Other Voices: A Calculated Bet On Tesla

Bret Jensen

By Jay Soloff

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There is no stock that is more divisive to investors than Tesla(TSLA). The electric car producer (and solar power company) seems to have an equal split of investors who love it and hate it. Some of the love/hate relationship is due to the company’s eclectic CEO Elon Musk, while some is due to the fundamentals of the company itself.

Recent news about the company’s debt (and potential default) along with inventory issues have sent the share price into a downward spiral. Year-to-date, the stock is down over 38%.

That’s to say nothing of the volatility. The stock’s 52-week high is $387 and the low is $177. That’s a massive range for a stock, but especially one that has been between $250 and $300 for much of the year. (The price as of this writing is $205.)

However, according the options market, there may be a ray of hope for the beleaguered company. A massive covered call recently traded, which takes a moderately bullish position on the stock. It’s a pretty big deal because over the last 30 days, the average sentiment based on options trades has been about 62% bearish.

Let’s take a look at the trade.

A trader (or more likely a fund) purchased one million shares of TSLA for $209.11 while selling 10,000 of the June 21st 220 calls against the stock. The premium collected from the calls was $6.30 or $6.3 million.

That $6.3 million can be viewed as cushion against a downward move in the stock. It essentially protects the long shares down to $202.81. The premium is also what makes this an income trade. In fact, it works out to a 3% yield over the next two weeks. For reference, that’s 6% per month or 72% per year.

What’s more, the trader can make money up to $220 from the long stock. After $220, the gains are capped by the short calls. At max gain ($220 or above), the position can generate $10.89 in stock appreciation and $6.30 in premium for a total of $17.19, or 8.2%. In total dollar terms, it would be $17.2 million in profits.

It’s hard to argue with the yield and upside potential of this trade. On the other hand, this isn’t a trade for the faint of heart. Keep in mind, the share price has recently been as low as $177. In other words, the $6.30 in premium won’t make much of dent if the stock drops $30 bucks or more in the next couple weeks.

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Still, someone with access to major resources is betting a boatload of cash that TSLA isn’t going to plunge before June 21st, and may even have some decent upside before then. The company is expected to have strong vehicle deliveries in North America, and it could be the catalyst for this trade.

If you don’t mind taking a risk, this TSLA covered all may be a good way to earn some decent yield over the next couple weeks. However, it’s definitely a riskier trade than the standard covered call strategy.

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