Sell TSLA Puts Options or Wait for the Stock's Price to Bottom?
Tesla is in a difficult position, and that is forcing its shareholders to make hard decisions about what to do with the stock.
By Donald E. L. Johnson
Cautious Speculator
Tesla, GM and other stocks are down sharply this year, and they are facing increased electric vehicle competition, labor shortages and domestic and world wide recessions. So they could go lower.
TSLA’s PE is about 85 higher than GM’s.
TSLA’s P/FCF ratio is 53.3, GM’s is a high 46.6 and Ford’s is 18.1. They’re all high tech auto makers.
Bearish speculators can sell the stocks, sell covered calls, short the stocks, buy puts or buy bearish vertical spreads on the stocks. Or they can hold and hope.
Tesla’s (TSLA) stock is way oversold, and it may stay over sold for a long time. It also may bottom out at any time. Nobody can predict stock prices.
TSLA’s five-year chart shows a bubble stock. The bubble imploded about a year ago, and the chart is as one of the most bearish charts around. All the indicators are pointing to lower prices.
However, when a stock has a chart like this, a snap back, or bear market rally, can happen at any time. And then head lower again. Tesla, like other auto stocks, is down on investors’ fears of a recession, the appearance of new electric vehicles from General Motors, Ford and other established auto makers. There is a lot of profit taking by investors who expect TSLA will be priced as an auto company, not a technology innovator.
GM’s chart is more like Tesla’s that most people think. There is one huge difference. TSLA’s PE is an astronomical 42.5. GM’s is only 6.09. If Tesla’s PE falls 85% to GM’s PE, TSLA will be about $21 per share, give or take depending on what happens to demand for autos and the cost of making, marketing and shipping them.
Ford’s price to free cash flow ratio is a fairly high 18.1. GM’s P/FCF is a very high 46.6. And TSLA’s P/FCF is an even higher 53.3. P/FCF is a more credible and important valuation metric than PE ratios. Anything over a 20 P/FCF shows that investors expect a company will grow much faster than most companies that are in the Dow Jones Industrial 30 stocks index. The average P/FCF for DJI30 stocks is 13.3.
Ways to Trade TSLA
Obviously, a lot of long-time TSLA bulls have been taking profits for more than a year. Anyone who bought puts or did a bear puts or bear calls vertical spread a year ago has made a lot of money on the trade.
Buy puts. Given the current market outlook and prospect of weaker auto sales during a recession, there probably are traders who are buying TSLA Feb. 2, 2023 $135 puts, which closed Wednesday at $97.10 per share, or $9,710 per 100-share puts option. When a stock price falls, puts prices rise. If prices rise, nimble traders will sell the puts at small losses, say 7% stop losses.
Trade bearish vertical spreads. OptionsPlay.com is not recommending any TSLA trades. Its calculator says TSLA bears might buy a Feb. 17, 2023 $140/100 put vertical for about $1,330. That is a lot less risky than buying or shorting the stock or buying or shorting puts. It involves buying the TSLA 2.17.23 $140 put and selling the 2.17.23 $100 put. OptionsPlay gives the trade a high score of 135, which suggests that there is a high probability that the trade will expire profitably. Most traders close vertical spreads at profits or losses well before the trades expire when the options expire. Prices fluctuate rapidly, so it’s unlikely a trader can do this exact trade at these prices.
Sell puts. TSLA bulls who want to buy the stock at say, $100, could sell TSLA 1.6.2023 $100 strike (delta .04) puts. If the stock closes above $100 on Jan. 6, speculators would pocket the $0.52 per share premium. If the stock closes below $100, speculators would be sold the stock at $100, or about 27% below Wednesday’s closing price. The short 15-day duration of the trade would give speculators a better chance of having the puts options expire worthless and unassigned.
Speculators looking for higher annualized returns on risk (AROR) and higher risks of assignment could do the trade at higher strikes.
Sell covered calls. TSLA stock owners who want to generate premium income at the risk of having TSLA called might sell TSLA 1.6.2023 $170 strike (delta .13) covered calls that have a 90% probability of closing uncalled, or out of the money (OTM). That trade would produce about an 18% ARoR if about the same trade was done 24 times over the next 12 months.
The risk of a cover call trade is that the stock will be called at a strike price that is lower than the speculator wants. Or the stock will continue to plunge and the covered call premium won’t be a perfect hedge against the price drop.
My Trades
Today I sold cash secured puts on three stocks and covered calls on four. Four other trades expired unfilled because I asked too much for the puts and calls that I wanted to sell. These were all options premium income trades.
Puts that will expire on Jan. 20 are DGX ($145 strike), QCOM ($103), RSG ($125) and VRTX ($270).
QCOM $124 strike covered calls will expire on Jan. 6, 2023. Covered calls that will expire on Jan. 20 are DOW ($55 strike), DVN ($75), DGX ($160) and KMI ($19). These trades were done at low deltas and high probabilities of expiring OTM because I’m not eager to sell any of them but possibly KMI. If KMI is called, I’ll sell puts on it and try to buy it back for less that I get when I sell it. Then I'll sell covered calls again.
LINKs:
Home Page. See previous articles on other trades, stocks and watch lists. If you read several of these articles, you’ll learn how my strategy is meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.
Selling in The Money Covered Calls Can Yield Big Annual Returns on Risk. By Donald E. L. Johnson
20 Ideas for Adjusting Your Stock and Bond Portfolio, by Christina Lourosa-Ricardo.
How to Beat Inflation Tax, Bear Market Tax With Dividend Stocks, Covered Calls, Cash Secured Puts, by Donald E. L. Johnson.
Wars Breed Inflation, Rising Interest Rates, Market Turmoil, By Donald E. L. Johnson.
Ways to use StockRover.com to analyze stocks
Calls vs Puts Options: What’s the Difference?
A video on how to place options trades on TDAmeritrade’s Think or Swim.