At Cornell-Capital we write a lot of options. In some cases, it is part of a hedging strategy in which we own the underlying stock. But it many cases, Tesla is an example, it is naked writing. You would think that these short options positions would do well when the market drops like it did in October and they do, but less than you would expect. The reason is that market declines, particularly recently, are associated with increases volatility. For example, changes in the VIX index are negatively correlated with the return on the market. The result is that when stock prices fall, volatility rises, so that there are two offsetting effects on the price of options. The rising volatility pushes option prices up, muting the impact of declining prices.
The fact that you have been redirected here is not a mistake. Going forward all posts will be part of Cornell Capital Group’s Economics blog (all previous posts and comments have been forwarded).
I don’t often disagree with Warren Buffet, but his position on companies providing guidance was one example. In a previous post, I argued that the more information companies give investors, the more accurately they will price stocks, on average. Perhaps there will be instances where investors might over- or under-react to certain information releases, particularly if it is vaguer information like guidance. But that possibility should not make executives the paternalistic managers of investor sentiment.
The problem is a good deal worse if companies decide to withhold value relevant historical information as Apple has now decided to do regarding the number of units it sells. Withholding that information clearly makes it more difficult for investors to value Apple accurately. Remember that the fundamental social role of the stock market is to move funds from savers to investors. That task requires accurate pricing so that funds are allocated to the companies with the best opportunities. If companies withhold information and pricing becomes noisier, the capital allocation process is impeded, and everyone loses.
Service hell. Though it might be more hell for owners than for Tesla. Tesla reported a 3rd quarter profit ather the market closed today and the stock has sky-rocketed again. The company showed that it can produce the Model 3 in meaningful volume at margins of 20% (as long as the cars are sold for a minimu of $46,000). The problem is that as all these added cars roll out, they will all have to be serviced. In fact, the new Model 3s may need more service than the S or X given the race to produce them. As the owner of an S (in fact I have owned three of them), I am dreading service hell. Recently a light came on in my car saying that my suspension needed service. My initial call to Tesla went unanswered. Fortunately, the light went out. Next time I may not be so lucky. With limited servicen centers, no third party service outlets, and a lot of new Model 3s on the road, customers may be about to enter service hell. What it means for the stock price is another question.