Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Investing with options - Tesla earnings
Koen Hoorelbeke
Investment and Options Strategist
Summary: Tesla publishes its quarterly earnings after the bell. Amid challenges like reduced production and narrowing margins, the market's expectations seem muted, and investors are keenly watching Tesla's next moves, especially around the Cybertruck and in-house production of the so-called 4680 batteries. As always these publications create opportunities and risks for investors, and options strategies can help navigate the turbulent waters. In this article we take a look at those opportunities and how you could profit or control risk using various options techniques/strategies.
Investing with options - Tesla earnings
Today we zoom into Tesla (TSLA), which has its upcoming quarterly earnings release, after the bell tonight.
Tesla's current landscape and forecasted numbers
As of the last trading session, Tesla stock closed at $254.92. Since its last earnings, Tesla has largely moved sideways, never crossing the opening price of the previous post-earnings date ($279.56 on Thursday, July 20th, 2023).
The market forecasts an EPS of $0.74 and revenue of $24.29B, roughly equivalent to its previous quarter's numbers. Amid challenges like reduced production and narrowing margins, the market's expectations seem muted, and investors are keenly watching Tesla's next moves, especially around the Cybertruck and in-house production of the so-called 4680 batteries.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Bullish outlook: optimism with caution
Strategy: buying a call option
- Trade setup:
- Action: BuyToOpen
- Quantity: 1
- Expiry: 20-Sep-2024*
- Strike: 185
- Premium: $94.48 (per share)
- Premium and risk:
- Premium cost: $94.48 x 100 (per contract) = $9,448
- Max risk: $9,448 (if Tesla is below 185 at expiry)
- Max reward: Unlimited (potential gains amplify as Tesla's stock price rises)
- Breakeven point: $185 (strike) + $94.48 (premium) = $279.48
- Comparison with buying stock: Leverages the stock's potential upward movement while limiting the downside risk to the premium paid. It requires a smaller initial investment compared to buying 100 shares at the current price of $254.92.
* A Note on expiry
I chose options with an expiry a year from now for a reason: to give the stock ample time to reach its target, minimizing the impact of time decay. In the options world, time decay or "theta decay" refers to the rate at which an option loses value as it approaches its expiration date. The further away from the expiration date, the less the value of the option will deteriorate because of theta-decay.
Bullish outlook: buy stock using ITM put option(s)
Strategy: selling an in-the-money put option
- Trade setup:
- Action: SellToOpen
- Quantity: 1
- Expiry: 20-Oct-2023
- Strike: 260
- Premium: $9.80 (per share)
- Premium and risk:
- Premium received: $9.80 x 100 (per contract) = $980
- Max risk: Moderate (obliged to buy Tesla shares if exercised)
- Max reward: $980
- Breakeven point: $260 (strike) - $9.80 (premium) = $250.20
- Comparison with buying stock: This strategy can potentially allow you to acquire Tesla stock at a discounted price compared to the current market price, with the added benefit of premium retention
Bearish outlook: hedging and potential profits
Strategy: buying a put option
- Trade setup:
- Action: BuyToOpen
- Quantity: 1
- Expiry: 20-Sep-2024*
- Strike: 325
- Premium: $87.10 (per share)
- Premium and risk:
- Premium cost: $87.10 x 100 (per contract) = $8,710
- Max risk: $8,710 (if Tesla is above 325 at expiry)
- Max reward: Significant (gains rise as Tesla's stock price falls)
- Breakeven point: $325 (strike) - $87.10 (premium) = $237.90
- Comparison with selling stock: This strategy mitigates the risk of short selling, providing a safer route to profit from a potential decline in Tesla's stock price.
* A note on expiry
I chose options with an expiry a year from now for a reason: to give the stock ample time to reach its target, minimizing the impact of time decay. In the options world, time decay or "theta decay" refers to the rate at which an option loses value as it approaches its expiration date. The further away from the expiration date, the less the value of the option will deteriorate because of theta-decay.
Neutral outlook: extra yield with owned stock
Strategy: writing covered calls
- Trade setup:
- Action: SellToOpen
- Quantity: 1
- Expiry: 27-Oct-2023
- Strike: 275
- Premium: $2.75 (per share)
- Premium and risk:
- Premium received: $2.75 x 100 (per contract) = $275
- Max risk: moderate (missing out on potential upside if Tesla's stock price surges past 275)
- Max reward: $275
- Breakeven point: $254.92 (current stock price) - $2.75 (premium) = $252.17
- Yield:
- Yield over 9 days: 1.08%
- Annualized yield: 43.73%
- Comparison with buying stock: If you already own Tesla shares, this strategy allows you to earn a yield of 1.08% over 9 days, potentially annualizing to 43.73% if replicated successfully throughout the year.
Conclusion
As Tesla's earnings approach, options offer a versatile array of strategies to capitalize on various market outlooks. Whether you're bullish, bearish, or somewhere in between, the key is to approach each trade with a clear understanding of both its potential rewards and inherent risks.
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 Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
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