How to Insure Your Tesla Stock

[Christine69420]

Tesla Economist about insuring your investments by buying puts

He has a mortgage partially funding his TSLA investment. So what if the interest rate go up and the market tanks?

 

[Christine69420]

If your investment account do not allow options - like mine don't - then perhaps there are some ETFs or other investments one can make which tend to go up on market crashes.

 

[LightngMcQueen]

Few observations:

1. TSLA PUTs are quite expensive, in fact I made good money selling them. Here is some science behind it: Volatility Risk Premium Effect - QuantPedia.

2. PUTs are quite time sensitive ie they work well for short, momentary protection, but do not work so well for long term hedge. Also most of dramatic corrections revert to close to the mean in relatively short time .. 1..2 years. If you are concerned about TSLA price in 3rd week of August it may make sense to buy the PUT, if you are concerned about TSLA price in 2025 buying puts will cost a lot

3. There are hedges but few hedges work reliably for years. You are looking for negative correlation, but correlations between assets fluctuate. I recommend to play with Portfolio Visualizer to confirm that.

4. Better way to think about protection is:
total assets - max drop down >> debt
total real interest cost x projected increase << inflation adjusted projected free cash flow

Unless you live on fixed income it is important to think about real interest rate (nominal rate - inflation) as most of income sources will roughly track inflation. Real interest rates are now negative in most countries and will likely remain very low years, as this is the only practical way to deleverage economies. While nominal interest rates might raise "dramatically" in response to inflation, change to real interest rate will likely be quite small.

Borrowing against real estate to buy equities might be a great way to write off interest and diversify your assets, as long as you do diligent math and understand your risk.

 

[jeewee3000]

Had to laugh when I watched the video.

He says he's being risk averse by "insuring" his TSLA stock by buying puts. But he takes huge risks by investing borrowed money in the first place.

If the stock flatlines for years, he's paying through the nose on put options. Better to not borrow and dollar cost average TSLA stock and buy and hold, IMO.

If he wants to go options, I see much better methods. Selling calls against a part of his portfolio, turning part of the stock portfolio into LEAPS, etc.
Buying puts/options = losing theta/money, except if you time it properly. Have to disagree on this one with the Tesla Economist therefore. (I do like his channel, BTW, just not this video).

 

[Christine69420]

Couldn't a similar effect be had by buying a VIX ETF? As an insurance against a general stock market drop?

Would not help if only TSLA go down of course.

 

[jeewee3000]

Couldn't a similar effect be had by buying a VIX ETF? As an insurance against a general stock market drop?

Would not help if only TSLA go down of course.

IMO yes, but as you mention TSLA =/= the market. So for hedging a TSLA stock position it would be best to look at TSLA specific options.

My beef with buying puts by the way, is that you could be adding TSLA shares with that money.

Let's say you buy puts whenever TSLA hits ATH (generally you want to buy puts at peaks and sell them at dips), you will profit if:
- the stock drops after you buy the put;
- fast enough to compensate time decay of the option;
- you are wise enough to sell the put when the above happens.

That's a lot of IFs.

However, if you were to invest the put-premium into some TSLA shares, those shares are always worth something and will increase your TSLA delta so you're well positioned for 2030.

The only instance the puts are the preferred path is if you're playing with money you NEED, as the Tesla Economist is doing apparently. That's why I find it funny he talks about risk management. His whole portfolio is Tesla AND it consists of borrowed money. Recipe for possible disaster right there.

 

[LightngMcQueen]

Couldn't a similar effect be had by buying a VIX ETF? As an insurance against a general stock market drop?

Would not help if only TSLA go down of course.

Thats good idea.
Not an expert on VIX ETFs, but tried to back test the following assets as hedges: Gold, US Long Treasuries and. VXX - one of many VIX ETFs.

Here are results:

Link to simulation:

Asset Correlations

Calculate and view correlations for stocks, ETFs and mutual funds

www.portfoliovisualizer.com

What looks like a promising negative correlation of -0.22 of VXX ETF to TSLA comes at the price of strong underperformance (2nd column) and high risk (3rd column) . Someone here might be able to point out a better derivative based ETF, that would be interesting.


Based on data above Long term treasures (TLT) offered some hedge in the last few years.
I will not use treasuries as hedge though: given very low interest rate environment and potential for higher inflation, owning long term bonds issued by extremely generously spending government does not seem much safer proposition, in terms of risk to reward ratio, than owning sound and appreciating business like TSLA.