8.1.18 - Countdown to Tesla Earnings: A View on Issuer Volatility Risk (IVR)

Hanweck’s Issuer Volatility Risk Indicator (IVR)* is a tail-risk focused volatility measure sensitive to underlying price, skew, and implied volatility. IVR reflects longer term risk, and the model  is consistent with price evolution processes that allow a stock price to reach a default barrier. This is particularly relevant to recent Tesla (TSLA 269.50 -7.09 -2.56%) stock debates, whether based on fundamentals of the balance sheet and cash flows, or the Elon Musk social media sentiment indicators. So it is interesting to consider what, if any, new information is visible in the option market as we approach the latest earnings release today.

The chart below shows IVR for TSLA, along with the model’s skew parameter (alpha), and for additional context, the 6-month ATM implied volatility, and stock price.

Chart 1: Hanweck Issuer Volatility Risk Plot for Tesla 

 

The recent high of the IVR Indicator at 45% is almost near the extreme seen after the Model S recall announced on March 27, 2018. The current skew parameter is close to that of the March episode but not quite as extreme.  Often when there are fundamental changes in market outlook for an issuer, or changes in capital structure, IVR will show distinct departures from ATM IV. This is not the case here, with ATM IV moving consistently with IVR.  Also the skew parameter became more extreme but has steadied recently.

Earnings events for TSLA have not been generally favorable, but the negative shocks have been short-lived with stock behavior returning to whatever vision was supporting it before the “boring” questions of earnings call analysts caused distraction.

There are no departure or breakout points visible here, or in our other Trading Indicators, that readily support any particular trading view. There is nothing occurring for example, in the longer term indicators of Borrow Intensity.  But it is interesting to note that despite recent talk of looming bankruptcy amidst production challenges and memos to suppliers, such a view is not reflected from the equity derivatives market now any more strongly than it was at the end of March on a short burst of bad news.

* Hanweck's Issuer Volatility Risk (IVR) Indicator models the market implied default process of single name equities, applying a CEV-based approach calibrated with real-time option analytic and equity data. IVR converges information across the entire structure of a single name option volatility surface into real-time and end-of-day data series. This creates an inherently integrated indicator, sensitive to implied volatility levels, skew, and stock price.