Tesla (TSLA 3.11%) inspires a wide range of opinions from investors. Some see the electric-vehicle giant as the most important company on the planet, while others believe it's overhyped and potentially the biggest bubble in stock market history. The harsh debate between the two sides makes it hard for many investors to maintain an unemotional view of Tesla.
Focusing on the facts is the best way to keep your emotions in check. When it comes to Tesla, two key facts are coming together to create a short-term opportunity that promises to be fascinating to watch. And you don't have to wait long because the day of reckoning is coming within the next two weeks.
Why Dec. 18 will be the day to watch for Tesla
These are the facts, and they're undisputed:
- As of Dec. 3, Tesla's stock had jumped more than 600% so far in 2020. That sent the automaker's market capitalization to more than $550 billion.
- Tesla's stock is slated to be added to the S&P 500 Index effective at the start of trading on Monday, Dec. 21.
Investors have waited for a long time to see when Tesla would get an invitation to join the ranks of roughly 500 companies tracked within the key benchmark. Trillions of dollars in index-linked investments follow the S&P 500, so getting added to the index is a big deal. Hundreds of billions of dollars of Tesla stock is likely to change hands in the coming two weeks in preparation for the S&P addition. To ensure they'll have Tesla's returns as part of the index's calculation, investors following the S&P 500 will need to make sure they have stock exposure by the end of trading on Friday, Dec. 18 -- the last trading day before the official addition.
Moreover, S&P Dow Jones Indices, which runs the S&P 500, said this week that Tesla would come into the index in one fell swoop. The index manager had previously suggested the possibility that Tesla might get added in two parts, but it decided not to go that route in favor of an all-at-once strategy.
By itself, this would be enough to cause extreme volatility in Tesla's stock. We've already seen the results of that volatility since the S&P announcement. But many stock investors don't realize the other component of what could cause a perfect storm in trading in Tesla shares on Dec. 18.
Tesla and quadruple witching
It just so happens that Dec. 18 is also an important day for traders in options and futures. It's one of four days each year in which stock futures contracts, stock index options, individual stock options, and single-stock futures contracts all expire. Traders sometimes refer to these confluences of four different expirations as quadruple witching days.
Quadruple witching days often bring massive volatility for the entire market. The nadir of the coronavirus bear market came in the two days surrounding the March 20 quadruple witching day, with stocks hitting bottom the subsequent Monday and then never looking back.
It's also going to be a huge day for Tesla. Options play a major role for investors in the electric automaker, with open interest of more than 7.8 million options contracts as of early Dec. 3. That might not sound like much, but with each option representing 100 shares, the underlying stock represents more than Tesla's entire public float of 760 million shares.
Not all of those options expire on Dec. 18. However, some financial institutions tracking the S&P 500 will use options to guarantee their ability to obtain Tesla as of the market close on that day -- and the traders who specialize in those markets will be doing everything they can to take advantage of their forced buying.
Use your focus on Tesla's fundamentals to your advantage
Smart Tesla shareholders have already used these coming fireworks as an opportunity. You can see simply from the nearly $200 per-share rise in the automaker's stock price since the S&P 500 announcement that those who might have sold their stock have instead held off, knowing they'd have guaranteed buyers come Dec. 18.
Those who are interested in a long-term investment in Tesla will have two things to consider. In the absence of company news to the contrary, there's reason to believe the path of least resistance for Tesla's share price in the next two weeks will be upward. Following the addition on Dec. 21, many short-term traders will then sell off their stock for a profit, potentially creating a short-term dip. What might make the most sense for those looking to add Tesla is to buy half now and then wait until after the S&P 500 event is done to buy the other half.
The key thing to remember, though, is that in the long run, the disruption caused by Tesla's addition to the S&P 500 won't matter much. If Tesla's fundamental business fails to perform well, then naysayers will be proven right. But if Tesla executes on all its potential, further gains lie ahead.