Sell This Unusually Active Tesla Option for April

Tesla’s TSLA volume for its shares and options was below average on Wednesday. It traded 123.7 million shares, about 20 million less than its 30-day average. On the options front, its volume was 1.67 million options, 300,000 less than its 30-day average. 

Investors focused on stocks like Lululemon LULU, which delivered strong Q4 2022 results after Tuesday’s close.

Tesla did experience unusual options activity in Wednesday options trading. I was particularly mesmerized by three put options expiring on April 28. All three are attractive but each for very different reasons. 

Read on, and I’ll explain.

Is Tesla a Buy at Current Prices?

Before I get into the specific put options, I would like to discuss the pros and cons of buying TSLA stock at current prices. After all, I’ll be selling these puts, so it could come to pass that I have to purchase the shares if they are put to me. 

According to Barchart.com data, the 26 analysts covering TSLA stock rate it a Moderate Buy (3.92 out of 5) with a mean target price of $219.16, 13% higher than Wednesday’s closing price of $193.88. That’s a decent if not spectacular, one-year return. 

The analysts’ ratings are up slightly from three months, but nothing significant to make you put in an order on the spot. 

On Monday, Barclays analyst Dan Levy wrote a note to clients about Tesla vehicle deliveries in the first quarter. He sees 425,000 vehicles delivered, 5,000 more than the consensus estimate. Regarding production, Levy and his colleagues projected 430,000 vehicles in the quarter. 

In Q1 2022, Tesla’s delivery and production numbers were a record 310,000 for the former and 305,000 for the latter. If Barclays is right on the button with its projections, deliveries will be 37% higher, while production will be up 41% in Q1 2023. 

These numbers would be increases of a little more than half last year’s first quarter, but still very healthy. The company’s price cuts and the tax credits for electric vehicle (EV) buyers through the Inflation Reduction Act (IRA) have turned a potential lack of demand into a supply issue. As a result, Tesla might not have enough vehicles to sell. That’s a good problem to have. 

Fortunately, Tesla’s factories in China, Berlin, and Austin will produce more vehicles in the coming year as they get up to capacity, providing some supply relief. As a result, further price cuts could be in the offing. 

“We believe price cuts are likely to be core for Tesla in unlocking additional volume, especially as Tesla ramps on further capacity,” Yahoo Finance reported Levy’s comments. “Tesla’s margins are currently exceeding the ICE margins of other OEMs, and EV margins for the legacy OEMs are by and large still quite negative. And with others likely to face a long path to reaching appropriate EV margins, we expect the Tesla cost lead to be sustained for quite some time.”

So, there is no question that Tesla remains the pure-play EV leader. 

The question for potential buyers of Tesla stock is whether current prices are a good entry point. Up 79% year-t0-date, TSLA is a lot more expensive than in early January. 

What’s the Play?

Let’s assume you want to be a long-term owner of Tesla stock. Let’s also take that you would prefer to buy it for $150, nearly 25% lower than its current price. The obvious thing you can do is wait to see if it falls in price. 

It traded below $150 in December and January. Before that, you’d have to go back to November 2020. It went over $150 for the first time in August 2020. So, is it probable that it will fall to $150 in the near term? No, it’s not. 

The second thing you can do is buy a $150 call. For example, the Oct. 20 $150 has an ask price of $61.45, so you’d ultimately pay $211.45. That makes no sense. Move closer to today, and the ask price drops. The April 28 $150 has a $46.95 ask price, so you’d pay $196.95, about $3 higher than its current price. That’s a little better, but it doesn’t get you your $150.

Honestly, I’m not enough of an options person to know how you get your $150 other than playing the waiting game. 

This leads me to the three put options expiring on April 28.

1. April 28 $195.00 with a $14.15 bid price

2. April 28 $192.50 with a $12.95 bid price

3. April 28 $185.00 with a $9.65 bid price 

Subtracting the premium income from the strike prices, it’s easy to see that your lowest entry point is to sell the $185 put. The ultimate price paid would be $175.35. It’s not $150, but it’s a good buy. 

The only problem: TSLA stock is unlikely to fall below $185 in the next 29 days. Never say never, but it’s doubtful. However, like a dividend, why not get paid to wait for it to come down in price? The $965 in premium income is 5.2% of the strike. Do that 12 times over the next year, and you’re looking at a 60% return. Unlikely, but I think you get my point.

This one is a patient investor’s income play. 

The $195 strike has a net price of $180.85, while the $192.50 is $179.55, or $1.30 cheaper. So your first thought is to go for $192.50 because it’s cheaper. 

However, while the current price is below the strike and could be put to you, what happens if the shares increase in value in April, hitting $200 on the expiry date? Neither will be put to you, so the income is yours. 

The $195 provides a 7.3% 29-day return. The $192.50 provides a 6.7% return. So with the higher-priced strike, you’ve given yourself a better chance of buying Tesla stock while earning a better yield. It’s a win/win. 

Of the three, I like the $195 the most. It provides both an income and stock-buying play wrapped up in one.

On the date of publication, Will Ashworth 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.