TL;DR
Tesla’s bad earnings should have tanked the stock. Instead, high “put” option bets backfired, creating a short squeeze that fueled a rally. The lesson? Market mechanics can override reality—and small investors usually pay the price.
Story
Tesla’s “surprise” stock jump after terrible earnings? Less a surprise, more a rigged casino. Here’s the play:
‣ Implied Volatility (IV): The cost of insurance (options) on Tesla stock was sky-high pre-earnings. Everyone expected a crash—buying “put” options (bets on the price dropping). Like flood insurance before a hurricane…except the hurricane never hit.
When Tesla didn’t tank, this “insurance” became worthless. This drop in IV is called an “IV crush.” Ouch for those holding puts.
Now, the real game: Market Makers (MMs—big institutions who sell these options) hedge their bets. If they sold you a put, they bet against Tesla dropping. When Tesla rose, MMs scrambled to buy Tesla stock, covering their losses. This buying frenzy fueled the stock further—a classic short squeeze.
‣ Short squeeze: Stock goes up, those betting on the drop lose and buy to escape further losses. Like a house of cards with lighter fluid poured over.
Add some FOMO (Fear Of Missing Out) from retail investors, and boom—a rally built on nothing. Remember the 2008 housing bubble? Same vibes.
This isn’t about Tesla’s value. It’s about exploiting market mechanics. The irony? The crowd betting against Tesla caused the price surge. Wall Street’s version of a self-fulfilling prophecy.
‣ Gamma feedback loop: As the price moves, dealers need to buy more to keep their positions neutral. Price goes up more, they have to buy more, fueling further buying.
This is not “investing.” It’s gambling. And in casinos, the house always wins. Don’t be fooled by complexity; it’s just a new version of an old scam.
Advice
Don’t bet against the herd unless you understand the mechanics of how options work. It’s like trying to outsmart a casino—the odds aren’t in your favor. Stick to fundamentals and learn the mechanics!