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Tesla Still Looks Attractive to Sellers of OTM Puts as an Income Play

Barchart - Fri Dec 1, 2023

TeslaInc (TSLA) stock still looks attractive to short sellers of out-of-the-money (OTM) put options in near-term expiration periods. This is a good strategy to make extra income for existing shareholders.

I discussed this play in my Nov. 10, 2023, Barchart article, “Tesla Stock Takes a Hit from Analysts - But Selling Short Its Puts Make Sense.” At the time, TSLA stock was trading at $208.63 per share and I discussed selling short the $185 strike price put options for expiration on Dec. 1 (today). 

The premium received was $2.45 per share and the strike price was over 11% out-of-the-money (OTM), i.e., selling below the stock price. Today TSLA is trading for $237.86, so there is no danger that the $185 strike price will be exercised. 

As a result, the 1.32% yield made by the short seller was a good trade for just three weeks. That can be seen by dividing the premium of $2.45 by the $185 strike price. 

Similar returns can be made again.

Shorting OTM TSLA Puts Again

For example, look at the expiration period ending Dec. 22, three weeks from today. It shows that the $215 strike price puts trade for $2.36 per contract. That represents an immediate yield of 1.1% (i.e., $2.36/$215) for a strike price over 9% below today's price.

That means that TSLA stock could fall significantly, by $22.86 or 9.6% before the investor has any obligation to purchase 100 shares. That is a good deal of risk protection on the downside.

TSLA Puts - Expiring Dec. 22 - Barchart - As of Dec. 1, 2023

What This Means for Investors

Here is how that works exactly. The investor sets up $21,500 in cash and/or margin with their brokerage firm. That is security to allow the account to purchase 100 shares at $215, in case the stock falls to this strike price.

Then the investor enters a trade order to “Sell to Open” one put contract at $215 for expiration on Dec. 22. The account will immediately receive $236.00. That is 1.1% of the $21,500  invested or secured with the brokerage firm.

As long as TSLA stock stays above $215 on or before Dec. 22, the account will not be obliged to purchase 100 shares of TSLA stock at $215 per share.

Moreover, note that the $2.36 received effectively lowers the total breakeven price for the investor to $212.64 (i.e., $215.00 strike price- $2.36 received). That means the breakeven level is 11% below today's spot price of $238.97.

In other words, there is a good chance that the investor will not only keep this income (which always happens) but also make a good return. 

For example, if the investor can repeat this trade every 3 weeks for a year, the expected return is 18.7% (i.e., 1.1% x 17). That is because there are 17 periods of 3 weeks in a year.

The bottom line here is that given that Tesla does not pay a dividend this is a good way for TSLA shareholders to create extra income. The risk is that TSLA falls to the strike price or lower. 

Downside Risk

In that case, the investor has a lower breakeven price given the high TSLA put option premiums.

But even with a much lower stock price, the investor ends up doing nothing more than buying shares of TSLA stock. That could result in an unrealized loss. 

But at least the investor has not been forced to sell any shares. Moreover, they can either wait until TSLA stock rises or else sell OTM calls to generate more income from these shares.

In any case, the investor has ways to potentially turn the unrealized loss into a lower loss or even eventually a profit.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.