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Tesla is so firmly ensconced in the popular imagination that it’s easy to forget that it’s just another company—and that, occasionally, it might be useful to apply prosaic financial analysis to the stock.
The exercise is important because it helps illuminate issues that are typically overshadowed by the star power of founder Elon Musk and a future full of sleek electric cars.
So far this year, Tesla’s (ticker: TSLA) shares have gained 138%. During the past year, the stock is up 345%. The rocket ship ride is likely not over, and thus aggressive speculators, er investors, need a way to handle a stock that, at around $1,000, costs about $100,000 per 100 shares. Selling a put and buying call—something Wall Street calls a “risk reversal”—can help, but first it is useful to understand the backdrop.
Tesla’s income statement reveals nice sales growth for the company’s electric cars, but a lot of red, too, revealing the tough financial realities. But there is no need to focus on losses and the like when considering a company and stock that exists within the stock market’s astral plane.
Tesla’s stock performance indicates that investors think the electric-car maker is impervious to a conglomeration of facts and events that have hobbled most of the world. Unlike most every other company in existence, Tesla is priced in the stock market as if it is impervious to COVID-19, which has decimated the global economy, an increasingly dour relationship between China and the U.S., and historic civil unrest in America sparked by the killing of George Floyd. (Investors could probably say the same thing about other parts of the stock market, too, but that’s a story for another day).
If the previous four paragraphs struck you as annoyingly myopic, and irrelevant, welcome to the options market.
With the stock at $994.32, investors can sell Tesla’s January $990 put for $191 and buy the January $1,005 call for $190. The trade pays investors $1 for agreeing to buy Tesla stock at a slightly lower price, while enabling them to participate in rallies above $1,005.
The risk-reversal strategy—that is, selling a put and buying a call with higher strike price but the same expiration—enables investors to potentially buy low and sell high. Should the stock be at $1,200 the call is worth $195.
Selling a put, which essentially obligates the investor to buy stocks at a lower price, isn’t without risk as Tesla is dancing around record highs. If the stock suddenly reflects the world around it, put sellers could be stuck buying the stock at the $990 strike price even if the market is sharply lower.
During the past 52 weeks, the stock has ranged from $211 to $1,027.48.
Without a doubt, the Tesla trade oozes exuberance and risk. If you have an appetite for the high wire, and living in fast lanes, the options market will pay you to step right up.