Tesla Stock Could Be Headed for a Fall. Why It’s Time to Buy Some Insurance.

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One short-term issue facing Tesla stock is off the table, but enough remain that investors may want to think about hedging their

Tesla

positions.

That is the argument in a Friday research note from The Bear Traps Report suggesting investors take out some Tesla insurance. “Buy some 12 month puts and place them in the drawer,” reads the note, just before mentioning that work has resumed at Tesla’s Shanghai factory.

That is the short-term problem Tesla has gotten past. Media reports say the factory is working again following a halt of a couple of days related to parts shortages resulting from the latest wave of Covid-19 in China. Tesla (ticker: TSLA) didn’t immediately respond to a request for comment about production resuming.

Investors expect Tesla to increase unit production volume by 50% to 60% in 2022, compared with 2021. The Shanghai plant is Tesla’s largest, so limiting any production delays is a good thing.

Put options—the kind of insurance Bear Traps suggests—give the holder the right to sell a stock at a fixed price in the future. Put options are worth something if the stock price is below the strike price of the option at the time of expiration. If the stock price is above the options price at expiration then the put option is worthless.

If a Tesla shareholder, for instance, buys put options and the stock falls, they lose less money than if they didn’t hold the options. If the stock keeps rising, they benefit from the stock increase while losing the price paid for the put options.

The Bear Traps report isn’t overtly bearish, just cautious. It acknowledges there is a lot going right at Tesla. Production and sales are growing, oil price volatility has raised the profile of electric vehicles and Tesla’s cars are attractive and fast.

But it also focuses on headwinds. Inflation is raging and the chance of a recession is higher than it has been in recent months. “The Street is looking for 2023 sales of $105 [million] vs. $83 [million],” pointed out Traps. “Tough to grow the top line at this speed with a consumer in a lot of pain.”

Investors might sleep better at night, given the headwinds, if they had a little downside protection. “In a bull market, you want to make money. In a bear market, YOU WANT YOUR MONEY BAAAAACK,” says the note.

A Tesla put option that gives the holder the right to sell Tesla at $870 a share between now and mid-April costs about $53. That is about 6% of the value of the stock price, given that Tesla closed at $871.60.

That 6% is pricey. The more volatile a stock the more expensive the option. Tesla tends to be more volatile than the average stock. Tesla stock is about twice as volatile as

Apple

(AAPL), based on recent trading.

Options aren’t easy. If investors aren’t used to hedging transactions they should ask for help.

Tesla stock was up 2.2% in early trading Friday. The

S&P 500
was little changed, while

Dow Jones Industrial Average
was down about 0.2%.

Write to Al Root at [email protected]