*DISCLAIMER: THIS IS THE OPINION OF THE WRITER AND NOT A RECOMMENDATION OR OFFER OF SERVICE OF ANY KIND TO THE READER. IT SERVES AS AN EDUCATIONAL TOOL ONLY*
With NKLA only having trading data since 6/3 , data is what I would call limited. Needless to say the last several days have been a textbook retail investor time series. A massive spike on a 0 revenue company on speculative news. I’m going to stay away from the fundamentals , if it has any, and try to speak from the options data I have available in order to explain my thoughts.
For starters underlying volatility calculated from the gjr-garch model is 926.82% annualized. To give you a comparison Tesla’s garch volatility is 77.94%. For those of you who have never taken a derivatives course or don’t know the math on option pricing, higher underlying volatility equals greater price of the option.
Looking at the contract specific side the $19.50 6-26 Put has an implied volatility of 309%. That’s the implied volatility retrieved from the finite-difference option pricing in reverse or the volatility that will give the current price of the option back. Some of these contracts are so overpriced on a volatility basis that it is impossible to calculate the implied volatility using traditional methods, meaning that no implied volatility will give back the current market price of the contracts, you can notice the holes in the term-structure graph. Similarly if you’ve been following my other term-structure graphs you have noticed the blue line or “actual implied” by using the at-the-money contract price this allows the reader to see where volatility should be. NKLA doesn’t have that blue-line because again it’s unable to be calculated using those traditional methods.
Normally my opinion would be to short volatility doesn’t matter the contract but there is so little data available I am unable to calculate where volatility should be at this given time. The calculated delta for the $19.50 put is -0.0357 or roughly 3.57 shares to be hedged. The investor would have to sell the $19.50 put and then go short 4 shares. But again if the investor does not understand option pricing or the greeks I would stay away to avoid getting caught off guard.