Tesla Stock Has Fallen, But Its Put Premiums Are Still High - Good For Short Income Plays

Tesla Inc (TSLA) stock is off about $20 in the last month, or 10.7% to $167.98 as of Friday, May 12. However, its put premiums are still elevated, albeit not as much as before. As a result, this continues to give investors who short TSLA stock put option premiums (on a cash-secured basis) good income opportunities.

We wrote about this last month in our Barchart article on April 11, “TSLA Surges, As Do Its Put Premiums - Providing Income Plays for Short Investors.”In that piece, we pointed out that even TSLA stock was at $187.97 midday, but the 9% lower strike price put options expiring May 5 at the $170 strike price traded for $5.45 per contract. 

That represented a juicy 3.20% yield (i.e., $5.45/$170) to the investor who secured $17,000 in cash and/or margin with a brokerage firm for 1 short put contract. As things turned out, on May 5, TSLA closed at $170.06, so the put option expired worthless. So, the investor kept all of the 3.20% yield made upfront without having to purchase the stock at $170.00. 

However, note that any investor in this cash-secured short put play likely covered their short bet well before the expiration period. This is because the put premium had fallen dramatically near the end of the expiration period.

Shorting TSLA Stock Puts Today

Today, even though TSLA stock is up 36.3% from $123.18 at the end of last year, it peaked at $214.24 on Feb 24.  Since then, TSLA has been falling, including a drop of over 10.7% in the last month. As a result, the TSLA put option premiums are high, albeit not as high as before.

For example, for the expiration period ending June 9, which is 27 days from now, the $150 strike price puts (10.7% below today's price), trade for $2.73 per put contract. That represents an immediate yield of 1.82% to the cash-secured short-put investor.

TSLA Puts - Expiring June 9, 2023 - Barchart - As of May 12, 2023

For example, an investor who deposits $15,000 in cash and/or provides equity margin with a brokerage firm, can then enter an order to “Sell to Open” 1 put contract at the $150 strike price. This immediately results in a deposit of $273 (at the put option mid-price from Friday, May 12) into the account. That is why the trade results in a 1.82% yield (i.e., $273/$15,000). 

Moreover, if this can be repeated each month for a year, the annualized return would be 21.84%. So, in effect, it is a way to make money on TSLA stock even if it keeps dropping or stays flat over the next year.

However, keep in mind that there are significant risks. The high put premiums reflect a good deal of implied volatility in the stock as it has been up and down a lot over the last 6 months.

There is a good chance that TSLA stock could fall to $150 on or before June 9, even though it's only 27 days from now. As a result, any investor who shorts these puts should be willing to purchase TSLA stock at that price.

For more risk-averse investors, the $130 puts expiring June 9 trade for 63 cents. That strike price is 22.6% below the $167.98 price as of May 12. So there is significantly less risk that TSLA stock could drop that far in just 27 days. Nevertheless, the premium-to-strike yield is attractive at 0.49%, or 5.81% on an annualized basis.

Other Trade Strategies

Both of these two strike prices are very popular with investors as can be seen by the high levels of open interest (see Barchart chain above) at the $150 and $130 strike prices. In fact, some investors may be shorting the $150 strike price and using that premium to purchase the $145 puts at $1.92 per contract. 

That provides a net 81 cents credit per contract, which is slightly better than the $130 strike price put and provides good downside protection at $145 and below. That provides a net yield of 0.54% (i.e. $0.81/$150).

Nevertheless, if the stock falls to between $150 and $145, the investor will have to purchase the stock at $150. However, given the $2.73 already received the actual breakeven point is $147.27 (i.e., $150-$2.73). That means that the spread risk is only between $145 and $147.27, or $2.27. This may be acceptable to the investor as they could turn around and sell calls if their puts were exercised at $150. Moreover, the investor might be able to exit the long put trade (i.e., sell the long put at the $145 strike price) closer to expiration, which would enhance the overall return well over the 0.54% yield from shorting the $150 puts and going long the $145 put.

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.