is offering a new incentive on one of its electric vehicle models at the end of the quarter. That's good for car buyers, but could worry investors. However, one analyst has an idea on how to protect Tesla stock's recent gains.
The electric vehicle maker is offering three months of free charging for Model 3 sedans purchased from existing inventory before the end of the second quarter. It's another carrot to buy now. In addition to the recent price cuts for the base model at the beginning of 2023, the cars in stock already have slight discounts.
Stimuli can signal weak demand. Tesla (Ticker: TSLA) isn't offering the same deal for its better-selling Model Y. Additionally, US inventories of the Model 3 have risen, about 2.5 times higher than Model Y inventories.
Still, there are some mitigating factors. First off, most Tesla vehicles are made to order, and the approximately 1,000 Model 3 sedans in inventory represent about a day or two of Model 3 sales in the United States. Car dealers typically work with 30 to 60 days inventory.
And Tesla doesn't just make electric vehicles. It's the dealer, and auto dealers often offer incentives that aren't immediately apparent to investors. In the case of Tesla, this is not the case as all offers are published on the company's website.
Tesla also essentially operates a network of EV charging stations, and the new incentive is similar to buying a prepaid card from a dealer.
More stimulus could weigh on shares. Tesla stock opened around $8 in the red in Thursday trading. Shares have rebounded, falling 0.1% to $256.45. The
are up 0.6% and 0.5% respectively.
Tesla stock just ended a 13-day winning streak that has seen the stock soar more than 40%. Christopher Jacobson, options and derivatives analyst at SIG, has an idea on how to protect some of those short-term gains.
“Alongside a huge surge in shares, we highlight an apparent short-term downtrend put spread buyer,” Jacobson wrote in a Thursday report.
He speaks of a put spread trade. Jacobson noted that an investor bought put options expiring on July 7 with a “strike price” of $220. This gives the holder the right to sell Tesla shares to the option seller for $220 each. The investor also sold put options with the same expiration date and an exercise price of $200. If Tesla stock falls below $200 on the open market, the investor might be forced to buy Tesla stock at $200 apiece, but the investor can fund this transaction by buying Tesla stock at $220 Sold in US dollars each.
The put spread strategy costs money, and the right to sell Tesla shares at $220 per share is worth more than the right to sell them at $200 per share. But it does limit the downside if Tesla stock falls in the coming weeks. It's like taking out insurance.
Jacobson points to another way to protect yourself from a fall. Tesla holders could sell a call option with a $295 strike price. The money from this can be used to buy a put option with a $230 strike price. If Tesla stock plummets in the open market, the strategy caps the investor's stocks fall to $230. However, if Tesla stock goes above $295, the Tesla shareholder must sell the shares to the person who bought the call option, limiting the shareholder's upside potential. This trade is cheaper insurance.
Both can serve as risk management tools. Options strategies can be difficult to execute and less experienced traders should always seek help from a broker or financial advisor.
Write to Al Root at [email protected]