Tesla Hedging Strategy
- Why Tesla is up 12% after Earnings
- Hedging Tesla position via Covered Calls
- Covered Calls Pros & Cons
- My Personal Plan
Tesla's share price increased more than 10% after Q2 earnings. A few key reasons:
- Financial Discipline
(Sold 75% Bitcoin for profit, trimmed 10% salary workers etc) - Guidance Reaffirmed
(50% growth trajectory on track) - Consensus that the worst is over
(& Q3/Q4 will see ramp up in profitability)
Basically, solid earnings & better-than-expected numbers.
With this pop in Tesla's share price, investors who feel markets will stay down this year can consider hedging their positions while generating cash via the Covered Call Strategy.
The idea here is to generate some premiums while waiting for the share price to recover.
I will skip the basics and dive straight into the Trade Setup. For beginners new to Covered Calls, can recap here.
Trade Setup
Example: Sell TSLA Covered Call:
Expiry: 16th Sep 2022
Strike Price: $1,000
Premium received: $1,350
- Guaranteed Capital Gains:
Previous ATH was $1,243. I assume most of us bought the bulk of our shares at much lower prices.
Let’s say your average buying price is $888, your shares will be called away at a higher price than you bought them, locking in a guaranteed profit:
$1000 -$888 = $112
$112 / $888 = 12.6% ROI capital gains
2. Generate Premiums:
Doing this trade will net $1,450 (per contract). With Tesla's current price at $808, that’s a 1.8% return ($1,450/$80,800) for 10 mins' work.
On expiry day, if Tesla's share price remains below $1,000, you can continue to sell Oct/Nov expiry for more premiums. Rinse & repeat to generate additional cash.
No Free Lunch
The downside of Covered Calls is “missing out” on potential gains in TSLA. If you hold Tesla stock, only do this strategy if you feel TSLA will be down/sideways for at least the next few months.
There are no free lunches in the market. However, understanding this strategy is a great way to bring income to your portfolio.
My Personal Plan
I won’t be doing Covered Calls on my whole TSLA position. I will start layering in from 10% to a max of 30%.
Theoretical example:
- Say I have 1,000 TSLA shares, I will sell 1 covered call (100 shares). That’s 10% of my TSLA position.
- If TSLA moves up higher to $900-$1k range, I will layer in the 2nd covered call at a higher Strike Price (20% of total positions).
- If TSLA shoots up even higher (at new highs), I will layer in the 3rd CC at an even higher Strike Price (30% of total positions).
This means 70% of my TSLA positions are uncapped (from potential capital appreciation).
Why not do Covered Calls on 100% of my position?
As TSLA is my highest conviction stock, I am expecting the share price to go much higher in the future. Therefore, I don’t wish to input too many Covered Calls and cap the potential gains.
10–30% is my individual sweet spot for Covered Calls Income Generation.
For investors who want to recap on Covered Call Strategy, check out these links:
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