it is called the volatility skew.

Screenshot 2017-10-25 22.51.35

Screenshot 2017-10-25 23.06.03

If one were to take a gander at insurance premiums, for Tesla’s stock to go up down,  the options market in January of 2019  suggests that tesla’s implied probability distribution has a standard deviation of 40% for the at the money strike. Leave aside the fact that the model is broken, and its attempted fixes such as GARCH and Jump-Diffusion models are inadequate for the average investor, not to mention most professionals, then the standard deviation approximations by the market are the best fix the market price has for Tesla’s stock.  In either case, getting beyond the eccentricities of what is in a name, all models are broken, and so we look at skew or the difference that Tesla’s other options suggest the company’s price return distribution should be equivalent to.

But first let me say that the 40% volatility is an estimation that Tesla’s stock could be up or down 40% in a year’s worth of annualized return with more or a less a 68% chance.

it is a reasonable guess but that is not correct distribution by those crude standards.

If one were to revise their perspective to what a potential bankruptcy scenario might look like, the percentages for that same underlying stock distribution suggest for Tesla’s stock could move up to 80%.

Screenshot 2017-10-25 23.07.16

What would an 80% move look like? Something like 2008. Tesla’s stock lost 97.3 percent that year.

The quantitative insurance gods have not been fooled. Tesla is and has always been at a high risk of bankruptcy.

If the underlying model were sound, all the options would have the same volatility or expected move.

Screenshot 2017-10-25 22.59.02


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