How to Buy Tesla on Dips Using Options How to Buy Tesla on Dips Using Options How to Buy Tesla on Dips Using Options

How to Buy Tesla on Dips Using Options

Sean Teo

Sales Trader

Summary:  Tesla stock is now down 58% from the highs of $414.50 in November 2021. In contrast, S&P 500 was up 37%. Why has Tesla been declining and more importantly, is Tesla a buy now?


Tesla VS S&P 500

Why has Tesla been declining?
Tesla has been facing a number of key challenges in the past 2 years, mostly from competition from global brands, in particular Chinese EV makers. Some of the key competitors include BYD, Xiaomi, Rivian, Nio, Audi and Mercedes. As a result, Tesla has resorted to price cuts to stay competitive and as a result led to lower margins.

Secondly, the market’s premium on Elon Musk is beginning to diminish as the firm continues to struggle in recent times. Expectations have been set high and the market has been repricing this premium over the past year.

Thirdly, the elevated level of interest rates does have an effect in reducing overall demand of luxury goods. As Tesla is priced and marketed as a premium brand, cheaper alternatives are more appealing in this environment.

When is a good time to buy Tesla?
Although it is challenging to pick the bottom in any stock, investors who have been waiting for this dip would be happy to know that you don’t have to buy the absolute bottom to build a good portfolio over time. Often, it is as important to create a structured plan to accumulate shares over a period of time to take advantage of dollar cost averaging and bet that markets in general rise over time, especially market leaders.


What can you do?
Clients can choose to accumulate Tesla shares over time by selling cash secured puts, which enables them to earn premiums while waiting for the price to move to their desired purchase price.

This is especially useful if a trader/investor is bullish on a stock over the longer term but believes that there could still be some downside to the stock price in the short term. This can happen in bullish, bearish or even volatile markets. In fact, volatility would be good for option premiums.

Example: The investor is interested in buying Tesla at $150 while Tesla is still trading at $172.98 on 8th April 2024.

1. 
Investors can sell a cash-secured put option with a strike of $150 and expiration date of 10th May (31 days to expiry). By selling the option, you receive a premium of $327 ($3.27 x 100 shares) from the buyer of the option.

2. Setting aside sufficient cash of $15,000 ($150 x 100 shares) to cover the potential purchase of 100 Tesla shares at $150 if the option gets assigned.

3. Two
 potential outcomes:
a) If Tesla remains above $150; you’ll keep the premium of $315.
b) If Tesla falls below $150; the put option may be exercised and you’ll need to buy 100 shares of Tesla at $150.

4. 
Annualized yield of 21.95% derived by (3.27/172.98) x (360/31)

Comparing with a longer maturity, you can see how this changes the premium you receive and how far you’ll be able to strike.

  • For the same strike at $150, the premium increases to $7.78 as the duration increases to 101 days. (Annualized yield 16.03%)
  • For a similar premium of $3.34, you can now stretch the strike to $130 as the duration increases to 101 days. (Annualized yield of 6.88%)
How premium yields change with strike and expiry

What if Tesla reverses higher?
If you are concerned about missing out on the upside if Tesla starts rallying from here on, you can consider buying an out of the money (OTM) call option in addition to selling the put option. This is called a risk reversal strategy. For a premium of $3.31, you can buy an OTM call option at $200, expiring in 31 days. Therefore, if Tesla rises above $200, you will be effectively long from $200 at expiry.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992