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Tesla’s (TSLA) shares closed trading last Friday at $185. The electric vehicle (EV) manufacturer reported disappointing Q1 2023 earnings on Wednesday after the markets closed. On Thursday, predictably, TSLA stock dropped nearly 10%.
Heading into Friday trading, Tesla was down 12% on the week, adding to the stock’s woes over the past year. However, you've done well if you were brave enough to buy Tesla at the beginning of the year when it was trading near $100.
For those who weren’t so brave but believe the company’s tactical change to focus on revenue growth at the expense of profits, I have three examples of unusual options activity from Thursday that could generate profits from Elon Musk’s tactical redirection.
Is Tesla Worth Buying?
Before buying any stock, I usually ask myself, regardless of price, if the company is worth owning for the long haul. It's not that price isn’t important, because it is, but in the end, as Warren Buffett always says, you ought to be thinking as if you’re buying the entire business rather than a piece of paper.
Further, if I could only buy one stock, would Tesla be the one? That second question is much more challenging to answer. There are so many great companies listed on U.S. exchanges. How could I possibly buy just one? In reality, you wouldn’t, but cementing your commitment is not a bad exercise.
One person who’s very committed to Tesla is Cathie Wood, the portfolio manager behind Ark Investment Management—on Thursday, she upped her price target for Tesla to $2,000 by 2027 from $1,533 by 2026. To reach that bogey, TSLA needs a 71.5% compound annual growth rate over the next 56 months.
That’s a tall order, no doubt.
Barron’s reported that Wood’s price target is based on 2027 EBITDA earnings of $345 billion, nearly half of that generated from self-driving technologies.
While Wood is one smart cookie, that’s a leap of faith that most mortals wouldn’t be willing to take, myself included.
However, excluding the $155 billion from self-driving technologies, you’re still left with $190 billion in EBITDA, nearly 11x Tesla’s 2022 EBITDA. Tesla currently trades at 29x its 2022 EBITDA. Apply the exact multiple to its 2027 estimate, excluding self-driving, and you get a market capitalization of $5.5 trillion, or $1,739 a share.
I’d settle for a CAGR of 66% over the next 56 months.
Of course, that doesn’t answer whether I would buy Tesla if it were the only stock I could own. The short answer: I would not. But within a concentrated portfolio of 10-20 stocks? You bet.
As the saying goes, “[Elon Musk] is crazy like a fox.”
The 3 Unusually Active Options to Plant Your Flag on Tesla
Of Thursday's top 20 unusually active Tesla options, 14 were calls, with just six puts. Seven expire today, so I’ll exclude those from my three possibilities.
Regarding strike prices, all but one of the remaining 13 -- June 16 $400 -- are between $120 and $175. Of the 12 (the $400 strike excluded for now) available, five are in the $170s, five are in the $160s, and two are below $160.
So, I’ll take one from each group.
First up are the two under $160: We’ve got the May 26 $120 put (35 DTE) and the Dec. 19/2025 $135 put (974 DTE). Neither of these is optimal for selling.
The odds of TSLA falling below $120 in the next five weeks is low, so you’re looking at an annualized yield of 4.8% on the $75 premium income. Meanwhile, the $135 expires in nearly three years, which is a long time to wait for an outcome. So again, this is most likely an income play. On this one, the $3,070 premium income equals an annualized yield of 7.1%.
If you’re looking for income, the latter is the buy, but of course, this is a discussion about buying Tesla for the long haul. Neither is on target.
Next, we’ve got five choices from the $160s, with four expiring in seven days and another in 14. All of them are calls. My choice would be the May 5 $165 call. It has an ask price of $6.30, so your cost would be $171.30, 5.1% higher than its Thursday close of $162.99. The delta’s 0.48325, so to double your money, TSLA has to rise by $13.04 over the next two weeks, or 8%. Given Tesla’s volatility, up and down, that’s more than possible.
Lastly, we’ve got five in the $170s. All are calls, with three expiring in seven days, another in 14, and a fifth in 21 days. I’d go with the $175 that expires in seven days. Its ask price was $1.37 with a delta of 0.19597, which means you could double your money if TSLA jumps $6.99 over the next week. In addition, the $137 premium you’d pay is the lowest upfront cost of the five. It will have to increase by 8.2% over the next week to buy Tesla stock.
The Bottom Line
I purposely left the June 16 $400 put for last because I knew that most of the other options weren’t all that appealing. This is because if you sell it, you have 56 days to see what happens with Tesla stock.
In the meantime, subtract the $236.25 premium income from the strike, and you would pay $163.75 for Tesla, just 76 cents higher than Thursday’s close. If it goes up $10 or $20 over the next two months, which it could, you buy 100 shares on June 16 or unload the contract and make money on the option.
Either way, at least from where I sit in the cheap seats, you’re further ahead than any of the other 12 options.
Have a great weekend!
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