Tesla Options Look Cheap Now, Especially for Short Put Investors

Tesla (TLSA) has tumbled over 17% this month, down to $168.60 as of Nov. 22 from $233.36 on Nov. 1. As a result, TSLA stock is now very cheap selling for less than 30x forward earnings. This makes selling out-of-the-money cash-secured put options very attractive to potential buyers of the stock.

By selling these puts at strike prices well below today's price, the investor gets two major benefits. First, the investor gets to keep the premium income immediately. And second, even if TSLA stock falls to the point where the put strike price is exercised by the owner of the put, the investor gets to buy the stock at a much cheaper price.

Tesla's Multiple Is Too Low

Here is why this is important. As it stands, analysts expect Tesla will make significantly higher earnings next year. The average EPS (earnings per share) estimate of 31 analysts surveyed by Seeking Alpha is $4.16 for 2022. But for 2023, analysts project a 38.5% higher EPS at $5.76 per share. This puts TSLA stock on a forward multiple of just 29.2x.

Now granted, this is considered a high multiple compared to other car companies. But Tesla's earnings are growing quickly. The P/E multiple compared to its growth rate is well less than 1.0x (i.e., 38.5/29.2 = 0.75). Moreover, in the past 5 years, its average P/E multiple has been 3 to 4x times higher than today.

That implies that TSLA stock could easily rise if the market fears about a recession fade. Or else, TSLA stock could “grow” into a lower multiple, with the stock staying flat and earnings per share rising.

The market seems to be concerned that Tesla will have to shut down operations in China, especially if that country's zero-tolerance COVID policy this winter is ramped up. But many people seem to forget that Tesla weathered that very same situation very well last time 2 years ago. In short, this seems to be a temporary dip.

Either way, one of the best ways to take advantage of this is to short cash-secured puts in TSLA stock.

Shorting Cash-Secured Puts

For example, look at the put option chain for Dec. 30 (see the Barchart option chain below). It shows that even at $140.00 per share, which is 17% below today's price, you can collect $4.45 per put contract.

This means that the cash-secured put investor, after putting up $14,000 in his brokerage account (i.e., 100 shares x $140 strike price), would collect $445 immediately by selling one Dec. 30, 2022 put contract at the $140 strike price. This is an immediate return of 3.178%, which is very high for an option income contract. That works out to an annualized return of about 38%. 

Moreover, even if the stock falls to $140 by Dec. 30, the investor's breakeven price is actually just $135.55 per share (i.e., $140-$4.55 already received). That is very cheap compared to the $5.76 projected earnings for next year - i.e., just 23.5x forward earnings.

Moreover, the investor could immediately turn around and sell out-of-the-one call options to lower their investment cost if the put option was exercised and the investor was forced to buy 100 shares at $140 per share.

To be even more conservative, investors could buy put options at lower prices, such as at $130.00 per share. That would lower the potential losses if Tesla fell below $130.00. Since those long puts cost $2.80 at the midpoint, this cuts the amount of income received on a net basis to just $1.75 (i.e., $4.55-$2.80) per contract. But that alone is still a great return on investment, i.e., $1.75/$140 or 1.25%. 

Moreover, the downside is limited to just $8.25 per share (i.e., $10.00, the difference between $140 and $130, minus $1.75 in net proceeds from selling puts at $140 and buying puts at $130). In addition, the investor would still own the long shares in TSLA. At some point when the stock has stopped falling, the investor could sell the long puts, keep the shares and sell covered calls to make up the difference in the unrealized losses in the long shares.

The bottom line here is that selling cash-secured puts in TSLA stock looks like a good bet for value investors.
 

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