Tesla’s Earnings Report Is Coming. How to Play It With Options.

It’s a sign of these unusual times that Tesla, one of the world’s most controversial stocks, might offer stability to the weary and the wizened.

The electric-vehicle maker’s stock (ticker: TSLA) is a relatively known quantity, and arguably even an aggressively defensive investment, at a time when the old ways of advancing through the stock and option markets on the back of major technology companies may give way to stocks that have been battered by the Covid-19 pandemic, such as cruise ship operators, airlines, and hotels.

Tesla largely exists in a world of its own making, complete with critics and short sellers who are regularly humbled and abused by the stock’s incredible advance. One might observe that Tesla is in a secular bull market, but such dry descriptions fail to convey the power of the stock. In the past 52 weeks, Tesla has gained 709% (that is not a typo), and shares are up 21% so far this year.

The path forward for the stock market may prove to be heavily dependent on whatever fiscal stimulus plan Congress approves. Janet Yellen, the incoming Treasury secretary, essentially said during her congressional testimony that the plan was to “act big.” Yet Tesla’s pathway is likely beyond the influence of politicians and bureaucrats.

As my young son recently observed, Elon Musk, Tesla’s founder and CEO, is creating the future. Many people agree, and that may explain why Tesla seems immune from the ordinary laws of markets and financial analysis—at least for now.

Thanks to the flexible qualities of options, it’s possible to calibrate any enthusiasm one might feel toward Tesla to a key event: the release of Tesla’s financial results for the fourth quarter on Jan. 27.

With Tesla’s stock trading around $850, investors can sell the January $740 put option that expires Jan. 29 for about $22 and buy the January $900 call option that expires Jan. 29 for about $25. This “risk reversal”—that is, selling a put and buying a call with different strike prices and the same expiration date—costs $3. The strategy obligates investors to buy the stock at $740 and enables participation in gains above $900.

The trade’s upside profitability is predicated on Tesla’s stock moving into a new, higher trading range. During the past 52 weeks, the stock has ranged from $70.10 to $884.49. The difference between Tesla’s high and low price is among the widest, if not wildest, in memory. The gap between the prices is like a graveyard for skeptics and a sea of celebration for true believers.

The risk is that the stock tumbles, leaving investors on the hook.

Every earnings report summons a truth-or-consequences moment for a stock. All of the haters and fans will gather around to make concentrated wagers on the post-earnings direction. They will parse management’s language and discount or hype whatever is said and not said.

All that is certain as far Tesla is concerned is that the stock price tends to exhibit extraordinary swings. The ferocity of the movement is, in many ways, a perfect fit for options trading. As we have noted several times, a little bit of money spent in the options market can become a lot of money if the stock price moves in the anticipated direction. The appeal of that type of potential profit—despite the significant risk of profound loss—is likely why so many people treat Tesla like a messianic lottery ticket.

We could cite all sorts of analyst commentary to support the bullish Tesla thesis into earnings. We could note that some analysts recently increased their target price. We could cite reams of negative commentary, too. Frankly, all of it is probably of minimal utility. Musk’s vision of the future, and his command of Tesla’s ecosystem, exists in what is arguably an alternative universe that children understand, even if many adults do not.

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Originally Posted on January 21, 2021 – Tesla’s Earnings Report Is Coming. How to Play It With Options.