Tesla (NASDAQ:TSLA) stock encountered fresh challenges as an HSBC analyst, Michael Tyndall, released a critical report on the company. Despite the negative sentiment, some investors find potential in shorting deep out-of-the-money put options due to their lucrative premiums in near-term expiration periods.
Tyndall’s inaugural report set a $146 price target for TSLA stock. As of Friday, Nov. 10, morning trading saw TSLA at $208.45, signaling the analyst’s anticipation of a $62.45 per share decline, equating to -30%.
Additional analysts, including Guggenheim as of Oct. 19, have also expressed pessimism. Roth and Citigroup maintained neutral ratings on TSLA stock, contributing to the prevailing negative outlook.
TSLA’s Market Value Reflects Widespread Pessimism
A considerable portion of this pessimism is already factored into TSLA’s stock price, witnessing a decrease of nearly $60 in the past month, equivalent to over a 22% decline. The disappointment stems from lackluster Q3 results, with a mere 9% revenue increase compared to 47% in Q2 and 24% in Q1. Additionally, free cash flow (FCF) experienced a decline, exacerbated by reports of ongoing price reductions by the company.
Capitalizing on High Put Premiums
Consequently, TSLA put option prices have surged, creating an opportunity for investors to profit by shorting near-term out-of-the-money (OTM) puts and generating additional income.
Examining the Dec. 1 options expiration period reveals the appeal of deep out-of-the-money puts. For instance, the $185 strike price put option, positioned 11.85% below the current price, trades at $2.45 per contract on the bid side. This suggests an immediate yield of 1.32% with three weeks remaining before expiration, providing a breakeven price of $182.55, or -12.4% below the present valuation.
Mitigating Risks and Enhancing Returns
While this strategy offers significant downside protection and a high yield, it is not without risks. If TSLA’s stock falls to $185.00 or below, the investor may be obligated to purchase TSLA stock at that price, resulting in an unrealized loss position. However, considering the $2.45 received immediately, the true breakeven price is $182.55. Investors can also explore selling covered calls in near-term expiration periods to further reduce their breakeven price.
Given the current elevated put premiums, existing TSLA investors may find this an opportune time to leverage these options for additional income.
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