Large Unusual Activity in Tesla Put Options Dominates the Options Market Today

Today there is large, unusual activity in Tesla Inc (TSLA) options. This is almost certainly due to the recent rise in TSLA stock. The puts highlight investors' concerns about Tesla stock, but they also present good income plays.

TSLA stock is at $244.65, having risen dramatically since the July 2 release of its Q2 EV production and deliveries data. The bottom line is that even though both were below Q1 levels, they were down much less than expected.

As a result, TSLA stock is now at a peak, which brings out bullish and bearish investors. Put options, in particular, give the buyer the right but not the obligation to sell TSLA shares at a specified strike price and expiry date. On the other hand, shorting puts is a way of generating income, especially for investors at strike prices below the spot price (i.e., out-of-the-money).

Unusual Put Options Activity in TSLA

The Barchart Unusual Stock Options Report today shows that 7 major strike prices with various nearby expiration data have very high volumes. This can be seen in the table below.

For example, it shows that an at-the-money (ATM) put option for $245 expiring on Friday has had 422 times the prior outstanding volume in put option activity.

The midprice is $6.20 for the $245 put option expiring July 5. That implies that buyers of those puts expect the stock to close at $238.80 (i.e., $245-6.20) or lower in just 2 days. These buyers are counting on a pullback in TSLA stock. This means the stock has to fall by 2.53%.

The sellers of these puts collect $6.10 on the bid side. That represents an immediate yield of 2.489% over 2 days (i.e., $6.10/$245). The short sellers of these puts have to secure $24,500 in cash and/or margin (to buy 100 shares) per put contract with their brokerage firm. But they immediately collect $610 in that account selling short the puts.

In other words, these short sellers are essentially bullish on TSLA stock, at least for the next two days. They want to see the stock stay at this level or even depreciate, as long as it does not fall to $238.90 on or before the July 5 close of business.

This unusual activity in TSLA stock continued from last week as well. I discussed this in my Barchart article on June 26, “Unusual Tesla Put Options Activity Today Highlights Investors' Concerns About TSLA Stock.”

Out-of-the-Money Put Trades are Attractive

Some of these tranches are out-of-the-money (OTM), which provide attractive income opportunities. For example, the $240 strike price put expiring July 12, just 9 days from now, is 2.2% below the spot price right now. But the bid side premium is $7.20.

That means that the short seller of these puts makes an immediate yield of 3.0% (i.e., $7.20/$240) for an investment of less than 2 weeks. Moreover, these play provides good downside protection. The breakeven price is $240-$7.20, or $232.80, which is 5% below today's price.

In other words, the worst that could happen to these short sellers is that they end up buying shares at $232.80, including the income they earn. That might be a good investment from their standpoint.

The same is true for the $235 strike price tranche expiring July 12, or 9 days away. The bid side is $4.90, so that provides a put yield to the short seller of 2.085% (i.e., $4.90/$235). This is a lower yield than the $240 strike price put yield play. But the downside protection (i.e., breakeven) is $230.10, which is 6.39% below today's price.

In other words, the tradeoff is lower risk for lower income. But it is still a very good expected return for the short sellers of these puts.

The bottom line here is that Tesla put options look extremely elevated here. This provides good opportunities for both bullish investors (i.e., short sellers). It is also attractive to buyers of puts who believe that the stock's recent rise is overextended.