Tesla Surges, As Do Its Put Premiums - Providing Income Plays for Short Investors

Tesla Inc (TSLA) stock has been surging - up over 10% in the last month to $187.97 as of mid-morning April 11. As a result, put premiums have also spiked as the market fears a reversal. But this also presents attractive short-term income opportunities for short-put investors, as I described in an earlier article.

These investors are shorting deep out-of-the-money puts for high-yield returns, as I described in my last article on March 17, “Tesla's High Option Premiums Attract Investors Shorting Them for Income.”

For example, in that article, I discussed shorting the $160 strike price puts for expiration on April 21. At the time the puts were trading at $5.53 per put contract. Today, with just 10 days to expiration, they are at just $1.32 in the mid-price. In other words, the investor has already made $4.21, or 76% of the original shorted premium. These are likely to expire worthless, providing a 100% return. 

At the time the yield was 3.46% for the investors who shorted the puts at the $160 strike price (i.e., $5.53/$160). So the investor will likely make a monthly yield of 3.46%, or, if repeated each month for 12 months, 41.5% on an annualized basis.

Similarly, investors have the ability to roll over that trade at today's high premium prices.

Shorting TSLA Stock Puts For Income

For example, today the May 5 expiration puts at the $170 strike price trade for $5.45 per put contract in the midpoint between bid and ask. This expiration period is just 24 days from now, a little over 3 weeks. That means in this short period, the investor can make an immediate yield of 3.20%. On an annualized basis, if this is done every three weeks, that works out to an annual return of 48%, since there are 15 three-week periods in a year.

Here is what exactly this means. If an investor were to secure $17,000 with their brokerage firm, they can then enter an order to “Sell to Open” one put contract at $170 for expiration on May 5. The account will immediately receive $545.00, proving the 3.20% immediate yield. 

This particular trade is very popular as there are now over 2100 put contracts outstanding at this strike price. As long as TSLA stock does not drop 9% to $170, short-put investors will make 100% of the 3.20% yield during that period. 

But even if it does fall below $170 on or before May 5, the investor's breakeven cost is $164.55, or 12.5% below today's TSLA stock price. That provides a huge margin of safety in this income trade. 

Moreover, even if the investor has to purchase TSLA stock at $170 per share, they could also then turn around and short out-of-the-money calls on a covered call basis. That means that the investor could cover some of the potential unrealized capital loss, assuming the stock is below $164.55, the breakeven price. This is a popular options strategy known as the Wheel strategy.

The bottom line here is that TSLA stock provides huge income opportunities for short-put investors since its put option premiums are very high.

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