Tesla’s Earnings Will Move the Stock. Options Can Reduce the Risk.

Text size

Earnings from Tesla—the next report is due on Wednesday—tend to move the stock big time, so the stakes are high for investors. Stock options can help to take the edge off.

In a Tuesday research report, Susquehanna analyst Christopher Jacobson, detailed how Tesla (ticker: TSLA) stockholders can use a so-called collar strategy to get “low-cost mid-term protection.” He recommends buying a put option on Tesla stock with a strike price of $150 that expires in September and selling a call option with a strike price of $240 that expires the same month.

Put options give the holder the right to sell a stock at a fixed level, the strike price, for a set period. A call offers the right to buy the stock.

A collar, the trade Jacobson suggested, gets it name because it limits potential gains and losses. In this case, the downside is limited to about 19% because the put allows holders to sell at $150. The upside is limited to about 30%. The person holding the call sold can buy Tesla stock for $240.

Tesla stock was down 1.5% in early trading Tuesday at about $184.32 a share. The

S&P 500
and

Dow Jones Industrial
Average were off 0.1% and 0.4%, respectively.

The cost of doing all that is minimal. Buying the put costs about $10, but selling the call generates more or less the same amount.

Options trades are typically the domain of experienced investors. People new to options should seek advice.

Selling a call option, for instance, without holding the underlying stock can generate large losses. But if a call-option seller has the stock, they can just hand it over if the option holder wants to exercise their right to buy.

Options are a way, however, to generate income, add some leverage to a portfolio, or protect a position, as Jacobson suggested in this instance.

There is some good reason to seek protection. Earnings estimates have been coming in since Tesla cut prices for its vehicles around the world. Significant price cuts started in January. First quarter earnings estimates are down about 18% compared with three months ago. Over the past year, the only quarter that saw estimates cut more significantly was the second quarter of 2022.

Lower estimates into the second quarter of 2022 led to an earnings beat and Tesla stock jumped almost 10% after the report.

For the first quarter of 2023, Wall Street expects Tesla to earn about 85 cents a share from $23.7 billion in sales. Three months ago Wall Street expected Tesla to earn about $1.05 a share.

Year over year, sales are expected to be up about 26%. Per-share earnings are expected to fall from the $1.07 generated in the first quarter of 2022. Tesla’s price cuts, which have boosted demand for its cars, are the reason for the drop.

The odds of predicting whether earnings will exceed or fall short of expectations are little better than a coin flip. Over the past eight quarterly reports, Tesla stock has risen four times and fallen four times. The average move, up or down, was about 6.5%. Options markets imply Tesla stock will move roughly 8% to 10%, up or down, following the results.

It is a lot of volatility to endure. Options markets can take some of the sting out of the move for shareholders if the price heads lower.

And of course, a shareholder can collar only a portion of their position. One options contract represents 100 shares of the underlying stock.

Write to Al Root at [email protected]