Tesla is set to report earnings on Wednesday after the closing bell. The options market is pricing in a 7.4% move in either direction. So, let's look at selling a cash-secured put to take advantage of the high implied volatility in Tesla stock just ahead of its Q3 announcement.
When Tesla reports its third-quarter earnings, the focus will return to fundamentals, such as product demand and profit margins. This follows an underwhelming robotics event that left some investors skeptical.
Nonetheless, analysts on Wall Street expect a positive earnings report. This could serve as a near-term catalyst, even as concerns over demand and regulatory scrutiny on self-driving technology persist. Quarterly revenue is expected to rise almost 9% to $25.41 billion, up from $23.35 billion in the same period a year earlier. But analysts see earnings dropping 10% to 48 cents share.
There is also growing buzz that Tesla is about to start production of a refreshed Model Y.
Tesla Stock Today: The Trade
A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal? Either have the put expire worthless and keep the premium. Or, take assignment and acquire the stock below the current price.
The trade is very similar to a covered call and quite easy to understand once you know the basics. Anyone selling put options must understand there is risk to get assigned 100 shares at the strike price.
For Tesla stock, a trader selling the Oct. 25-expiration put with a strike price of 210 will generate around $365 in premium per contract, based on recent trading. The put seller would have the obligation to purchase 100 shares of TSLA stock at 210 if called upon to do so by the put buyer.
This put in Tesla stock has a delta reading of 25. This means there is an estimated 75% chance that it will expire worthless.
To calculate the break-even price for the trade, take the strike price less the premium received. In this case we see a break-even price of 206.35, 6.5% below Friday's closing price.
Risk Vs. Return
If the stock stays above 210 at expiry, the put option expires worthless, leaving the trader with a healthy 1.8% return on capital at risk. That works out to around 129% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss. However, the loss will be partially offset by the premium received for selling the put.
Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own. If Tesla stock trades below 210 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to IBD Stock Checkup, Tesla stock ranked 3rd in its group and has a Composite Rating of 52, an EPS Rating of 57 and a Relative Strength Rating of 52.
Remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
