Tesla's Earnings Could Cause Volatility This Week. Mitigating Risk by Using Options

I'm a huge admirer of Tesla's products and the company itself, though our portfolio currently does not include Tesla stock.

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Since reaching its peak on November 4th, Tesla shares have emerged as the weakest performer among the esteemed "Magnificent Seven." Its performance lags behind Nvidia, the group's top performer, by an astonishing 220%.

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What's noteworthy is that Tesla has achieved significant milestones during this period. More insights are anticipated when the company unveils its earnings report on Tuesday after market close, with the options market suggesting a substantial movement of around 10% either higher or lower by week's end.

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Here's what investors are watching closely, along with a proposed trading strategy.

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The Cybertruck:Elon Musk's outlined specifications for the Cybertruck upon its unveiling in November 2019 were striking. Ranging in price from approximately $40,000 for a single-motor version to $70,000 for a tri-motor variant, the Cybertruck boasted remarkable specifications such as long-range capabilities of up to 500 miles for the tri-motor model, formidable power, and a bullet-resistant "exoskeleton."

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Like many others, I placed a $100 reservation for a tri-motor Cybertruck. By the time deliveries commenced in November, I had officially deposited $1,000, but concerns arose shortly thereafter. The top-spec model's price had surged from around $70,000 to $100,000, with early deliveries commanding substantially higher prices for a "Foundation Edition" bundled with Full Self Driving (FSD) as a mandatory add-on.

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In late December 2023, when Tesla indicated imminent delivery, I discovered the true out-the-door price would be approximately $133,000, including tax and registration—more than I had budgeted for. Moreover, reports suggesting the actual usable highway range fell well below 300 miles raised doubts about its suitability for my intended use.

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While my decision not to proceed with my four-year-old reservation may not significantly impact the company, the Cybertruck has posed considerable challenges. Last week's announcement of the recall of all approximately 3,900 Cybertrucks delivered indicates that the truck will likely weigh on margins for some time.

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BYD:Chinese battery manufacturer BYD may not be as familiar to U.S. consumers, but it has garnered attention from global auto manufacturers after venturing into the automotive industry. Leading in China's EV market, BYD has surpassed Tesla in terms of production volume, prompting praise from Charlie Munger, Warren Buffett's longtime partner at Berkshire Hathaway, who remarked, "BYD is so much ahead of Tesla in China it's almost ridiculous."

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While legacy automakers initially dismissed Tesla as a threat, CEO Elon Musk underestimated BYD's potential to challenge Tesla. As upstarts like BYD improve their products and expand globally, they may compete with established players across all fronts, akin to Japanese and South Korean automakers in past decades.

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Trade Strategy:Given the challenging near-term environment for Tesla, signaled by recent layoffs and production slowdowns, I'm inclined towards an option trade that doesn't speculate on a specific direction but acknowledges prevalent market sentiments. This approach seeks to limit the potential move in Tesla's share price to 10% higher or lower by week's end, as implied by the options market.

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To capitalize on this, I'm considering a "strangle swap." This involves purchasing a longer-dated strangle (call and put options with different strike prices but the same expiration date) while simultaneously selling a nearer-dated strangle. Specifically, I'm exploring the April 26 weekly and August expirations, selling the nearer-dated 133/162.5 strangle to offset the cost of purchasing the longer-dated 130/165 strangle.

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