TSLA Earnings Strategy: Leveraging TSLA Volatility with Naked Put

Selling put options before a company's earnings announcement can be a valid strategy for options traders seeking to capitalize on volatility. 

One of the primary reasons traders may consider selling a Tesla (TSLA) put option before their earnings announcement is the elevated implied volatility. Earnings reports can trigger significant price movements, and this volatility results in an increase in option premiums. By selling the put option before the announcement, traders aim to capitalize on the inflated premium, especially if they believe that the stock will remain above the strike price by the option's expiration date.

Before delving into the strategy, let's quickly recap what it means to sell a put option. A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium or be assigned and acquire the stock below the current price.

Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics.

Traders selling puts should understand that they may be assigned 100 shares at the strike price.

Potential Benefits

Selling put options allows traders to collect premium income upfront. If the options expire worthless, the seller keeps the entire premium as profit.

The premium received can lower the breakeven point for the trade. If the stock price drops but remains above the breakeven point, the seller still profits.

Traders who are bullish or neutral on TSLA can benefit from the increased volatility leading up to the earnings report.

After the earnings announcement, implied volatility tends to drop significantly, reducing option premiums. By selling options before the announcement, traders can take advantage of this implied volatility drop.

Potential Risks

If the stock price falls below the put option's strike price, the seller may be obligated to buy TSLA shares at a higher price than the current market value.

While the profit potential is limited to the premium received, losses can theoretically be unlimited if the stock price drops significantly.

An earnings surprises could result in a sharp drop in the price of TSLA stock.

Selling a TSLA Put Option Before Earnings

A trader selling the January 31, $355-strike put on TSLA would receive around $370 into their account, which would be theirs to keep. 

If TSLA falls below $355 by Friday, they would be required to buy 100 shares at $355. The effective net cost of the position would be $351.03, thanks to the option premium received.

That is 11.75% below yesterday’s closing price.

If the stock stays above $355 at expiry, the put expires worthless, leaving the trader with a 1.05% return on capital at risk.

That works out to be 128% annualized.

Company Details

Tesla is the market leader in battery-powered electric car sales in the United States, with roughly 70% market share.

The company's flagship Model 3 is the best-selling EV model in the United States. Tesla, which has managed to garner the reputation of a gold standard over the years, is now a far bigger entity that what it started off since its IPO in 2010, with its market cap crossing $1 trillion for the first time in October 2021.'

The EV king's market capitalization is more than the combined value of legacy automakers including Toyota, Volkswagen, Daimler, General Motors and Ford.

Over the years, Tesla has shifted from developing niche products for affluent buyers to making more affordable EVs for the masses.

The firm's three-pronged business model approach of direct sales, servicing, and charging its EVs sets it apart from other carmakers. Tesla, which is touted as the clean energy revolutionary automaker, is much more than just a car manufacturer.

Conclusion

Selling an TSLA put option before their earnings announcement is a strategy that can potentially generate income while taking advantage of heightened volatility. However, it's essential to understand the risks involved, including the possibility of assignment and unlimited losses. 

Conservative investors may consider buying a further out-of-the-money put to reduce the risk and capital requirements.

This essentially turns the trade into a bull put spread.

Please 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.