stock options indicate significant concern about the shareholder vote on CEO Elon Musk’s enormous 2018 pay package.
Shareholders have to reconsider the issue after a Delaware judge voided the package, which passed in 2018 with more than 70% support, in January, citing inadequate disclosures. Tesla’s board has put the same package, granting Musk some 300 million stock options, worth some $50 billion if they were exercised now, up for another vote with new disclosures.
Options markets imply Tesla shares will move about 7%, up or down, following the vote. The risk of a decline outweighs the chance of a gain: Put options expiring soon are more expensive than call options with the same strike price.
There are a few reasons calls and puts with the same strike price and expiration dates don’t trade for the same prices. Still, a difference in put and call prices can tell investors how traders feel about risks over short time horizons.
Put options give the holder the right to sell a stock for a fixed price in the future. If the price falls below that level, an investor can buy the stock at the market price and then sell it, pocketing a gain.
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A call option works the opposite way. It gives investors the right to buy shares at a fixed price.
Differences in pricing of puts and calls can tell investors how traders feel about risks over short periods. Similar call options in
stock are a little more expensive than the puts right now, indicating investors have more hope than fear about what might come next for the company.
Based on options pricing, traders also expect Tesla stock to be two to three times more volatile than Apple stock in the coming months. That is typical for Tesla shares.
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The expectations for volatility and the risk highlighted by the cost of puts are both related to Musk’s leadership. No one knows exactly how Musk would react if shareholders voted against his pay package. He recently said that he wants 25% voting control in Tesla stock to keep artificial intelligence projects inside the company. If the options were restored to him, Musk would control about 20% of the company.
At least some of Musk’s AI efforts won’t be pursued within Tesla. Musk has set up an artificial-intelligence company called xAI and raised billions of dollars for it. Still, investors and Wall Street believe Musk’s engagement at Tesla is critical for the company.
“Tesla is Elon,” is how Baron Capital CEO Ron Baron put it in a recent news release. Baron, whose funds hold more than 17 million shares, according to Bloomberg, says he is voting in favor of the pay package.
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“We have long argued that one of the primary reasons the stock trades at such lofty multiples is the innovation of Musk,” wrote CFRA analyst Garrett Nelson in a Monday report. “If the pay package were to be voted down, we believe it could increase uncertainty regarding the future leadership of the company and jeopardize the Musk premium.”
Nelson said that while the pay package has widespread support among retail investors, he isn’t sure how institutional investors will vote.
How much of a boost Tesla stock gets from Musk’s leadership is incredibly difficult to gauge. Tesla stock trades for about 54 times the per-share earning the company is expected to produce in 2025, while
trades for about five times. That would imply the Musk premium is worth some $500 billion, but the companies have very different growth expectations and shareholder bases.
Tesla’s earnings are expected to grow a little below 20% a year on average for the coming few years, according to FactSet. That gives the stock a price-to-earnings-to-growth, or PEG, ratio of about three times. The figure for the
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is closer to two times, which indicates the Musk premium is about $60 a share, or $185 billion.
Forecasting what happens to the stock over short periods is far easier than calculating the Musk premium. On Monday, Bernstein analyst Toni Sacconaghi estimated the stock would drop 5% if shareholders voted no.
Technical analysts Frank Cappelleri of CappThesis and Katie Stockton of Fairlead Strategies both recently pointed out to Barron’s that Tesla stock has been hovering near its 50-day moving average at about $172. A move below that price level brings $150 into play.
That would be down about 15% from recent levels. Investors can think of that as the maximum short-term pain from a “no” vote.
Write to Al Root at allen.root@dowjones.com
