Thanks to Tesla Earnings Surprise, Put Writing Generates a Speedy Profit

Tesla’s earnings report last night has now pushed the common stock over $150, netting a 30% gain in just 47 days for investors who recently wrote September puts at the 90 strike.

Recently, I suggested the September 90 strike as an attractive put for option writers willing to own Tesla Motors (TSLA) and looking to capitalise on relatively high levels of implied volatility. (See “Booking Tesla Profits, Rolling Put Options to September Expiry”.) Investors who wrote the September 90 put were looking at profitability at any Tesla price down to $80.80 by expiry, but following last night’s earnings report, the common stock is now trading well over $150 per share. The value of the short option has plummeted accordingly and now trades for around 31 cents per contract, compared with the $9.20 per contract it was fetching on 21 June.

Thanks to the market’s reaction to the earnings surprise, this yields a gain a little north of 30%, relative to the initial margin requirement for the position of $2900, in just 47 days. In my view, this leaves little incentive to maintain the position all the way until September expiry, given that virtually all the profit can now be locked in and all risk avoided simply by closing the position.

As I’ve mentioned previously, put writing should only be considered by investors willing to own the underlying stock anyway. Many investors employ put writing in conjunction with a long position in the underlying stock, in which case it serves as an analogue of hedging part of a long stock position with a covered call. Investors who have used put writing in this way have now seen very large gains in the underlying stock during the course of the year, plus additional significant gains from writing puts on the way up. (See “Extreme Investor Worry in Pre-Earnings Options Pricing: Is Tesla Like Apple?” for the original article mentioning put writing against Tesla.)

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