Shares of Tesla surged Monday after the company announced that sales of its Model S vehicle have exceeded its mid-February target.
The electric car company predicted sales of 4,500 in the first quarter, and ended up selling 4,700. It now says that it expects to be profitable in the first quarter, and will show "slightly positive net income."
The bullish move in the stock has prompted a flurry of option activity. One of the most active options is the April 45-strike calls. As of 11 a.m., over 1,110 had already been bought for an average price of $0.80. Buyers of these calls expect the stock to continue its rally, and close above $45.80 at April expiration.
(Read More: Why the Tesla S May Be a Game-Changer)
The company will report earnings on May 6, so these options are a way to play a rally into the earnings announcement for which Tesla is now raising expectations. For traders hesitant to buy the stock after its big gap up this morning, buying out-of-the-money calls offers an excellent risk-reward profile that could pay off as the market digests the news and revalues the company.
In addition, Tesla CEO Elon Musk has said that he will have a big announcement on April 2. Traders could be looking to buy in ahead of whatever Musk will unveil.
And finally, Tesla has also been a heavily shorted stock that saw the cost to borrow shares increase dramatically over the past two weeks. That suggests that Monday's big move is being driven partially by short covering. Shorts may lose confidence in their position after today's bullish news, and scramble to cover their position ahead of earnings. That alone could be another catalyst for the stock to move above the $45.80 breakeven level on this trade.
A move to positive earnings should allow Tesla to ensure a successful roll-out of the Model X next year, which some anticipate will be the vehicle that expands their reach into the family world.
I don't have a position in Tesla, but I might soon have to put in my order for the Tesla X.
