The WSJ Says Tesla Options Volume Surged Making Shorting Calls Attractive

The Wall Street Journal reported that Tesla (TSLA) stock options volume surged to 13% of all trades. Prices seem to be skewed to the call side, implying investors think the stock is undervalued. This has pushed up premium prices to very high levels. That makes shorting out-of-the-money calls worth looking at for income-oriented investors.

The WSJ said that much of the volume is in ultra-short-dated option periods on Friday with much of the activity related to puts and calls around the $175 strike price. As of mid-morning Monday, Jan. 30, TSLA stock was trading down over $4.00 to $173.07.

This is attracting investors to short near-term (1 month forward) call strike prices. For example, let's compare call and put options premiums for strike prices that are roughly 5% away from today's price in the Feb. 24 expiration period. 

The $182.50 call option strike price trades at $9.70 per call contract. That strike is 5.45% over today's price of $173.07. The $162.50 strike price put option, 6.1% away from the spot price, trades at 8.25 per put contract.

This shows that the option premiums are now very high and are skewed to the call side, implying investor enthusiasm for TSLA stock. As a result, any investor who shorts a covered call for 1 call option at $182.50 will make an astounding 5.6% yield. 

Here is what that means from a practical standpoint. The investor buys 100 shares at $173.07 and spends $17,307. He then puts in an order to “Sell to open” 1 call contract at the $182.50 strike price. His account immediately receives $970 (i.e., $9.70 x 100). That works out to an immediate return of 5.60%. 

This is an extraordinarily high premium level. Normally, the yield would be in the 1% to 2% range. In fact, more conservative investors might consider shorting even higher strike prices in order to not risk having their stock exercised if TSLA rises to $182.50 by Feb. 24.

For example, the $200 strike price calls trade between $5.10 and $5.20. That strike price is over 15.5% from today's price, and the implied yield is still about 3.0%. This means that even if the stock rises to $200 by Feb. 24, the investor gets to keep the 15.5% capital gain if the call is exercised then. On top of that, they have already earned 3.0% from the covered call play. That brings the investor's 3-week potential gain to 18.5%. If the stock falls short at say $199.00 the investor still has a huge unrealized gain, along with the 3.0% covered call yield.

This makes shorting deep out-of-the-money TSLA calls well worth the potential risk on the upside that the stock could rise to the covered call strike price.

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