I sold a Cash Secured PUT on Tesla for a 30-day contract to earn 1.59% return on capital if the contract expires worthless on 28 April 23. This is a relatively low risk trade where I have enough safety of margin for a 21% drop in share price (USD190 -> USD150). Even if Tesla crashes in a month’s time, I have a contingency plan ready, which I will explain later in the article.
Why Tesla For CSP Contract?
To recap, selling CSP is a bullish bet. The options seller wants the share price to close above strike price during expiration so the contract will expire worthless and he can take the premium without having to use up his reserved capital to buy 100 shares.
Tesla’s share price has almost doubled since the low of early Jan 2023. It has risen from the low where the company is slashing car prices due to weakening demand and competition from other legacy automakers and the Chinese EV competitors.
While I am not hopeful that Tesla will go on and create another 20% high over the next 30 days, I think Tesla may stay within this range between 170 to 210 as the market remains choppy for the weeks ahead. If it happens, this PUT contract will expire worthless.
Tesla also has a higher IV (Implied Volatility), which means it is more volatile than other stable stocks such as Apple, Microsoft or SPY, so the Tesla options contract will earn a higher premium.
Why I Chose This Strike Price (USD150) And Expiration date (28 Apr 23)?
I chose this strike price to give myself a 21% buffer just in case Tesla’s share price started dropping in the coming weeks.
(190 – 150) / 190 = 21%
So, between now to 28 April, Tesla can fall to USD150.01 and I will still win.
I chose the 30 days to expire because theta (time) decay happens exponentially in the last 30 days of an options contract. So, even if the share price remains stagnant, the time decay will cause the premium to drop fast. If the share price increases, the premium will drop even faster together with theta decay.
What If I Am Wrong?
If I am wrong and Tesla’s share price starts to fall in the coming weeks, all the way to expiration date (28 April), there are a few scenarios that can play out.
In the first scenario, I give myself a buffer of USD40 for the share price to fall before it expires in the money, which means Tesla can keep falling from the current price of USD190 all the way to USD150.01 (21% decline) on expiration date (28 April 23) and I will still keep the full premium and free up my capital without having to buy 100 shares of Tesla.
If Tesla goes on a free fall to less than USD150 by 28 April 23, I will either let the contract get exercised and buy 100 shares of Tesla at USD150 each (total USD15k) or roll the contract to a later date, to earn more time premium and allow the share price to rise above USD150 eventually. I think given time, Tesla’s share price will definitely rise above USD150.
This method of selling CSP may be capital intensive but it provides downside in the event where things do not turn out the way I have expected. If Tesla turns out the way I have expected, I may close the contract way earlier than 28 April 23, to lock in my profits (especially when the premium of the contract drops to less than 20% of the original price that I received).
If Tesla’s share price stays stagnant all the way, or drops slightly (10 ~ 15 %), I am still able to capture the 1.59% profit and free up my capital for other trades after a month. It may not give the best returns in the shortest time but it gives me the margin for error if I get it wrong eventually. I think that downside protection is very important in 2023 because we really don’t know whether the market is going to crash or shoot to the moon and creates the next bull market.
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