Tesla's (TSLA 5.46%) stock closed at a record high of $479.86 on Dec. 17, 2024, up 1,800% over its previous five years. At the time, investors were impressed by its robust sales in China, its progress in the autonomous driving and robotaxi markets, and expectations for fewer restrictive regulations -- especially regarding autonomous vehicles -- under the Trump administration. Elon Musk's close relationship with President Trump also sparked a massive post-election rally for Tesla's stock last November.
But today, Tesla's stock trades at about $325. It retreated over 30% as investors fretted over its slowing sales, intense competition, and its margin-crushing mix of tariffs, price cuts, and investments in AI and robotics. Musk's divisive actions in Washington exacerbated that pressure by sparking protests and boycotts against Tesla, and his acrimonious split with President Trump over government spending cast more clouds over its future. Some analysts are even removing Tesla from the "Magnificent Seven."
Image source: Tesla.
As Tesla faces these challenges, it seems tempting to short its stock. But instead of taking on margin to directly short Tesla, you can take a closer look at Tidal's YieldMax Short TSLA Option Income Strategy ETF (CRSH +4.23%), which aims to profit from Tesla's stock declines while generating consistent income for its investors.
How does CRSH work?
To short a stock, you borrow someone else's shares on the open market, sell them, then buy them back at a lower price (hopefully) and return them to pocket the difference. But shorting a stock is risky for three reasons: its price could soar and force you to buy it back at a much higher price, you need to pay borrowing fees every day before those shares are returned, and you're charged daily compounded interest on your margin account until that position is covered.
To avoid those issues, CRSH doesn't actually borrow any Tesla shares. Instead, it simultaneously buys puts and calls on Tesla to create a "synthetic short position" which moderately rises if Tesla's stock declines. However, it's mainly designed to generate passive income instead of fully mirroring a real short position in Tesla's stock. Its puts will generate income if Tesla's stock trades sideways or declines, while its calls will cap its losses if Tesla's stock abruptly rallies.
NYSEMKT: CRSH
Key Data Points
CRSH generates its options income with a slight twist on the cash-secured put strategy for generating passive income. When you write a cash-secured put, you earn a premium by agreeing to buy a stock below its current trading price at a future date -- but you must lock up enough cash to cover that trade until the put expires. CRSH writes its puts on Tesla's stock, but it collateralizes that trade with its U.S. Treasuries -- which generate interest as it waits -- instead of simply setting aside cash like retail investors do.
Options on volatile stocks like Tesla net higher premiums than more stable ones, since they're more likely to hit their strike prices. Therefore, CRSH constantly sells these put options, earns additional income from its Treasuries, and rolls them together with its investors' own cash (in a return of capital, or ROC) to fund its distribution rate of 71%.
Don't confuse CRSH's distribution rate with its yield
A 71% distribution rate sounds huge, but it doesn't mean CRSH pays you a fresh $71 in income for every $100 you invest. A whopping 95% of its latest distribution came from a ROC while the remaining 5% came from the new income it generated from its options and interest. That payout is further reduced by its high gross expense ratio of 0.99%.
Therefore, CRSH is really paying a low-single-digit yield (its latest 30-day SEC yield is just 3.1%) on its shares which have a bearish tilt against Tesla's stock. That might be appealing to investors who are bearish on Tesla and want to earn a little extra income.
That said, CRSH is also rapidly reducing its own net asset value (NAV) by funding most of its distributions with an ROC instead of its options or interest income. That NAV decay, along with the costs of some of its options expiring worthless, caused its price to decline 24% year to date as Tesla's stock dropped 20%. Even if we include its distributions, CRSH delivered a dismal year-to-date gain of 4%.
By comparison, AT&T's stock rallied 23% year to date with a total return of 26%, and it pays a forward dividend yield of nearly 4%. For most investors, it might be smarter to simply stick with one of those blue chip dividend stalwarts than bet against Tesla with this ETF.
