Tesla stock strategy,
Even with the recovery in TSLA stock, near-term put options on the company remain at high premium levels. Short out-of-the-money (OTM) put options are a great way for current shareholders to generate additional revenue. That’s what this article will demonstrate.
After closing at $142.05 on April 22, TSLA’s stock price on Friday, May 3, increased by 27.6% to $181.19 per share. Still, given analysts’ price targets and revenue projections, TSLA stock appears inexpensive at this point.
Earlier Short Put plays
In my most recent Barchart article, “Tesla Stock Is Off Its Lows and Still Looks Undervalued – Good for Short Put Income Plays,” I talked about this situation on April 9. I talked about selling the May 3 expiration strike price puts at $155 and $160 in that article. These strike prices were 10.% and 13.25% out-of-the-money at the time.
Additionally, short sellers who obtained cash and/or margin from their brokerage firm received 2.0% and 2.6875% of the yield from this short-put play, respectively. The strike prices remained out of the money as TSLA stock closed at $181.19 on May 3, and the investors who followed these plays profited handsomely.
For current shareholders, this play performed best. They achieve, in a sense, the best of both worlds. Their long hiding increased in value by 27.6%, but they also earned additional money by shorting OTM puts.
It turns out that, despite declining in value, TSLA stock still has high premium levels. This justifies rerunning this short-put play. Let’s first take a look at what analysts are saying.
Analyst Goals for Prices
Being prepared to own the stock should it close to or below the strike price at the end of the expiration period is essential when shorting puts. With TSLA stock, it appears that this is the case.
To begin with, despite the stock’s recent increase, analysts have higher price targets for TSLA. Price targets, for instance, vary from an average of $175.41 per share to a maximum of $310 according to Barchart’s survey of 29 analysts. Similar price targets range from $179.84 to $320 per share at the peak, according to Yahoo! Finance’s poll of 41 analysts.
36 analysts have recently written on TSLA stock, and according to AnaChart.com, a new sell-side analyst tracking service, the average price target of these analysts is $203.41. Around 12% more than Friday’s closing price is the average target price. The highest price target—$400—is significantly higher than in the other surveys.
Additionally, AnaChart assigns a performance rating to the suggestions made by different analysts. For instance, it reveals that Daniel Ives of Wedbush, an analyst, rates the stock as Buy and thinks it’s worth $275.00 per share, which is 58.6% more than Friday’s closing price.
Notably, AnaChart gives this analyst one of the highest Performance Scores of any analyst who recommends buying TSLA stock—4.51—making it one of the highest ratings. It was his recommendations for target prices that ultimately proved to be successful that earned him this high rating.
Bottom line, based on analyst price targets, TSLA stock appears cheap at this time. This means that selling short OTM puts by current shareholders makes sense. As a result, they are able to generate additional revenue and acquire more shares at prices significantly lower than current ones in a methodical manner.
Forward Selling of OTM Puts
Consider the expiration period of May 24, which is in approximately three weeks. The data indicates that short sellers find the put option premiums at strike prices of $170 and $165 to be highly appealing.
Despite the fact that the strike price of the $170 put is more than 6% below the spot price of $181.19, the bid price of $3.15 offers an instant yield of 1.85% (that is, $3.15/$170.00!). Now, these puts appear appealing, even though the stock price and options may move by Monday’s trading opening.
There is also a bid-side premium of $2.03 per contract at the $165 strike price for investors who are more conservative. In other words, short sellers would receive an instant yield of 1.23%, or $2.03/$165. In other words, there is less downside risk because the strike price is nearly 9% out-of-the-money, meaning that buying TSLA shares at $165 within three weeks is unlikely.
Remember that the breakeven point for short sellers of these puts is even lower. For instance, the investor who obtains $17,000 in order to short the $170 put options immediately earns $315.00. As a result, their investment now only costs $16,685, and they receive a 1.852% yield ($315, divided by $17,000).
Therefore, the investor will not be required to purchase 100 shares at $170.00 as long as the price of TSLA stock remains above $166.85 per share on or before May 24. 7.9% less than the current price (i.e., $166.85/$181.19-1) is this breakeven price. That offers excellent protection against negative outcomes.
Likewise, the short seller of these puts would break even at $162.97 (that is, $165.00-$2.03) in the $165 strike price short play. It’s 10% less than what it was on Friday.
In summary, current TSLA investors can profitably supplement their income by shorting OTM puts with close to term expiry periods.