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.
Concluding Thoughts
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.
<< Subscribe to my blog to have all these articles delivered directly to your email address >>
*** FREE MONEY ***
Sign up for WeBull Securities Brokerage and fund any amount to receive up to USD500 in share value (Apple, Tesla, Microsoft, Google)
Receive Free Money (USD30~USD500) When You Sign Up With WeBull Securities Platform (Fund ANY Amount)
*** FREE RESOURCES ***
Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading
After accumulating more than 600k of unrealized losses on my portfolio, I wrote this article to encourage friends and investors who are also losing a lot of money to the market.
If You Are Feeling Depressed From Losing Lots Of Money In The Stock Market, Here’s An Article For You
In the 10 years of my investing journey, I have made many mistakes but also learned many lessons from these mistakes. I compiled the 10 most valuable lessons that I have learned and may they help you succeed in your investing journey.
Happy 10 Years Of Investing | 348k (Realised) Profit, 635k (Unrealized) Loss & 10 Lessons Learnt
The precious 6 lessons I learnt after cutting more than half a million of losses in the stock market through bad investments and risky trades.
6 Lessons Learnt After Losing 551k In 10 Years Of Investing & Options Trading | What Newbies Should Know They Start Investing/ Trading
How I managed to build a 1M investment/ trading portfolio despite coming from humble beginnings.
How A Poor Kid Got To A 1M Investment Portfolio | Tips & Principles Of Building Wealth
I did these 10 side hustles while holding a full-time job, so I share them here so you can be inspired to grow your wealth through a side hustle that you enjoy.
I Did These 10 Side Hustles While Working Full Time | 10 Side Hustle Ideas To Help You Earn An Extra Income
Struggling with inflation and high cost of living? Try these 10 methods to help you save money and accumulate more savings for investments or rainy days.
10 Ways To Save Money To Help You Fight Inflation & Rising Costs Of Living
Why I am building $120,000 of cash reserves in Singapore Savings Bonds (SSB) & 5 reasons why I think SSB is a worthy low or zero risk investment that you can consider.
Why I Am Building $120,000 Of Cash Reserves In Singapore Savings Bonds (SSB)? | 5 Reasons Why SSB Is A Worthy Low Risk Investment
Sharing why I am doing Dollar Cost Average (DCA) into SPY and QQQ ETF for long term investments and a step-by-step guide to doing it automatically with Interactive Brokers.
Why I Am Doing DCA (Automatically) For SPY & QQQ For My Long Term Investment? (20% ~ 30% Upside Potential) | Step By Step Guide To Activating Automatic Recurring Investment On IBKR
*** FREE MOTIVATIONAL BOOK ***
If earning more money from your investment does not excite you anymore, you may be seeking a purpose that brings fulfillment and meaning in life. I have written a motivational book that may be useful to you in some ways. You can also download a free copy here:
https://learninginvestmentwithjasoncai.com/finding-the-magical-realm-of-happiness-motivational-book
Learning Investment With Jason Cai 