Tesla’s judgment day is just 2 weeks away

You’re here (NASDAQ: TSLA) inspires a wide range of investor opinions. Some see the electric vehicle giant as the most important company on the planet, while others think it is outmatched and potentially the biggest bubble in stock market history. The heated debate between the two sides makes it difficult for many investors to maintain an emotionless 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 come together to create a short-term opportunity that promises to be fascinating to watch. And you don’t have to wait long because Judgment Day is coming in the next two weeks.

Why December 18th will be the day to watch for Tesla

Here are the facts, and they are not in dispute:

• As of December 3, Tesla’s stock has jumped more than 600% so far in 2020. That has brought the automaker’s market cap to over $ 550 billion.
• Tesla’s stock is expected to be added to the S&P 500 Index in effect at the start of trading on Monday, December 21.

Investors have waited a long time to see when Tesla receives an invitation to join the ranks of around 500 companies tracked as part of the key benchmark. Billions of dollars in indexed investments track the S&P 500, so getting added to the index is a big deal. Hundreds of billions of dollars in Tesla shares are expected to change hands within the next two weeks in preparation for the addition of S&P. To ensure they will have Tesla’s returns in the index calculation, investors following the S&P 500 will need to ensure they are exposed to stocks by the end of trading on Friday, December 18. – the last trading day before the official addition. .

Additionally, the S&P Dow Jones Indices, which manages the S&P 500, said this week that Tesla would enter the index all at once. The index manager previously suggested the possibility of Tesla being added in two parts, but decided not to go that route in favor of an all-at-once strategy.

On its own, that would be enough to cause extreme volatility in Tesla’s stock. We have already seen the results of this volatility since the S&P announcement. But many equity investors fail to realize the other element of what could cause a perfect storm in Tesla stock trading on December 18.

Tesla and quadruple witchcraft

It turns out that December 18th is also an important day for options and futures traders. This is one of the four days in the year that stock futures, stock index options, individual stock options, and single stock futures all expire. Traders sometimes refer to these confluences of four different expirations as quadruple days of witchcraft.

Quadruple days of witchcraft often result in massive volatility for the entire market. The coronavirus bear market low came in the two days surrounding the quadruple witchcraft day of March 20, with stocks hitting low the following Monday and never looking back.

It will be a huge day for Tesla as well. Options play a major role for investors in the electric automaker, with open interest of more than 7.8 million option contracts at the start of December 3. It may not sound like a lot, but with each option representing 100 shares, the underlying stock is more than Tesla’s entire public float of 760 million shares.

Not all of these options expire on December 18. However, some financial institutions that follow the S&P 500 will use options to guarantee their ability to get Tesla at the market close on that day – and traders who specialize in these markets will do whatever they can to profit from their forced purchases. .

Use your focus on Tesla fundamentals to your advantage

Smart Tesla shareholders have already used these upcoming fireworks displays as an opportunity. You can just see from the nearly $ 200 per share rise in the automaker’s share price since the S&P 500 announced that those who could have sold their shares instead resisted, knowing they would have buyers guaranteed on December 18th.

Those who are interested in a long-term investment in Tesla will have two things to consider. In the absence of news from the company indicating otherwise, there is reason to believe that the path of least resistance for Tesla’s share price over the next two weeks will be up. Following the addition on December 21, many short-term traders will then sell their stocks for a profit, potentially creating a short-term decline. What might make the most sense for those looking to add Tesla is to buy half now, then wait until the S&P 500 event ends to buy the other half.

The key thing to remember, however, 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 core business doesn’t perform well, opponents will be right. But if Tesla performs to its full potential, more gains lie ahead.