Is Tesla Worth Buying Here After Its Huge Runup? Shorting Puts Is One Way to Play TSLA

Tesla Inc (TSLA) stock has had a huge runup. TSLA is up over 221% in the past two days. Is it worth buying here? It's obvious that Elon Musk's relationship with President-elect Trump is one reason it spiked. But is TSLA stock overvalued now?

TSLA closed at $321.22 on Friday, Nov. 8. That is even higher than my previous price target of $306.72. I wrote about its valuation in an Oct. 25 Barchart article, “Tesla's Free Cash Flow Margins Spike - TSLA Stock Could be Worth Over $300.” 

This was after the company's strong earnings and free cash flow (FCF) results for Q3 were released on Oct. 23.

TSLA stock price - Barchart - Nov. 8, 2024

I've looked at Tesla's results again and analysts' revenue estimates. Based on its strong FCF margins, TSLA stock could be worth over 21% more, or $389 per share. However, that might take well over a year to achieve. Moreover, in the short term, TSLA stock could pull back.

As a result, shorting out-of-the-money (OTM) put options may be one profitable way to play this situation. This allows you to set a lower buy-in price target and get paid while waiting for this to happen.

Revised Price Target for TSLA Stock

In my last article, I showed that Tesla produced a strong 24.9% operating cash flow (OCF) margin and a 10.9% FCF margin. Analysts project that in 2025 revenue could rise to $116.28 billion next year. So, that implies OCF could hit $29 billion (i.e., $116.3b x 0.25).

Next, we can forecast its free cash flow (FCF), after deducting capex spending estimates from OCF. For example, I assume that capex will rise to $12 billion, up from $11 billion planned this year. That means that FCF will be:

     $29 billion OCF - $12 billion capex = $17b FCF

This works out to a much higher FCF margin: $17b / $116.3 revenue = 14.6%. This is greater than its recent 10.9% FCF margin. As a result, the stock's valuation is worth much more.

For example, using a let's assume that the market eventually gives the stock a 1.25% FCF yield. Theoretically, if 100% of its FCF was paid out in dividends, the dividend yield would be just over 1.0%.

Therefore, here's how this works:  $17b FCF / 0.0125 = $1,360 billion (i.e., $1.36 trillion). That is 32% higher than its present $1.03 trillion market cap today. In other words, TSLA could be worth 32% more, or $425.31 per share (1.32x $321.22).

But, to be conservative, let's use a lower valuation metric: 1.50% FCF yield. That implies a market cap of $1,133 billion, or 10% higher, or $353.34 per share.

The average of these two valuations is $389.33 per share, or +21% higher.

Shorting OTM Puts

TSLA put options are very high now. Therefore, it makes sense to short them in nearby expiry periods and in out-of-the-money (OTM) strike prices.

That way the investor can generate income and set a lower buy-in price target while waiting for the stock to retreat.

For example, look at the Nov. 22, 2024, expiration period, just 2 weeks away. It shows that the $300 strike price put option, which is over 6.6% below the trading price, has a $7.70 bid-side premium.

That provides an immediate yield of 2.567% yield (i.e., $7.70/$300.00) to the short-seller of these puts, for just 2 weeks. Moreover, even if the puts open up on Monday at a lower price, say $6.50 or so, that still provides a nice 2.167% yield.

TSLA puts expiring Nov. 22 - Barchart - As of Nov. 8, 2024

Here is what this means. Let's say that the investor wants to short 1 put contract. They must first secure $30,000 in cash and/or buying power with their brokerage firm.

Then, they can enter a trade to “Sell to Open” 1 contract to sell $300.00 strike price put options for expiry on Nov. 22. The account will immediately receive $770.00. That is why the put yield is 2.567% (i.e., $770/$30,000 invested).

Moreover, even if the stock falls in the next two weeks, the investor will be forced to buy at $300.00, but the breakeven price is $300-$7.70, or $292.30. That is well below Friday's close, i.e., 9.0% below $321.22. 

So, there is good downside protection. In that regard, note that the delta ratio is only -0.277, i.e., 27% probability. That implies a low chance that the stock could hit $300 in less than 2 weeks.

In addition, if TSLA stock stays flat for the next month, the investor can repeat this trade. If the short-put yield stays high, the investor could make over 5.1% in the next month (i.e., 2.567% x 2 = 5.134%). Moreover, the breakeven would be 5.134% lower at $304.73 per share.

The bottom line is that TSLA stock could be worth buying here using a short-put play.  This is a way to set a lower buy-in price while generating income in short expiry periods.

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.