Tesla could be volatile this week on earnings. Using options to mitigate the risk

Published Mon, Apr 22 202410:25 AM EDT

I am a big fan of Tesla products and the company, but we do not currently own the stock. Since hitting its all-time high on Nov. 4, Tesla shares are the worst-performing member of the "Magnificent Seven". It has underperformed Nvidia, the best-performing member of the group, by a staggering 220%. What's interesting is that Tesla has notched some notable achievements as a company in the intervening period, and we'll learn more when the company reports earnings on Tuesday after the close, and the options market is implying a big move, about 10% higher or lower by the end of the week. Here is what investors are keeping their eye on, and a way to trade it. The Cybertruck The specifications Elon Musk outlined for the Cybertruck when the concept was unveiled in November of 2019 were remarkable. With prices running from about $40,000 for a single-motor version to $70,000 for a tri-motor variant, the Cybertruck's specifications were remarkable. Long range, as much as 500 miles for the tri-motor, immense power and a bullet-resistant "exoskeleton" were among the standout features. I joined many others and plopped down a $100 reservation for a tri-motor. By the time deliveries began in November, I had formally put down a $1,000 deposit, but I began to have concerns shortly thereafter. For one thing the price of the top-spec model had increased from about $70,000 to $100,000, and the price for the earliest deliveries would be substantially higher for a "Foundation Edition" which included FSD (Full Self Driving) as a mandatory add-on. In late December of 2023, when Tesla informed me delivery was imminent, I learned the true out-the-door price would be about $133,000 including tax and registration, more than I wanted to spend, but reports that the true usable highway range was well below 300 miles suggested it might not be well-suited to my intended use. While deciding not to go through with my four-year old reservation won't impact the company, the Cybertruck has presented it with considerable challenges, and last week's announcement that all of the roughly 3,900 Cybertrucks delivered have now been recalled suggests the truck will drag on margins for a while. BYD Chinese battery maker BYD may not be well-known to U.S. consumers, but the company is definitely on the radar of auto manufacturers globally after getting into the auto business. China represents the largest market for EVs at the moment, and BYD is leading Tesla there. Before he died, Warren Buffett's long-time Berkshire Hathaway partner Charlie Munger said: "BYD is so much ahead of Tesla in China it's almost ridiculous." The company built 3 million cars over a period during which Tesla produced 1.8 million. The irony is that where legacy automakers such as GM, Ford and Toyota once dismissed Tesla as a threat, CEO Elon Musk initially underestimated BYD's ability to challenge Tesla. Upstarts generally tackle legacy participants on price, but as their products improve, and their markets expand globally they may compete on all fronts much as Japanese automakers did in the 1970s and 1980s followed by South Korean automakers more recently. Among U.S. manufacturers, Tesla, because it eschews the conventional dealer model, has excellent flexibility on pricing, which they adjust dynamically. The company has lowered prices on more than one occasion but has the ability to balance supply and demand on the fly, which helps match production to sales comes at the cost of declining margins. While I continue to believe Tesla is better positioned to build EVs profitably than companies such as Ford Motor and General Motors — or U.S.-based EV makers such as Lucid and Rivian — BYD will cap both unit sales and margins in China for the near future and possibly in the U.S. and Europe soon. The trade Consequently, I think the near-term environment will remain challenging for Tesla, a view reinforced by the recently announced layoffs and production slowdowns. Against this backdrop, I'm inclined to use an option trade that doesn't commit to a direction, but rather assumes that most of the negatives I've just outlined are well-known to most investors. This could limit the move in the share price to 10%, higher or lower by week's end as the options market currently implies. To take advantage of this, I would use a "strangle swap." This entails purchasing a longer-dated strangle (call and put of different strikes, but the same expiration) and selling a nearer dated strangle. Specifically, I was looking at the April 26 weekly and August expirations. Selling the nearer dated 133/162.5 strangle to help finance the purchase of the longer-dated 130/165 strangle as follows : DISCLOSURES: None. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.