Tesla's High Option Premiums Attract Investors Shorting Them for Income

TeslaInc. (TSLA) stock is attracting investors who are taking advantage of the high option premiums. They are shorting deep out-of-the-money puts and calls to create high-yield returns. After all, TSLA stock is one of the few gainers in the past week, in contrast to all the turmoil in the financial sector. That is pushing up the premium prices on both the put and call side.

For example, the $160 strike price put option for April 21, expiring 36 days from now, is trading for $5.53 per put option, in pre-trading on Friday, March 17. That strike price is over 13% below today’s opening price of $184.13, so it provides a good deal of downside protection to the short-put investor. 

But, even after putting up $160 per contract in cash and/or margin, the investor who puts in an order to “Sell to open” 1 put contract at $160 will receive $5.53. That represents an immediate yield of 3.46%. Moreover, the investor’s breakeven point is now $154.47, or 16% below today’s opening price.

As a result, investors are piling into this short trade. The chart below shows that there are already 15,728 open put option contracts at this strike price.

TSLA Puts – Expiring April 21 – As of March 17 – Barchart

A similar result can be seen by selling covered call out-of-the-one (OTM) call options for TSLA stock. For example, the $210 call option strike price call option is trading for $5.53 per call option. That is the same price as the put option, although the call option strike price is 14% higher than today’s opening price.

In other words, investors who buy 100 shares per call option at today’s price of $184.13, and then put in an order to “Sell to Open” 1 call option at $210 for April 21, will receive $5.53. That works out to an immediate 3.0% yield to the investor. 

This is very attractive to options traders as the typical premium for an option this far out-of-the-money one month in the future would be well less than that – closer to 1% or less. What is going on here?

Tesla Looks Cheap Here if Earnings Keep Growing

Investors are still keen on this electric vehicle and energy storage company given that it is trading for just 46x this year’s earnings projections and 33x next year. That is based on a $4.00 earnings per share (EPS) 2022 estimate on average from 32 analysts surveyed by Seeking Alpha. For 2024, analysts foresee $5.54 in EPS, representing 38% growth.

Although on an absolute basis, these multiples are high, investors are willing to pay for the company’s growth. Moreover, these ratios are well below the stock’s 5-year historical multiples, which have averaged 120x, according to Morningstar. Seeking Alpha has a similar historical valuation metric picture on the company’s historical average.

This is essentially what is causing the option premiums to be so high.

For example, even assuming the stock takes another hit in valuation, the options investors who short deep out-of-the-money puts have very good downside protection. If these puts and calls get exercised, especially on the put side, the investor will likely be able to hold the position for the long term, given the company’s growth prospects.

For example, when we last wrote about Tesla, investors were taking advantage of the stock’s call premiums in late December at the mid-$160 put strike prices. If they held the stock until now these investors would still have a profit, despite the volatility in the stock since then.

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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.