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Heavy activity today in Tesla Inc (TSLA) put options that expire in two days serve to highlight investors' concerns about the stock. The strike price is right at the money. Some investors may be betting the stock will fall in two days.
TSLA is trading at $192.65 today, up $5.35 or over +2.8% higher. But the strike price for the heavy TSLA put options activity is at $192.50 for puts that expire on Friday, June 28. That means that the investor activity in these puts is for a strike price that is “at-the-money.”
It implies that some large investors believe the stock could fall over the next two days. That is why these investors are willing to pay $3.05 in the midprice for these puts.
This can be seen in Barchart's Unusual Stock Options Activity Report today. It shows that over 28,000 TSLA put contracts have been traded at the $192.50 strike price. That represents almost 49 times the normal outstanding number of contracts at that strike price.
Shorting TSLA Puts
On the other hand, other investors are willing to sell these puts to the bearish buyers of the puts. They collect that $305 in income per contract, but have to secure $192.50 x 100, or $19,250 per contract shorted with their brokerage firm. That still works out to an immediate yield of 1.558% over two days of risk.
Moreover, their breakeven cost will be just $192.50-$3.00, or $189.50 per share. That provides good downside protection of 1.635% from today's spot price.
In addition, if the investor can repeat this play every week or so, it turns out to be a great way to make extra income. For example, the expected return (ER) over 4 weeks would be 1.558% x 4, or 6.22% per month.
That assumes that the stock always ends up out-of-the-money (OTM) and that the investor does not have to buy shares in TSLA at the strike price where the puts were shorted. Sometimes that will occur, especially if the puts are shorted at the money as in this example.
That is why investors should only do this strategy if they are willing to buy shares in the shorted stock. They must be willing to hold on to those shares or even incur an unrealized capital loss.
TSLA Stock Treading Water
TSLA stock has been treading water lately. It has traded below $200 for the past 3 months and has only recently been rising again. The company's revenue fell 13% Y/Y in Q1 and its operating profitability was down 56% Y/Y.
This is seen by investors due to a slowing in demand for EVs across the world. That could prove to be difficult for the company if this slowing demand keeps up. As a result, the stock is well off of its highs, although recently it has been rising.
Perhaps investors are feeling more positive about the company's prospects going forward. Either way, the huge increase in investor activity in its at the money puts shows that investors' concerns are still very high.
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.
