Strategic Covered Call Option Guide for Tesla Investors Strategic Covered Call Option Guide for Tesla Investors Strategic Covered Call Option Guide for Tesla Investors

Strategic Covered Call Option Guide for Tesla Investors

Hay Thi

Market Specialist

Summary:  Tesla (NASDAQ:TSLA) reported its Q2 delivery numbers on Tuesday, marking a second consecutive quarter of decline. Yet, the stock took off as the delivery numbers beat forecasts, by falling less than expected. The shares gained an impressive 10.2%, closing at $231.26 on Tuesday. The momentum extended into Wednesday with a further increase of over 6%, closing at $246.39. Tesla is now on track for it highest close since the start of the year.


What is going on with Tesla?

Tesla delivered approximately 444,000 vehicles in the second quarter, reflecting a 4.8% from the same period last year. The company’s EV sales have been under pressure due to waning demand and intensifying competition from other EV makers. Despite lowering prices, slowing sales growth and declining earnings estimates have dampened overall investor sentiment. However, the recent delivery figures represent a notable comeback for Tesla as it surpassed market expectations of around 438,000 units for Q2 deliveries. Prior to the recent delivery update, Tesla’s share price had fallen by approximately 16% this year.

Another notable highlight is its booming stationary energy storage business, which garnered a positive response from analysts. Tesla provides energy storage solutions such as Powerwall, Powerpack and Megapack to store renewable energy for residential, commercial and utility applications. In Q1, Tesla deployed 4.1 Gigawatt-hours of battery storage, which more than doubled in Q2 to 9.4 Gigawatt-hours. In January, Tesla projected the growth rate of deployment and revenue in its energy storage business to surpass that of its automotive sector in 2024. Elon Musk confirmed the company is on track for a “massive number of energy deployments”.

What can you consider if you are long Tesla?

Investors who have a long-term stake in Tesla and wish to earn some income while waiting for Tesla to reach their desired target price may consider selling call options on Tesla. This strategy allows investors to earn additional income from being long Tesla.

Illustration:

  1. With Tesla’s stock price at $246.39 on 3 July 2024, selling a call option with a $260 strike price (if you are comfortable selling your Tesla shares at $260) for 35 days expiry (09-Aug-2024) will yield a total premium of $1505 ($15.05 x 100 shares).
  2. This gives an annualized yield of 62.8% (15.05/246.39) x (360/35).
  3. If Tesla’s price stays below the strike price of $260 at expiry, the option will expire worthless, and the investor gets to keep the premium with no additional obligations.
  4. If Tesla’s price rises above the strike price of $260 at expiry, the investor is obligated to sell 100 shares at $260.The investor still gets to keep the option premium, thereby achieving the effective selling price of $260 + option premium.

Note:

  1. Please note options trade in lot sizes of 100 shares. When an investor sells 1 lot of call option, they are selling a call option on 100 shares.
  2. Prudent investors typically sell covered calls only on part of their holdings and keep the upside open on the rest.
  3. If the investor wishes to receive a higher premium, the investor could choose an option with a similar strike price and a longer expiry.
  4. If the investor is only willing to sell the stock at a higher price but still want to receive a relatively similar premium, the investor could choose an option with a higher strike price and a longer expiry.

Advantages of covered calls

  • Generates passive income. Selling a covered call generates an income via premiums that can supplement the overall return of a portfolio.
  • Relatively low risk. As the risk of being short a call is covered with your stock position, trading options this way carries a relatively low level of risk.
  • No extra margin required to sell covered callsAs you hold the underlying stock for delivery, there is no extra margin required to sell the same number of covered calls at Saxo.

Risks of trading covered calls

  • Capping your stock’s upside potential. One key risk is the loss of opportunity to profit from your stock’s potential upside above the call option’s strike price.
  • Risk of using covered calls as a proxy for take profit orders: In the example above, it is possible that the stock trades well above $260 through the course of the option but on expiry falls back below $260. Without the option, the investor might have booked the profits at $260 but because the stock was covered by call options, the investor might have waited out until expiry.

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Capital Markets Risk Warning, you will find more information on leveraged products and the associated risks. Trading in financial instruments carries risk and may not be suitable for you. Please refer to Saxo Capital Markets’ full Disclaimer here.

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