Tesla Inc. (TSLA) put options in near-term expiry periods are still at high premium levels, even after TSLA stock has rebounded. This is ideal for existing shareholders to sell short out-of-the-money (OTM) put options to gain extra income. This article will show how that can be done.

TSLA stock closed on Friday, May 3, at $181.19 per share, up 27.6% from its low price of $142.05 on April 22. However, TSLA stock still looks cheap here, based on analysts’ price targets and revenue estimates.

Prior Short Put Plays

I discussed this situation in my last Barchart article on April 9, “Tesla Stock Is Off Its Lows and Still Looks Undervalued – Good for Short Put Income Plays.” In that article, I discussed shorting the $155 and $160 strike price puts that were to expire on May 3. At the time these strike prices were 13.25% and 10% out-of-the-money.

Moreover, this short-put play yielded 2.0% and 2.6875% respectively to short sellers who secured cash and/or margin with their brokerage firm. As TSLA stock closed at $181.19 on May 3, the strike prices remained out of the money, and the investors who followed these plays made good money.

This play worked best for existing shareholders. They get the best of both worlds, so to speak. On the one hand, their long hiding appreciated 27.6% and on the other they made extra income shorting OTM puts.

As it turns out, TSLA stock still has high premium levels, although not as great as before. This makes it worthwhile repeating this short-put play. But first, let’s review what analysts are saying.

Analyst Price Targets

The key to shorting puts is to be willing to own the stock should it fall at or below the strike price by the end of the expiry period. This seems to be the case with TSLA stock.

For one, analysts have higher price targets for TSLA stock, even after its recent rise. For example, Barchart’s survey of 29 analysts has price targets that range from $175.41 per share on average to $310 on the high side. This is similar to Yahoo! Finance’s survey of 41 analysts, whose price targets average $179.84 to $320 per share at the high point.

AnaChart.com, a new sell-side analyst tracking service, says the average price target of 36 analysts, who’ve recently written on TSLA stock, is a $203.41 price target. That average target price is over 12% over Friday’s closing price. The highest price target is $400, well over the other surveys.

Moreover, AnaChart rates the performance of various analysts’ recommendations. For example, it shows that one analyst, Daniel Ives, of Wedbush, who has a Buy rating on the stock, believes it’s worth $275.00 per share, or 58.6% higher than Friday’s price. 

Note that AnaChart rates this analyst with a very high Performance Score of 4.51, one of the highest of all analysts that rate TSLA stock a buy. He gained this high rating by making target price recommendations that later came to pass. 

The bottom line is that TSLA stock looks undervalued here, based on analyst price targets. As a result, it makes sense for existing shareholders to sell short OTM puts. This allows them to gain extra income and also provides a disciplined way to buy more shares at prices well below today’s price.

Selling OTM Puts Going Forward

For example, look at the May 24 expiration period, about 3 weeks from today. It shows that put option premiums at the $170 and $165 strike prices are very attractive to short sellers.

The $170 put strike price has a bid price of $3.15, providing an immediate yield of 1.85% (i.e., $3.15/$170.00), even though the strike is over 6% below the spot price of $181.19. Granted, the options and stock price could change by Monday trading open, but for now these puts look attractive.

Moreover, for more conservative investors, the $165 strike price has a bid-side premium of $2.03 per contract. That provides an immediate yield of 1.23% (i.e., $2.03/$165) to short sellers. The point is that the strike price is almost 9% out-of-the-money, so there is less downside risk – i.e., the possibility of having to buy TSLA shares at $165 within 3 weeks.

Keep in mind that the breakeven point is even lower for short sellers of these puts. For example, the investor who secures $17,000 to short the $170 put options makes an immediate yield of $315.00. That lowers their investment cost to just $16,685, and the yield is 1.852% (i.e., $315/$17,000). 

So, as long as TSLA stock stays over $166.85 per share on or before May 24, the investor will not have any obligation to buy 100 shares at $170.00. This breakeven price is 7.9% below today’s price (i.e., $166.85/$181.19-1). That provides very good downside protection.

Similarly, the $165 strike price short play has a $162.97 (i.e., $165.00-$2.03) breakeven price for the short seller of these puts. That is 10% below Friday’s price. 

The bottom line is that it makes sense here for existing investors in TSLA to make extra income by shorting OTM puts in near-term expiry periods.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.