Should You Buy Tesla Stock? The Best Way to Play Shares Now.


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It’s hard to predict the future, but one thing is almost certain: Electric cars will be more popular tomorrow than they are today. The recent surge in oil and gas prices will likely cause seismic shifts in consumer demand and vehicle preferences. Many people are paying almost double what they did a year ago to fill up their cars and trucks.

Oil prices are unlikely to decline anytime soon, with demand outstripping supply. It’s a major reason why the world has been blanketed by extraordinary inflationary pressures that have prompted central banks to raise interest rates—which, in turn, has sparked fears of a global recession.

Buying an expensive car that runs on batteries might seem like an odd way to save money—and it is for most people. But the investment theme is worth considering. Shares of major electric-vehicle makers have been banged up this year far more than the S&P 500 indexTesla  stock (ticker: TSLA), for instance, is down more than 30%, and Rivian Automotive (RIVN) is down more than 70%.

EV companies are battling production issues and dealing with inflationary pressures, like everyone else, but demand for their products is growing despite the challenges facing the economy and consumer wealth. Tesla CEO Elon Musk recently said that productionnot consumer demand, was a key challenge.

Anyone who is interested in monetizing the EV theme can consider what we have long called the time-arbitrage strategy. The approach involves selling short-term put options to potentially acquire stocks that are worthy long-term holdings—while collecting an options premium if the stock stays above the strike price. (Puts give buyers the option to sell an underlying asset at a specific price within a set period.)

Consider Tesla, an admittedly controversial company that has probably done more than any other to birth the EV age. With Tesla’s stock at $725.60, investors who are willing to warehouse the shares for at least three to five years could sell Tesla’s August $500 put for about $17.50. The cash-secured put sale positions investors to buy the stock at an effective price of $482.50 ($500 strike price minus a $17.50 options premium).

A lot can happen between now and the Aug. 19 expiration, but it would have to be extremely bad. The August $500 put is about 31% below Tesla’s current stock price. An effective price of $482.50—a price last seen in late 2020—means the stock would be about 61% below its 52-week high.

The distance between the put and the equity was chosen to provide somewhat of a margin of safety, but this approach isn’t suitable for everyone. Tesla is a volatile stock, and Musk might be even more volatile. He is embroiled in a takeover of Twitter (TWTR) that he seems to be trying to exit. Who knows what will happen?

More important, it’s hard to escape dour predictions about the economy. If people become even more skittish about spending money, especially on cars, Tesla’s stock price could weaken even more than it already has.

Still, should the stock price be above the put strike at expiration, investors can keep the put premium and consider resetting the trade to keep the strategy alive. If the stock price is below the strike price at expiration, investors are obligated to buy the stock or to adjust the put to avoid assignment.

In time, electric vehicles could be as ubiquitous as Apple’s (AAPL) iPhone. It’s hard to know just when that could occur, and the road might be rocky, but the future of automobiles is unlikely to be like the past.

Originally Posted June 9, 2022 – Should You Buy Tesla Stock? The Best Way to Play Shares Now.

Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.

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