Autonomous Driving is Coming! How to Use Options to Ride Tesla's Rally?

Trump Team to Prioritize Musk’s Key Agenda: Reports Suggest Federal Regulations Hindering Tesla’s Autonomous Driving Could Be Eased, Directly Benefiting Musk

On Monday, Bloomberg reported, citing insiders, that President-elect Trump’s team plans to make “establishing a federal framework for fully autonomous vehicles” one of the Department of Transportation’s key priorities.

If new regulations enable the deployment of fully driverless cars, Tesla CEO Elon Musk stands to benefit directly, having staked Tesla’s future on advancements in autonomous driving and artificial intelligence. Tesla is planning a large-scale rollout of cars without steering wheels or pedals, with Musk announcing in October plans to begin mass-producing Robotaxis in 2026.

Currently, however, federal regulations pose significant barriers to Tesla’s plans, including limits on deployment numbers. During Tesla’s Q3 earnings call, Musk mentioned that he aims to leverage potential positions within the U.S. government to promote a streamlined regulatory framework, enabling the use of fully autonomous vehicles nationwide.

Following the news, Tesla’s stock surged in after-hours trading, rising nearly 6% before settling at over a 5% gain.

While the Department of Transportation can promote autonomous vehicle operations through the National Highway Traffic Safety Administration (NHTSA), a Congressional bill would be crucial for the large-scale adoption of such vehicles. Insiders revealed that a bipartisan legislative measure is being discussed to create federal regulations for autonomous vehicles.

Trump’s team is also reportedly searching for a suitable candidate to lead the Department of Transportation to formulate policies for regulating autonomous vehicles. One contender under consideration is former Uber executive Emil Michael, who has been in discussions with Trump’s team and potential staff.

It is worth noting that past efforts to enact federal legislation for autonomous vehicle regulation have faced obstacles.

Currently, NHTSA allows manufacturers to deploy 2,500 autonomous vehicles annually under exemptions. Efforts to raise this cap to 100,000 vehicles through legislation have repeatedly failed.

During Trump’s first term, a bill aimed at this goal passed the House but stalled in the Senate. Similarly, during President Biden’s first year in office, attempts to combine this legislation with other bills failed due to manufacturers attempting to include provisions limiting consumer lawsuits or class actions.

For Investors Bullish on Tesla: Using a Cash-Secured Put Strategy

One way for investors optimistic about Tesla’s future is to sell cash-secured put options.

Selling a Cash-Secured Put Option

Selling a put option is a common strategy with both attractive benefits and notable risks. The maximum profit from selling a put is the premium received, which is fixed as long as the underlying asset’s price does not drop below the strike price. In low-volatility markets, selling puts can provide steady cash flow. If the option is exercised, the investor purchases the underlying asset at the strike price but at a net cost (strike price minus the premium received) lower than buying it outright in the market. This can be a “discounted entry” method for investors confident in the asset’s long-term value.

However, the potential downside can be substantial if the underlying asset’s price plummets. For instance, if the asset’s price approaches zero, the seller must buy at the strike price, incurring significant losses.

Tesla Example: Selling a Cash-Secured Put

Investors bullish on Tesla can sell a put option expiring on December 20, with a strike price of $320, earning a premium of $2,170.

Maximum Profit

The maximum profit is the premium received, i.e., $2,170.

• If Tesla’s stock price is at or above $320 at expiration, the buyer will not exercise the option, and the seller retains the full premium as profit.

Breakeven Point

The breakeven point is the lowest stock price at which the seller neither profits nor loses:

Breakeven Point=Strike Price−Premium Per Share=320−21.70=298.30 USD\text{Breakeven Point} = \text{Strike Price} - \text{Premium Per Share} = 320 - 21.70 = 298.30 \, \text{USD}Breakeven Point=Strike Price−Premium Per Share=320−21.70=298.30USD

Potential Losses

The potential loss for selling a put option is theoretically unlimited as it is inversely proportional to the asset’s price.

• If Tesla’s stock price drops to zero, the seller’s loss would be:

Loss=(Strike Price−0)×100−Premium=320×100−2,170=31,830 USD\text{Loss} = (\text{Strike Price} - 0) \times 100 - \text{Premium} = 320 \times 100 - 2,170 = 31,830 \, \text{USD}Loss=(Strike Price−0)×100−Premium=320×100−2,170=31,830USD

Possible Outcomes at Expiry

1. Price above $320:

   • The option expires worthless, and the seller keeps the $2,170 premium.

2. Price between $320 and $298.30:

   • The option is exercised, but the premium offsets some of the losses, potentially yielding a small profit or close to breakeven.

3. Price below $298.30:

   • The seller incurs losses, with increasing severity as the price falls. For example, if the price is $280, the loss is $1,830.

4. Price near $0:

   • The seller faces a maximum loss of $31,830.

Applicability

This strategy is suitable for investors who are moderately bullish on Tesla and believe its stock price will remain above $320 until expiration. It is also an active bullish strategy for those seeking to generate additional income via option premiums, provided they are prepared to manage the associated risks.

Summary: Selling Tesla put options offers limited upside (the premium income) but carries potentially significant downside risks. Investors need to carefully assess market conditions, Tesla’s performance, and their risk tolerance to ensure this strategy aligns with their investment goals.