Tesla Stock Is Stuck In a Trading Range - Ideal for Short Sellers of OTM Puts

Tesla Inc (TSLA) stock has been stuck in a trading range from $200 to $276 for the last 6 months. This is ideal for short sellers of near-term out-of-the-money (OTM) put options as an income play.

TSLA is trading at $243.86 in morning trading on Friday, Dec. 8. This is up from its lows of $203 or so at the end of October. It recent high of $276.04 was on Sept. 4 and $298.30 on July 17.

As a result, investors are getting used to selling at the peak and buying at the bottom. Right now TSLA stock seems to be in the middle of the range. That makes it profitable to sell short-term put options.

I detailed this strategy in my Nov. 10 Barchart article, “Tesla Stock Takes a Hit from Analysts - But Selling Short Its Puts Make Sense.” 

TSLA stock last six months - Barchart

At the time, an HSBC analyst came out with a hit piece on the stock when TSLA was at $208.45. This was the wrong call and as I predicted the stock moved back up.

Shorting TSLA Puts Again

I recommended shorting the $180 puts expiring Dec. 1, which was 3 weeks away. Investors following this recommendation collected $2.45 in put premiums or a yield of 1.36% on the $180 put strike price. 

TSLA stock closed at $238.83, so the options stayed out of the money and there was no risk of the puts being exercised (i.e., the short sellers would have had to buy the stock at $180).

This trade can be repeated for more income, even though the stock has risen.

For example, look at the put options expiring Dec. 29, which is 21 days from now. It shows that the $220 strike price puts, which are almost 9.25% below today's price, trade for $1.99 per put contract. 

That represents an immediate yield of 0.86% (i.e., $1.99/$2.20 for the short seller of those puts with just 3 weeks until expiration. That is an ideal yield, especially since there is so much downside protection. Moreover, if the trade is repeated every 3 weeks it represents an expected return of 14.6% annually (i.e., 0.866% x 17).

TSLA puts expiring Dec. 29, 2023 - Barchart - As of Dec. 8, 2023

Moreover, the $225 strike price puts, which are still over 7% below the spot price today, trade for $2.87 per put contract. That is a huge yield of 1.28% (i.e., $2.87/$225), or 21.7% on an annualized basis.

Here is what this means on a practical basis. An investor can secure $22,500 with their brokerage firm. Then, upon options approval for shorting puts, they can enter an order to “Sell to Open” 1 put contract at $225 for expiration on Dec. 29. The $22,500 secures the worst-case scenario in case the stock falls to $225 and the account will automatically buy 100 shares at $225 per share.

The account then immediately receives $287 (i.e., $2.87 x 100). That represents a yield of 1.28% (i.e., $227.00/$22,500 invested). I

f that trade can be repeated every 3 weeks for a year, the account will accumulate $4,879 or 21.68% of the $22,500 invested in this play. So you can see that this is a good long-term play for investors right now. 

That way existing investors in TSLA can take advantage of the trading range in which TSLA stock is stuck. Moreover, existing shareholders have no risk that their shares will be called away, which is one risk that a covered call option strategy incurs.

 

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.