

2) New investors are jumping on board both as the Clean Energy transition becomes more clear and as Tesla’s future cash generation potential becomes more obvious.

These two factors have reduced the effective free float of investors willing to trade their shares.

This has combined with options delta hedging feedback loops to drive huge share price volatility:

3) The net delta exposure of the options market has got far too large relative to the effective free float.
A) When share price rises, the delta of an option increases (the $ change in option price for each $1 change in underlying share price).

B) Options market makers who sold options are nearly always delta hedged to hedge exposure to underlying stock price moves.

C) To delta hedge they buy or short shares equivalent to the delta exposure of the option they sold. But if they sold call options and the share price goes up, delta increases and they have to buy more shares to remain delta hedged. But this itself pushes the share price higher.

D) Conversely when share price reduces, they need to sell shares to remain delta neural and this pushes the share price lower.

So because the effective free float of investors willing to trade their shares has got so small, changes in the number of shares held by market makers for delta hedging can drive huge changes in share price.

All of this is further amplified by:

4)
A) A trend has formed and strengthened of buying options on Monday and taking profits through the week (particularly on Thursday and Friday ahead of weekly maturities).

B) As investors open new call positions, market makers have to buy a significant number of shares to delta hedge the option they sold, and this drives the price up.

C) More investors (& maybe algos) have identified the daily trends in share price so it becomes equivalent to a self reinforcing investor buy/sell technical signal.

Added to all of this is a smaller effect from short sellers covering (buying shares) as share price rises to maintain a flat $ exposure (which may be at position or risk limits). And conversely short sellers shorting more shares as the price goes down.

If this is all the case, very high volatility is likely to continue.
And if investors took enough profit on Monday and Tuesday, they can boost the stock again significantly on Monday by buying options en masse again.

A further note here is that while daily share volume in Tesla has been extremely high, I think a vast majority of this was the same shares trading hands multiple times and not a huge number of long term investors buying and selling.

Changes in net delta exposure of the options market as share price increases or decreases leads to a huge volume of trades to adjust this hedge up or down each day. There is also large volume from option delta hedging as investors open and close their positions.

Added to this there is also volume from general share market making and high frequency traders.

Previous thread on key drivers of share price changes generally:

https://twitter.com/ReflexFunds/status/1214130085852319744?s=20

Prior thread on the options delta hedging feedback loop at Tesla:

https://twitter.com/ReflexFunds/status/1214985572655210499?s=20

More detail on the delta hedging impact on $TSLA this week:

https://twitter.com/ReflexFunds/status/1225386238640885760?s=20