StockVane
Tesla is the most discussed stock in retail investing and is also one of the stocks where retail investors lose money more consistently by doing the things that “make sense” at the time. This is not a bear or bull market on the company, but rather a call on the market. It’s a look at five specific, persistent behavioral and structural error types, based on real numbers from the last few months, that keep repeating themselves when ordinary investors think about this specific stock, and a look at what a more disciplined approach to this stock would look like.
Mistake 1: Playing For Big Out-Of-The-Money calls As A Cheap Lottery Ticket
The options chain for Tesla is a fascinating and revealing glimpse into retail behavior, and it’s not a pretty one. The recent statistics regarding Tesla’s call option open interest indicate that 41% of all outstanding call options are more than 65% out of the money. That’s an incredible amount of speculation concentrated in a single position and it is a very common, very basic error that people make when they buy an option that is far out of the money—they think it’s cheap, but they don’t realize how much the stock has to move, and how quickly or how slowly. Speculators cannot enjoy sell put option and are unwilling to be friends with time to earn compound interest.
In fact, Tesla’s own options market is pricing in extreme scenarios as real possibilities. The December expiration trade looks to be pricing in a 37% probability of an increase and a 31% probability of a decrease from current levels. Even if the price of an out-of-the-money option may be cheap on the surface, implied volatility this high means that the option is expensive given the probability that it will pay off. A trader who is buying a call that is 65% above the current price isn’t trading a small bull call, they’re trading a call that the market considers a tail event that has a low probability, and they’re paying real money, over and over, for exposure to that tail. Remember to use tools to calculate profits and risks before trading options
If you’re looking for directional exposure to Tesla via options, then the mathematically sounder play is to stay closer to the money, where the breakeven point isn’t nearly impossible, it’s just impossible. Those retail investors who are continuing to hold on to these deep OTM calls month after month are essentially playing a strategy that demands repeated home runs to break even on a long series of contracts that are going to expire completely worthless.
Mistake 2: Panic Selling During The Single Day Crash And Missing The Recovery Period.
The share price of Tesla dropped 14.5% on one day on July 23, its worst day of the year, shortly after the company released a shareholder deck outlining the “largest and most exciting period of investment” it had in its future. That was not the language that the market wanted to hear when it came to spending discipline, but it was the language that management wanted to hear when it came to confident growth and the sell-off was rapid and severe. Tesla closed at a new 52-week low of $298.32 after six trading sessions.
What’s actually relevant to retail investors looking back at their own conduct in that period. Since then, Tesla has rallied 21.6% to close at $362.86 on August 21. The same core business that made the price target come to you in the first place was there after the crash, but it was repriced by sentiment, not by any new reality in the business.
Those who sold during the panic on July 23 or the days immediately after, who had taken their losses at or close to the $298 low, did not participate in a rapid and substantial recovery that was primarily due to sentiment normalizing and not any new catalyst. The one most frequent and costly error made by retail investors with a stock this volatile is assuming that a stock’s single-day crash is new information about the company, not a pause to consider whether anything about the underlying earnings power has changed. The sentiment driven air pocket sell, then the stock rallies more than 20% in the following weeks, is a self-inflicted wound that is a regular occurrence in Tesla’s trading data because this stock has these crazy single day moves with surprising frequency.
Mistake 3: Ignoring The Valuation Multiple Because The Delivery Numbers Sound Impressive
The headline figure of 480,126 vehicles delivered in the second quarter of the year was a record for Tesla, dominating the retail-focused coverage and social media commentaries around the print. Revenue for the quarter was $28.24 billion, which was 7.1% ahead of consensus estimates. At first glance, that sounds like clearly positive news and many retail trades around earnings season have been buying based on the headline delivery and revenue numbers.
The issue is what was under those top-line figures. Earnings per share of $0.33 beat consensus by 38.51%, much wider than the revenue beat indicated. For the quarter, operating margin was only 1.4% due to the drop. Free cash flow turned negative, at negative $1.09 billion, due to the sharp increase in operating expenses related to AI infrastructure investments and the 2025 CEO Performance Award expenses. Tesla’s trailing 12-month diluted EPS is $1.08, which works out to a trailing P/E ratio of approximately 336 times earnings, based on data directly from the company’s SEC filings. Even if the share price is $250, which is a pretty bad case, the P/E is still close to 231 times, which is still a very rich multiple by pretty much any equity valuation standard.
Retail investors who only look at delivery numbers and revenue growth and ignore the margin and free cash flow are always missing the critical piece of the earnings report that dictates whether the current valuation is reasonable or not. The fact that a record delivery quarter is one that is delivered at a 1.4% operating margin and with negative free cash flow is a different story than a record delivery quarter that is delivered with expanding profitability, but the same celebratory headline.
Mistake 4: Leveraged ETFs for “Amplifying Conviction” Without Understanding Volatility Decay
Retail trading volume is significant for both bullish and inverse leveraged products, and it’s hardly surprising why: If you’re bullish on Tesla, why not use a 1.5x or 2x product to increase your returns? The mechanical issue with this is the same as with all the other daily-reset leveraged products that track the most volatile underlying assets. If the stock drops 14.5% on one session and then is rebalanced back up over the following few weeks, the compounded return will not be the same in a leveraged wrapper as it would be in the underlying stock, because the daily rebalancing will be based on a percentage gain or loss on the already reduced or increased base, not on the original entry price.
Tesla is a very tough underlayment for this dynamic, especially due to its frequency and intensity. A stock that can drop 14.5% on a single day, then subsequently drop to a new 52-week low, then bounce 21.6% over the next few weeks is the sort of price action that can end up destroying the value of a leveraged ETF even if the security eventually reaches breakeven. Retail investors who have held these leveraged products for multi-week periods, not as a short-term tactical instrument, are always taken aback by how their leveraged holdings perform over a period of time relative to a multiple of the actual move in Tesla over that period of time, and the volatility regime that Tesla has been trading in this year makes it even worse than it would be in a calmer stock.
Mistake 5: Treating Every Piece Of News As Equally Predictive Of The Stock’s Direction
Tesla creates a lot of news, so much so that most of the time, people don’t know how to tell which of the news items is truly driving long-term value and which is just creating short-term price noise.
Read two pieces of data from the same week during late August. Nevada has granted the permission to Tesla, along with Uber and Waymo, to run up to 5,000 fully autonomous robotaxis in Las Vegas, sending the stock up more than 5% on the day of the announcement. In the same time frame, Tesla also announced the end of its Solar Roof business, which it had been working on for years, and the news had relatively little impact on the market, even though it was a true strategic decision to move away from a previously promised growth area. The approval of the robotaxi was the biggest story of the week, and retail sentiment was quick to latch onto it as the biggest news of the week, rather than taking a more disciplined approach and weighing the news against its actual contribution to future earnings power.
That is the pattern that continues to play out with Tesla specifically, as the stock trades on narrative momentum to a very high extent, compared to its current earnings base, with the trailing P/E above 300 times earnings. People who trade based on the most social media attention the week, not a well-thought-out strategy of considering regulatory news, margin trends, delivery data, and valuation, are trading Tesla’s noise, not Tesla’s actual fundamental trend.
What A More Disciplined Approach Actually Looks Like
None of this is a reason why Tesla is uninvestable, and the data doesn’t support that either. The diluted EPS of $0.45 for H1 2026 is flat with $0.45 for H1 2025, and is a positive inflection point after a 75% drop in earnings over the last two fiscal years, from $4.30 in FY2023 to $1.08 in FY2025. The rate of decline has slowed or even ceased, although it has not yet turned to growth. It’s a really important difference to make, and it’s something that’s lost in the retail hype and buzz around this stock, both from a bull and bear perspective.
Each of the five mistakes above has one thing in common – that it involves acting on a single, salient data point, a cheap-looking option premium, a scary single-day crash, an impressive delivery headline, the appeal of amplified leverage, an exciting regulatory approval, but none of these are cross-referenced against the wider data set right next to them. This is the kind of decision-making that is specifically punished on the Tesla and SpaceX stock, as it’s a combination of extreme volatility, unusually high valuation multiple, and unusually high news flow – all of which is highly rewarding to be patient with and make a multi-metric decision on, and not just a decision based on what story is in the financial media that week.
