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Tesla Inc. (TSLA) stock has skyrocketed in the past 2 months. It seems to be priced for perfection. As a result, put option premiums are very high. But shorting deep out-of-the-money puts still have good yields. That is one way existing shareholders can make extra income while holding TSLA stock.
TSLA was at $405.93 in midday trading on Monday, Jan. 6. This is up over 40% in the past two months ($288.53 on Nov. 6) and +4.3% in the last month ($389.22 on Dec. 6).
But is the stock due for a tumble here? What is its underlying value? And what is the best way to conservatively play this, especially if you are a shareholder? This article will discuss these issues.
TSLA Stock - What's Its Underlying Value?
I discussed TSLA stock's underlying value in my last Barchart article on Nov. 10: “Is Tesla Worth Buying Here After Its Huge Runup? Shorting Puts Is One Way to Play TSLA.”
I showed that TSLA stock is worth between $389 and $425 per share. This was based on its free cash flow margins, analysts' 2025 revenue forecasts, and using a 1.25% and 1.50% yield metric.
However, analysts have slightly lowered their revenue estimates for 2025 from $116.28 billion in the article to $115.91 billion. That affects the valuation.
For example, assuming Tesla can make a 24.8% operating cash flow margin in 2025 as it did during Q3, as I showed in my Oct. 25 Barchart article, it could produce:
$115.91 billion x 0.248 = $28.85 billion in operating cash flow (OCF)
Next, if we assume its capex spending rises to $12 billion in 2025 from $11 billion projected for 2024, free cash flow (FCF) will be:
$28.85 b OCF - $12 b capex = $16.85 billion FCF in 2025
This $16.85 billion is slightly lower than my previous estimate of $17 billion.
As a result, using a 1.25% yield metric (the same as multiplying FCF by 80x , the target market cap is $1.348 trillion:
$16.85b / 0.0125 = $1,348 billion mkt cap
That is just 3.06% higher than today's market cap of $1.308 trillion. In other words, the new target price is just 3% higher:
$405.93 x 1.03056 = $418.35 per share
That does not leave a large margin of safety in the valuation. The stock could be vulnerable to any hiccups, especially if Q4 earnings and FCF does not come in strong.
Moreover, analysts have significantly lower price targets. Yahoo! Finance says its survey of 48 analysts is $288.09. Barchart's mean analyst target is $291.75.
Even AnaChart's survey of recent analyst target prices is lower. Their survey of 37 analysts who've recently written on TSLA stock is just $383.31 per share.
So what is the best way to play TSLA stock here? How can existing shareholders, for example, make some extra income while waiting for the stock to move higher?
Shorting Deep Out-of-the-Money Puts
One way is to sell short put option premiums in deep out-of-the-money (OTM) strike prices. That works best for near-term expirations, i.e., one month or less until expiry.
For example, look at the Feb. 7, 2025, expiration put option chain. This is 34 days until expiration.
It shows that the $330 strike price put option contract has a premium of $5.90 on the bid side. This strike price is almost 20% below today's price, so it's deep out-of-the-money.
The $5.90 premium provides a short seller of these put options an immediate yield of 1.788% (i.e., $5.90/$330.00 = 0.017878) over the next month. That is a very high yield for such a deeply OTM strike price.
This means that any investor who secures $33,000 in cash and/or buying power with their brokerage firm can make $590 instantly by entering an order to “Sell to Open” 1 put contract at this strike price for Feb 7 expiry.
The $590 received works out to 1.788% of the $33k invested. Moreover, the investor has no obligation to buy 100 shares at $330 unless TSLA falls to that point on or before Feb. 7. In any case the investor always keeps the $590.
That means that the implied potential buy-in price is $330 - $5.90 = $324.10. That is over 20.1% below today's trading price.
In fact, there is a very low chance of this occurring, based on past volatility. That is what is implied by the -12.6% delta ratio for this strike price.
As a result, existing investors, if they can repeat this play for the next 3 months stand to make an expected return (ER) of 5.36%. That could help defray any unrealized losses if TSLA stock falls over the next quarter.
The bottom line is that TSLA stock looks at about par here. One way to set a lower buy-in target for new investors and provide extra income for existing shareholders is to short deep out-of-the-money put options.
