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Tesla (TSLA) stock took another hit with a new report from an HSBC analyst and his negative assessment of the stock. However, it makes sense to short deep out-of-the-money put options in near-term expiration periods since their premiums are so high.
HSBC analyst Michael Tyndall produced his first report on TSLA stock with a $146 price target. Today, Friday, Nov. 10, in morning trading TSLA stock is at $208.45. In other words, the analyst expects the stock to fall by $62.45 per share, or -30%.
Moreover, several other analysts have produced negative reports on the stock. For example, according to Yahoo! Finance, Guggenheim kept its sell rating on the stock on Oct. 19. Both Roth and Citigroup maintained their neutral ratings on TSLA stock as well.
TSLA Price Reflects Pessimism
Much of this pessimism is already incorporated into the TSLA stock price. It has fallen almost $60 in the last month, or over 22%.
A lot of this has to do with disappointment with its Q3 results. Revenue was up just 9%, after having risen 47% in Q2 and 24% in Q1. Free cash flow (FCF) was lower as well. Moreover, several articles had emerged that the company was continuing to lower prices.
Now the company's stock price reflects a lot of this negative sentiment.
Sell Short Near Term OTM Puts for Income
As a result, TSLA put option prices have risen. As a result, it makes sense to shell short near-term out-of-the-money (OTM) puts to gain extra income.
For example, look at the Dec. 1 options expiration period. It shows that deep out-of-the-money (OTM) puts are very attractive. One example, the $185 strike price put option, which is 11.85% below today's price, trades for $2.45 per contract on the bid side.
That implies that the short seller can make an immediate yield of 1.32% with just three weeks to go before expiration. Moreover, that gives the short seller a breakeven price of $182.55, or -12.4% below today's price.
In other words, there is huge downside protection for the short seller, along with a high yield. For example, if the investor can repeat this trade every 3 weeks for a year, the annualized expected return is 22.44% (i.e., 1.34% x 17). There are 17 periods of 3 weeks in a year.
Downside Risk
Keep in mind that this trade is not without risk. For example, if TSLA stock falls to $185.00 per share or lower, the investor will have to purchase TSLA stock at that price. This could lead to an unrealized loss position.
That occurs if TSLA stays below the $185 strike price. However, since the investor still keeps the $2.45 received immediately, their true breakeven price is $182.55. So, if the investor already has a position in the stock, their new cost could be higher or lower on average.
Moreover, the investor could also sell covered calls in near-term expiration periods to gain additional income. That could lower their breakeven price as well. So, given high these put premiums presently are existing TSLA investors might want to take advantage of them to gain additional income.
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.
