On Friday (4th March 22), it was announced that Tesla has received approval from the German authorities to start production of Model Y in their new Giga Berlin factory. The stock was holding up well while the stock market falls amid all the uncertainties surrounding the Ukraine war and Federal Reserves’ decision regarding rate hikes.
In my previous post where I shared that I sold all my SG bank stocks, my plan was to use the capital raised from the sale to buy more Tesla stocks if it keeps falling. On 4th March, I have decided to sell a PUT on Tesla, with a Strike Price (SP) of USD700 and an expiration date on 8th April, and here are the reasons why:
Reason 1: Higher IV, Higher Premium
In times where there are high volatiliy in the market, premium tend to be higher and this favours the options seller. So, now is a good time to be a seller of options rather than a buyer of options
Reason 2: 2.84% Returns In A Month
I collected a USD1990 worth of premium, which is a decent 2.84% returns over a period of 34 days. Someone once told me that selling deep OTM PUT is a sure win because you just keep collecting premium contract after contract, without having to buy the shares (provided the stock does not crash at expiration date).
What it means in this deal is that if Tesla stays at the closing price of USD838.29 after one month (trade sideways), the contract will expire worthless and I get open a new contract. In fact, Tesla does not have to trade sideways for me to earn. It can fall by a further USD138 dollars (or 16.4%) before the contract gets excerised. So, if Tesla closes at USD820, USD800, USD780, USD740 or USD701, the contract that I sold will still expire worthless.
Reason 3: Strike Price Meets My Target Price & Tesla Is A Stock I Love To Own
In the event the contract gets exercised, I am happy to own Tesla at USD700, because I think this is a good price for Tesla if I look at the long-term horizon. I can also average down on the price for my Tesla stock after having the previous Tesla PUT contract exercised at USD1,200.
I am confident Tesla share price will continue to rise in the coming years, especially when they are growing profits quarter after quarter, they are adding new Gigafactories to ramp up production, demand far exceeds supply and there are many exciting prospects about the company coming up in the next decade. With 200 shares in my account, I can continue to sell covered call on the stock and earn a sideline income.
Reason 4: Hedging Against Further Market Downturn
The market is likely to remain turbulent in the months to come, even after the Federal Reserves’ announcement about interest hikes (which I think they are going to adopt a take-one-step-at-a-time stance), so it is better to have cash reserves. So, if my OTM does not get exercised, my cash is always ready to either sell another PUT contract or to buy shares of fundamentally good companies at a bargain price when the market crashes.
While I have explained in Reason 3 that I do not mind owning another 100 shares of Tesla at USD700, it does not mean I want to own them now or lock up my capital in shares when the market is highly volatile and unstable. I have more options if I am holding capital right now. So, it is the best of both worlds of earning a return through the premium and also having cash ready when the contract expires worthless because SP is deep OTM. This is of course dependent on Tesla not falling below USD700 by 8th April 2022.
My Tesla Trading Strategies
Scenario 1: Tesla stock falls further to below USD700
My covered call contract will expire worthless and I do not have to sell my Tesla shares. My PUT contract will be exercised and I now own 200 Tesla shares at an average buy price of USD950. This price is lower if I factor in all the premium that I have collected from selling PUT and CALL contracts.
Scenario 2: Tesla stock stays sideways at USD850 range
Both covered call and PUT contracts will expire worthless and I keep the premiums without having to sell or buy any Tesla shares. I will continue to sell new covered call contracts and cash-secured PUT contracts to earn more premium.
Scenario 3: Tesla spikes up to above USD1000.
I will gain profits from my Tesla LEAPS contract and may choose to let my covered call contract gets exercised or I may choose to close the contract at a loss to prevent it from getting exercised and cover my loss by rolling it to a later date. The PUT contract will also expire worthless as SP is only USD700.
If you ask me, I would like Scenario 3 to happen because I want to sell away my 30 Tesla LEAPS contracts before they expire worthless in Sept 2022. I can also keep rolling my PUT contract when the share price of Tesla keeps rising and keep collecting more premium. However, nothing is for sure but I will keep monitoring the situation and react accordingly. I hope this article is useful to you and all the best!
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