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Tesla Inc (TSLA) stock is up over 44% in the last month and 145% YTD. TSLA stock is up again on Tuesday, June 20, at $263.90 in morning trading on June 20, after a long weekend. However, the stock could still rise based on its historical multiples and with good earnings. This makes shorting out-of-the-money (OTM) puts an ideal strategy for conservative investors.
We discussed using options to buy TSLA stock in our last article on Tesla on May 31, “Unusual Options Activity In Tesla Stock Shows A Large Investor Taking A Position.” We pointed out that a large investor had likely bought a huge amount of long-dated call options (expiring Oct. 20) at the $310 strike price for just $5.15 per call. Today those calls are trading at $21.18 per call option. That is a massive gain of 311% for the investor in just 20 days of trading.
Moreover, I pointed out that the investor had very little risk as they had likely shorted OTM puts at the $202.50 strike price and received $5.45 per put. If, indeed, this is what happened, then that trade paired option trade was truly a genius move.
As we will see below, a more conservative way to play TSLA stock with options is to short puts below today's spot price. That way the investor can still make some income but also have the ability to buy in automatically at a lower price.
TSLA Stock Could Still Peak from Here
Analysts and investors are looking to see if Tesla's Q2 results will continue to show powerful free cash flow (FCF). For example, last quarter the company produced an operating cash flow of $2.5 billion and an FCF of $0.44 billion. The difference between the two figures is the company's capital expenditures (capex). This FCF figure was down significantly from the $1.42 billion in Q4 and $3.297 billion in FCF for Q3.
As a result, if TSLA can show that its operating cash flow has grown, despite potentially higher capex spending, any FCF growth over Q1 will be seen as positive for the company. And, indeed, it's even possible that the markets won't be as concerned about FCF. The markets may be willing to take a long view on FCF, as it does with Amazon (AMZN). After all capex spending is what propels the company's earnings power forward.
Nevertheless, as it stands, TSLA stock trades on a forward multiple that is significantly lower than its historical average. For example, Seeking Alpha reports that its 5-year average forward multiple is 123x earnings. Today, TSLA stock is trading on a forward 2023 multiple of 74x and a 2024 multiple of 51.8x.
So theoretically TSLA stock could revert to this higher average P/E multiple, implying further upside in the stock. But, more likely, if earnings come in better than expected and more importantly if FCF is strong, the stock is likely to keep moving higher.
One way to conservatively play this is to short OTM put options.
Shorting OTM Puts in TSLA Stock
For example, the $250 strike price puts that expires on July 7, 17 days from now, trade for $8.20 per put contract. That means that the investor who shorts these puts makes an immediate yield of 3.28% (i.e., $8.20/$250). Moreover, this strike price is just 5.8% below today's price, giving the investor some room in case the stock falls, before they would be obligated to purchase the stock at $250 per share.
In addition, for more conservative investors, the $240 strike price puts trade at $5.15 per put. This strike price is 9.6% below today's price, giving more room for the stock to fall. Nevertheless, the investor still makes an immediate yield of 2.14% in just 17 days before the contract expires. On an annualized basis that is a return of 44.9% if it can be repeated every 17 days.
This shows that investors can use options to take long positions in TSLA stock, either by buying calls or shorting OTM puts. The latter is a more conservative strategy although it still has some risks. But at least the investor can make some immediate income by shorting OTM puts.
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.
