Sunday, November 19, 2023 11:38:53 AM
November 19, 2023 — 10:26 am EST
Written by Mark R. Hake, CFA for Barchart ->
Tesla (TSLA) produced mediocre results for Q3, but at least it generated positive free cash flow. The numbers should be much better in Q4. Meanwhile, near-term out-of-the-money (OTM) put options are looking worth selling short as an income play.
Tesla said its automotive revenue was up just 5% year-over-year (YoY) during Q3, and total revenue was up just 9%. This was after automotive revenue rose 46% YoY in Q2 and total revenue was up 47%.
This was partly due to price decreases, lower sales transaction volume, and lower production.
Tesla Q3 2023 revenue - Slide Deck
However, at least it still generated positive free cash flow (FCF). During Q3 it made $0.8 billion in FCF, after having made $1.0 billion in FCF during Q2. Its FCF margin was 3.4%, after making 4.0% in Q2.
Moreover, analysts seem to be more positive about Q4. For example, after making 66 cents in adjusted non-GAAP earnings per share (EPS) in Q3, analysts now forecast 73 cents for Q4. That represents a 10.6% potential gain in EPS.
Moreover, analysts expect to see $25.7 billion in total revenue, up 9.5% from the $23.35 billion in sales during Q3.
TSLA Stock Reflects All the Pessimism
TSLA is down over $20 in the last month as of Friday, Nov. 17, when it closed at $234.30. That represents a drop of 8.1%. However, from its peak of $293.34 on July 18, TSLA stock is off $59.04, or -20.1%.
That means that investors have already discounted a lot of bad news that occurred during Q3. They may not be looking forward to better numbers in Q4 just yet.
As a result, put option premiums are now extra high. In other words, investors have pushed up prices of puts assuming the stock has further to fall. This is despite analysts' better projections for Q4.
That means investors can take advantage of this pessimism by selling short near-term out-of-the-money (OTM) puts to generate extra income.
Shorting Near-Term OTM Puts as an Income Play
For example, look at the expiration period ending Dec. 8, which is 3 weeks from now (20 days). It shows that the $220 strike price puts trade for $4.35 on the bid side.
That means that any short seller of these puts makes an immediate 1.98% yield for just 3 weeks until expiration.
TLSA Puts - Expiring Dec. 8 - Barchart - As of Nov. 17, 2023
Here is what that means exactly. An investor must first secure $22,000 in cash and/or margin with their brokerage firm. Then they enter an order to “Sell to Open” 1 put contract at the $220 strike price. The account will then immediately receive $435. So, that works out to 1.98% of the $22K invested.
Moreover, if the investor can repeat this trade every 3 weeks for a year with the same $22,000, they could theoretically make $7,395. That is because there are 17 three-week periods in a year. So, this implies an expected return of 33.6% (i.e., $7,395/$22,000).
Managing Downside OTM Put Short Play Risks
Keep in mind that this $220 strike price is only 6.1% out-of-the-money (OTM) - i.e., below the existing spot price of $234.30. TSLA could easily drop this much in the next three weeks.
However, at least the breakeven level is lower than the strike price. For example, after subtracting the $4.43 received from the short sale from the strike price, the breakeven level falls to $215.57. That is 8.0% below today's spot price.
After that, if TSLA stock falls lower than $215.57, the investor incurs an unrealized loss. They would be forced to use to the $22K to purchase 100 shares of TSLA at $220. At least they can hold the shares and wait for TSLA stock to rise. Or they could potentially sell OTM calls against those shares to increase income and lower the unrealized loss.
Nevertheless, one way to reduce risk is to buy puts at a lower OTM strike price. For example, the $210 puts trade for $2.54 in the mid-price. That means an investor buying those puts with the $4.43 received shorting the $220 puts has a net credit of $1.89 per contract. That also reduces the potential downside risk.
However, the breakeven price is now just $218.11 (i.e., $220-1.89). That is just 7.0% below today's price for the next 3 weeks. Moreover, the investor is exposed to more risk until it drops to $210.
One way to improve this situation is to watch the situation and later sell the $210 puts for income (remember the investor bought the puts as a long hedge). This would be done once it becomes reasonably clear that TSLA stock might now fall anywhere near $210 during the next 3 weeks. That would improve the overall return.
Another very conservative way to play this is to short the $210 puts for $2.34 on the bid side. That works out to a very reasonable 1.11% immediate yield (i.e., $2.34/$210). Moreover, the breakeven level would be $207.66, or 11.4% below today's price. Less risk-averse investors might want to choose that play.
Recent TSLA News
- Stocks Fail To Hold Early Gains; Dow Settles Higher, S&P And Nasdaq Close Weak • IH Market News • 07/25/2024 08:39:40 PM
- U.S. Stocks May See Further Downside In Early Trading • IH Market News • 07/25/2024 01:05:29 PM
- U.S. Index Futures Mixed After Tech Sell-Off, Oil Prices Drop on Weak China Demand and Ceasefire Expectations • IH Market News • 07/25/2024 10:21:35 AM
- U.S. Stocks Move Sharply Lower On Disappointing Earnings News • IH Market News • 07/24/2024 08:39:47 PM
- Disappointing Earnings News Likely To Weigh On Wall Street • IH Market News • 07/24/2024 01:05:25 PM
- US Index Futures Fall Amid Tech Giant Earnings, Oil Prices Rise • IH Market News • 07/24/2024 09:55:54 AM
- Meta Unveils Llama 3 AI Model, Elon Musk’s X Poll Backs Tesla’s $5B xAI Investment, and More • IH Market News • 07/24/2024 09:53:32 AM
- Tesla Falls 7% on Profit Miss, Deutsche Bank Down 8% on Loss, Alphabet Drops 3% – Earnings Recap • IH Market News • 07/24/2024 09:47:11 AM
- Major Averages Finish Choppy Trading Session Modestly Lower • IH Market News • 07/23/2024 08:39:53 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 07/23/2024 08:32:27 PM
- Tesla Releases Second Quarter 2024 Financial Results • Business Wire • 07/23/2024 08:09:00 PM
- U.S. Index Futures Dip Slightly as Investors Await Major Earnings Reports, Oil Prices Edge Up • IH Market News • 07/23/2024 10:04:07 AM
- Johnson Controls Division Sold for $8 Billion; Alphabet’s Offer Rejected by Wiz; AMD President Announces Retirement • IH Market News • 07/23/2024 10:00:52 AM
- Berkshire Sells BofA Holdings, Ryanair Shares Drop 12%, Delta Still Struggling After IT Disruption • IH Market News • 07/22/2024 09:44:17 AM
- U.S. Stocks See Further Downside Following Major IT Outage • IH Market News • 07/19/2024 08:46:00 PM
- Microsoft Shares Drop 2% and CrowdStrike Plunges 21% Pre-Market Following Major Global Outage • IH Market News • 07/19/2024 10:01:22 AM
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- HSBC Names New CEO, Tesla Moves Headquarters to Texas, ASML Faces Trade Restrictions, GitLab Considers Sale • IH Market News • 07/17/2024 10:26:41 AM
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- Alphabet Nears $23 Billion Wiz Acquisition, Trump Media Stock Soars 63% Pre-Market, and More • IH Market News • 07/15/2024 10:34:36 AM
- Ericsson Reports 14% Profit Increase, UBS Downgrades Tesla Shares, Ozempic Linked to Reduced Dementia Risk • IH Market News • 07/12/2024 10:28:11 AM
- Costco Hikes Membership Fees; ON Semiconductor Stock Drops 3%; WD-40 Soars 13% on Strong Q3 Earnings • IH Market News • 07/11/2024 10:17:26 AM
- Microsoft and Apple Exit OpenAI Board, TSMC Exceeds Forecasts with Record Revenue, and Other Key Updates • IH Market News • 07/10/2024 10:42:17 AM
- BP Slashes Profit Forecast by $700 Million; Morgan Stanley Predicts S&P 500 10% Drop, and More News • IH Market News • 07/09/2024 10:54:32 AM
- Paramount-Skydance $28B Merger, Boeing Agrees to Plead Guilty with $243.6M Fine, and More News • IH Market News • 07/08/2024 10:37:52 AM
FEATURED Southern Silver Files NI43-101 Technical Report for its Updated Preliminary Economic Assessment for the Cerro Las Minitas Project • Jul 25, 2024 8:00 AM
Greenlite Ventures Completes Agreement with No Limit Technology • GRNL • Jul 19, 2024 10:00 AM
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Nightfood Holdings Signs Letter of Intent for All-Stock Acquisition of CarryOutSupplies.com • NGTF • Jul 17, 2024 1:00 PM
Kona Gold Beverages Reaches Out to Largest Debt Holder for Debt Purchase Negotiation • KGKG • Jul 17, 2024 9:00 AM