The stock market is the amalgamation of individual stocks. However, not all stocks are created equal. How a stock is weighted in an index can have a huge impact on the overall returns. That’s why swings in big tech names can increasingly move the market as a whole, up or down.
Another factor is whether or not to include a stock in an index. Different indices have different requirements, such as a number of quarters of profitability, before they can be included.
Tesla Motors (TSLA) met the requirements to join the S&P 500 earlier in the year, but was finally announced as an inclusion today. Given the company’s size, its inclusion may be broken into two tranches.
But, once in the index, passive funds that track the index will be forced to buy shares. That suggests a further rally higher in the stock may be likely in the weeks and months ahead, potentially 10-15 percent on top of the rally shares enjoyed on Tuesday.
Action to take: The March 2021 $500 calls shot up 60 percent on a 7 percent rally in shares on Tuesday. It’s likely to provide investors a high-double to low-triple-digit return on a continued move higher as shares hit the index. While a bit pricey around $49.00 or $4,900 per contract, doubling that amount can make a decent profit for most traders.