Tesla Stock Keeps Falling – But 10% Lower TSLA Puts Yield 2.0% for One Month Out

Tesla Inc (TSLA) stock has been falling over the past month. That has pushed up put option premiums. That makes them attractive to short-sellers. For example, just ove one month away puts at strike prices 10% lower have a 2.0% short-put yield.

Meanwhile, analyst price targets are significantly higher. That could provide significant upside to value investors. One way to play this is to short out-of-the-money (OTM) puts.

TSLA closed at $360.59 on April 2, down 11.1% from $405.94 on March 4, a month ago. However, it’s up slightly (+1.5%) from a recent low of $355.28 on March 30.

Could TSLA go lower? Possibly, but setting a lower potential buy-in point and getting paid to wait is one way to play it. That’s what happens by shorting OTM puts.

Analysts surveyed by Yahoo! Finance show an average price target of $417.08 per share. That’s 15.7% higher than its close last week of $360.59. However, it’s down slightly from a month ago, when I reported that the average of 46 analysts was $421.61.

Similarly, Barchart’s mean price target survey price is $405.64, although it’s lower than $408.36 a month ago.

The point is that analysts still see good upside in TSLA stock, albeit a bit less than before. Nevertheless, there is no guarantee TSLA will rise to these prices anytime soon.

As a result, it makes sense to set a lower potential buy-in by shorting out-of-the-money (OTM) puts.

I discussed this play last month in a March 6 Barchart article, “Tesla Put Option Premiums are High – Attractive to Short Sellers and Value Investors.”

For example, I suggested shorting the $370 and $375 put options expiring April 10. The premiums were $10.98 and $12.40, yielding 2.97% and 3.31%, respectively, at 7% and 6% lower strike prices when TSLA was at $398.88.

Today, those premiums are $13.63 and $15.33, i.e., slightly higher, as the puts are “in-the-money.” It makes sense to roll these trades over by buying them back at a loss with a new short-put trade for May. (The loss for the $370 strike is $10.98-$13.63, or -$2.65, and the $375 strike loss is -$3.23).

For example, the May 8 option expiry period shows that the $330 put strike price, almost 8.5% lower, has a midpoint premium of $9.27. That provides a short-put yield of 2.81% (i.e., $9.27/$330.00 = 0.02898).

This means an investor who secures $33,000 in cash or buying power can enter an order to “Sell to Open” 1 put. Then the account will receive $927.00.

Moreover, even if TSLA falls to $330.00, the investor still keeps the income already received. As a result, the breakeven point is lower:

$330 – $9.27 = $320.73 breakeven

That is 11% lower than the April 2 close of $360.59. In other words, this is a great way to set a lower potential buy-in.

Moreover, even after reducing this income by the loss from a rollover, the yield is still attractive:

$9.27 – $2.65 ($370 strike) = $6.62

$6.62 / $330.00 new strike = 0.02 = 2.0% net rollover yield

The $375 rollover from last month provides a net rollover yield of 1.83% (i.e., $6.04 net income /$330.00).

These are still attractive yields. For example, over the past two months, the investor would have averaged about 1.0% per month. And the investor has basically been paid to potentially buy in at 8 – 10% lower TSLA prices.

Moreover, note that the delta ratio is low at just 0.25. This means there is just a 25% chance that TSLA will drop another 8% to $330.00 by May 8. That helps an investor to potentially end up with an unrealized loss if their collateral is assigned to buy shares at $330.00.

The bottom line is that shorting OTM puts is one way to take advantage of Tesla stock’s recent drop.

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. This article was originally published on Barchart.com