Last month I revealed “My #1 Income Play of 2020”.
It involved selling an out-of-the-money cash-secured put option on Tesla (TSLA) that generated over $4,100 in cash in just a few seconds.
Although I do invest in growth stocks to ultimately help scale my income portfolio, as explained in this video, this was my first — and so far, only — dabble with Tesla stock for a couple reasons:
1) I’m primarily an income investor and Tesla doesn’t pay dividends
2) Selling options on Tesla have been out of my price range and comfort zone
However, as I explained, this all changed when Tesla recently underwent a 5-for-1 stock split.
After the split, a covered option contract was now in my price range, so on September 4 I jumped on the opportunity and sold one October 16, 2020 $350 cash-secured put option on Tesla for $41.72 per share.
Since option contracts work in 100-share blocks, selling that option generated $4,172 in instant income.
There were two ways I said this trade would work out:
Scenario 1: If Tesla shares fell below $350 by October 16, I may have been obligated to buy 100 shares at $350 per share. Taking the option premium I collected into account, my cost-basis for Tesla would drop to $308.28 — a 21% discount to what Tesla was trading for at the time. I liked that margin of safety, so this scenario was certainly attractive to me.
Scenario 2: If Tesla shares stayed above $350 by October 16, the option contract I sold would expire worthless and I’d make $4,172 without any further obligation. I wouldn’t be obligated to buy Tesla, and the cash that I had secured the trade with would now be available to me again to deploy into a new income trade. Walking away an extra $4,172 in income in about a month and a half, and with no further obligation, was pretty compelling.
After pulling the trigger on this trade, and generating $4,172 in a matter of seconds, it become one of my biggest income-producers of 2020 (second only to my high-yield trade with Nvidia (NVDA) that generated $6,383).
So how did this Tesla income trade end up?
The candlestick chart below shows Tesla’s price action between September 4 and October 16, the time period my trade was open.
Only once did the stock fall below $350, and it was intra-day on September 8. The buyer didn’t exercise the option that day, and then for the remaining period of time we were in the trade Tesla never breached $350 again.
With shares trading around $440 on October 16 expiration, my put option expired worthless and Scenario 2 happened: I walked away with $4,172, no obligation to purchase Tesla, and the cash I had used to secure this trade if was put shares was now available to me again.
Tesla reports earnings after the markets close today, and I’ll be keeping an eye on any big moves for another possible income trade with the stock. If the stock drops below $400 again, and if the premiums are compelling enough, I’ll likely look to put on a similar trade as this one and sell another out-of-the-money cash-secured PUT option on Tesla. I’ll keep you posted on any moves I make.
Greg Patrick
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