Tesla Now In The S&P 500, What's Next?

Share of the electric automaker, Tesla Inc (Nasdaq: TSLA), was officially added to the S&P 500. The response from the stock may be surprising, it was down 5.4% at the time of this writing. Being added to the S&P 500 is a major milestone for the company, but will the company have more impact on the index, or will the index have more impact on Tesla?

Tesla and the VIX

The first thought is what impact will Tesla have on the implied volatility of the S&P 500? The VIX is currently at 25% and the average implied volatility of TSLA is 81.96%. In order to begin to do the math, you have to figure out Tesla’s percentage of the S&P market cap.

The market cap of the S&P 500 is around $32 trillion and the market cap of TSLA is around $658.8 billion. Then you need to account for the number of shares that are available to be traded or float. The float of Tesla is around 80% of the shares outstanding. That means it will have a component weight of around 1.6%.

Converting its component weight in terms of the VIX is a little more difficult math. Luckily, banks like UBS have done some math and estimate that the addition of TSLA would raise the VIX on average by 0.12 points.  

That’s not the startling difference that you were anticipating, is it.

Tesla’s Volatility

Since the announcement on November 30, 2020, Tesla’s implied volatility has fallen from 97.3% to 81.3%. That’s not a significant decline, but it is likely the beginning of a trend.

For example, Facebook Inc (Nasdaq: FB) was added to the S&P 500 on December 20, 2013. While the company didn’t have a long history between its May 2012 IPO before being added, the implied volatility did see a big transition in the coming years. The 20-day average implied volatility of FB declined from 46% to 32% a year later.

(Click on image to enlarge)

Conclusion

Elon Musk has drawn attention to his company’s overvaluation a number of times over the years. While nobody knows exactly how Tesla will react, he may finally get his wish to see less volatility and overvaluation in the share price of Tesla. The company has been bid wildly since the announcement of its inclusion, and maybe today’s profit-taking is just the remedy to place Tesla on a more sustainable and pedestrian path moving forward. Or at least the EV version of “pedestrian”.

Disclaimer: Neither TheoTrade or any of its officers, directors, employees, other personnel, representatives, agents or independent contractors is, in such capacities, a licensed financial adviser, ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.