According to the Black-Scholes forecasting model, Tesla's (TSLA, Financial) June 17 call options with a $1,000 strike price are overvalued, suggesting that investors may still have an appetite for risk despite the recent stock market downturn.
Black-Scholes Model
The Black-Scholes derivative pricing model uses five to six inputs depending on whether the stock pays dividends or not. The exercise price is the stock price that the investor hopes for the underlying stock to reach, the time to maturity is the days remaining until the contract / position expires, the annualized risk-free rate is usually the 10-year bond yield, the implied volatility is the standard deviation of returns given the time remaining and the stock price is obviously the quoted underlying stock price.
I created the model for Tesla by choosing the June 17 call option with a strike price of $1,000, which is selling for an average of $133.05, suggesting that the option is undervalued by $1.53.
Source: CFI & Barchart
Why this is odd
Although volatility is a key determinant when calculating call option prices, I find it strange that a surplus number of investors are demanding call options on a stock that has been so overpriced the past couple of years. Some even see it as a meme stock, though when Tesla's rise began, that term had not yet been coined.
It even skyrocked last year during a period in which high-risk stocks were mostly in a sell-off - just look at the Russell 2000's nearly 10% capitulation over the past month for an example of how Tesla is bucking the trend. So, although volatility does add value to options, in theory, its nature isn't being considered here by investors.
Furthermore, bond yield levels (around 1.77%) are more or less what they were pre-pandemic, but with the forthcoming contractionary monetary policy, you'd expect a higher yield moving forward, subsequently decreasing the call option's value. Yet again, investors, brokers and dealers haven't priced this is.
How this could affect Tesla
Although Tesla has sold off by more than 10% in the past week, it still remains relatively unchanged during the past month. The June 17 $1000 strike call option is very widely traded, and the fact that we're seeing premiums on Tesla options prices suggests that investors aren't concerned about risk as much as they should be.
