Without a crystal ball, there’s no way to tell whether the post-earnings spike in Tesla Motors will hold through June options expiry, but for investors who wrote naked puts before earnings, the combination of a price surge and the fall in implied volatility makes for a profitable exit.
Yesterday I mentioned that implied volatility around 117% for May expiry and around 80% for June expiry had made Tesla Motors (TSLA) put writing an attractive proposition in advance of the company’s quarterly earnings announcement. At the time, Tesla was changing hands for around $57.23, and I suggested that June puts at the 57.50 strike could deliver a gain of nearly 28% on the required margin collateral, if held to expiry, while even the out-of-the-money May put could offer 15%. (For more details, see “Extreme Investor Worry in Pre-Earnings Options Pricing: Is Tesla Like Apple?”.)
After what has been widely interpreted as a blow-out earnings report (and the later announcement that Consumer Reports had given the Model S a near-perfect rating), the shares are now trading up 25% relative to yesterday’s close, at around $70.13. The May 55 strike has now collapsed to $.20 ask and the 57.50 to $.30. The corresponding June strikes are now around $1.40 and $1.95. Implied volatility has naturally fallen for both, but the larger contributor to the collapse in the puts is of course delta: it’s the underlying stock’s jump higher which has created the lion’s share of change.
The May options expire next week, while the June options have a little more than a month to go. Investors using either now have the choice of whether to lock in their gains immediately, which would range from roughly 14% of collateral for the lower May strike to about 20% of collateral for the higher June strike, or to sit out the remaining days until expiry. Awaiting expiry would boost the respective gains to around 15% and 28%, should the stock remain above the strike. The choice is not straightforward: closing the position now protects gains and frees capital for something else, while awaiting expiry entails longer exposure to the risk of a fall in the underlying stock but also profits from the rapid decay of remaining time value should the stock remain above the strike.
Awaiting May expiry is worth less (in decaying time premium) per day remaining until expiration than awaiting June expiry, yet the risk inherent in the latter’s holding period (nearly 5x longer) arguably makes that course of action less appealing.
Notably, the unhedged approach of simply buying the shares outright at a price of $57.23 or thereabouts would have netted a gain of nearly 23%, but obviously with a much higher capital requirement and with zero downside protection from the option premium received.
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