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Tesla: NHTSA Recall, Volatility Surge, And Put Option

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Call and put action trading signs

remco86

Thesis

Last week, nan National Highway Traffic Safety Administration ("NHTSA") issued a recall of Tesla (NASDAQ:TSLA) vehicles. The callback would effect astir ~360K of its vehicles (Model S, Model X, Model 3 vehicles, and Model Y vehicles) that are equipped pinch Full Self-Driving ("FSD") Beta software.

It is not nan first clip that nan NHTSA has ordered recalls of Tesla cars. A fewer different caller recalls see nan 2020 callback of almost 135,000 Tesla Model S and Model X vehicles (due to a problem pinch nan touch screen), a 2019 callback of astir 123,000 Model S vehicles (due to an rumor pinch nan powerfulness steering system), and a 2018 callback of astir 123,000 Model S vehicles (due to a problem pinch nan rider airbag).

In each of these cases, Tesla cooperated pinch nan NHTSA and resolved nan issues satisfactorily. The company has stated that it will proceed to activity pinch regulators to guarantee nan information of its vehicles. Under this humanities background, I americium assured that this callback would beryllium handled likewise and won't effect Telsa's semipermanent fundamentals.

In nan meantime, nan news of nan callback has pushed Tesla's implied volatility to beryllium adjacent its 52-week highest (see nan adjacent floor plan below). To wit, nan implied volatility ("IV") for TSLA's near-the-money put options has surged to ~71, which is adjacent to nan highest 80% percentile of its 52-week scope (i.e., only astir 20% of nan clip its IV was higher than nan existent level successful nan past year).

And next, I will explicate why specified a highest IV has created a bully setup to constitute a put action for some near-term traders and semipermanent investors.

Graphical personification interface, chart, statement floor plan Description automatically generated

Source: IVolatility.com

Implications for investors

As seen successful nan floor plan beneath (from Yahoo!), a put action pinch a $206 onslaught price, expiring connected March 17, 2023 (i.e., astir 1 period from nan time of this article), is presently trading astir $15, which represents 7.2% of nan onslaught price. Note that for nan remainder of this article, I will quote each action parameters connected a per-share ground (and each action contains 100 shares). As a result, nan setup is beautiful charismatic for some near-term and semipermanent investors. More specifically:

If an investor writes specified a put and nan banal value is supra nan onslaught value connected March 17, nan action will expire and supply a return of 7.2% successful ~1 month. This translates to an annualized return of astir 86%, which is simply a spectacular return for a short-term waste and acquisition successful my view.

Alternatively, if nan banal value drops beneath nan onslaught value connected March 17, nan action will beryllium assigned. The investor will request to acquisition nan Tesla shares astatine nan onslaught price. And nan effective acquisition value will beryllium astir $190 ($191 to beryllium exact, which equals nan onslaught value minus nan $15 premium received upfront). And next, I will explicate why $190 is an charismatic introduction value for semipermanent holding.

Table Description automatically generated pinch debased confidence

Source: Yahoo! data

Implications of $190 for semipermanent investors

As conscionable mentioned, if nan put action is exercised, nan action writer would efficaciously acquisition TSLA shares astatine a stock value of astir $190. The pursuing array displays my projections for its valuation multiples successful a fewer years astatine a $190 introduction price. Before I spell immoderate further, fto maine first articulate nan assumptions that I made successful these projections:

  1. These projections were made based connected an outstanding stock count of 3160 cardinal shares, and a full indebtedness of $5.75 cardinal (both taken from Seeking Alpha arsenic of this writing).
  2. For its profitability, I assumed a adaptable costs of $42,000 per vehicle, operating expenses that adjacent 13% of sales, and an mean conveyance waste value of $66,000. Details of these numbers are provided successful my earlier article. As based on successful that article, TSLA has intelligibly passed nan break-even constituent of wide production, recouped nan fixed cost, and will bask a lucrative separator going guardant based connected my study of its accumulation and transportation data.
  3. Finally, this projection assumes its yearly conveyance transportation expands astatine a 40% CAGR successful nan adjacent 4~5 years. In its 2021 Q2 Earnings Call, Tesla guidance stated that it intends to execute a 50% mean yearly maturation complaint successful conveyance deliveries complete a multi-year horizon. And TSLA advocates specified arsenic Cathie Wood judge it tin moreover grow faster. My projections assumed a much muted 40% maturation complaint to beryllium connected nan blimpish side.

Table Description automatically generated

Source: Author based connected Seeking Alpha data

Under these assumptions, astatine an introduction value of $190, nan P/S aggregate would beryllium astir 7.3x and would alteration to only 1.9x successful 2026. For reference, nan S&P 500 traded astatine an mean P/S ratio of 2.0x successful nan past decade (and presently trades astatine astir 2.4x). Furthermore, nan TTM EV/EBITDA would beryllium astir 37x nether my assumptions and would alteration to only 8.1x successful 2026. To supply a broader context, starring institutions for illustration Bank of America habitually delegate 10+ EV/Sales and 50+ EV/EBITDA multiples for companies pinch TSLA's maturation potential.

Final thoughts and risks

Lastly, let's see nan risks associated pinch TSLA. Most of nan risks person already been discussed thoroughly by different SA articles. And I won't delve into them further. Instead, I want to item nan risks associated pinch nan thesis successful this article much specifically: nan callback and nan penning of put options.

  • For nan recall, I americium assured that this existent callback would beryllium handled satisfactorily for illustration nan erstwhile ones and won't effect Telsa's semipermanent fundamentals. However, this is yet an presumption successful itself.
  • For nan penning of a put option, astatine slightest successful theory, location is ever nan anticipation that TSLA's banal value could driblet to zero and nan investor would person to bargain nan shares astatine nan onslaught price.

To conclude, nan caller surges successful nan implied volatility of TSLA's options person created an charismatic setup for some short-term and semipermanent investors. In particular, penning a put action pinch astir 1-month expiry could supply a 7.2% return (or ~86% erstwhile annualized) successful nan lawsuit of expiration. And successful nan lawsuit of assignment, it would connection nan shares astatine an effective introduction value of ~$190, which translates into valuation multiples that are rather charismatic some successful absolute and comparative terms.

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Editor: Naga



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