This Autonomous Driving Trade Could Deliver a Triple-Digit Gain
Trade summary: A bull call spread in Unity Software Inc. (NYSE: U) using the November $100 call option which can be bought for about $11.90 and the November $105 call could be sold for about $10.80. This trade would cost $1.10 to open, or $110 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $110. The maximum gain is $390 per contract. That is a potential gain of about 254% based on the amount risked in the trade.
Now, let’s look at the details.
PR Newswire carried details of an agreement, “Elektrobit (EB), a visionary global supplier of embedded and connected software products for the automotive industry, and Unity, the world’s leading platform for creating and operating interactive, real-time 3D (RT3D) content, announced a collaboration to streamline the process to design and develop automotive human-machine interfaces (HMIs), extending together the power of real-time rendering to create next-generation, future-proof user experiences.
The growing prevalence of high-performance computing platforms in cars and the increasing sizes and numbers of displays in vehicles are driving demand for more real-time and photorealistic 3D experiences, both for improved usability and enhanced customer delight.
In order to make these experiences available, 3D designers and HMI development teams need integrated toolchains that facilitate the design process all the way through to implementation.
This collaboration harnesses the power of Unity’s real-time 3D rendering platform, and EB GUIDE, Elektrobit’s unique and comprehensive HMI development toolchain that powers more than 50 million vehicles on the road today.
By combining their expertise, EB and Unity are enabling their customers to jump-start next-gen real-time 3D automotive HMIs by accelerating time to market and providing a reliable foundation throughout the entire development journey.
“We are collaborating with Elektrobit because they are the only expert in the automotive industry with a solution that is able to go from UI design concept to series production,” said Julien Faure, General Manager & Vice President, Industrial and Media & Entertainment, at Unity.
“Real-time 3D is redefining the in-car experience for vehicles of the future. As we accelerate into the era of highly automated vehicles, the HMI experience is moving to the forefront.”
As we accelerate into the era of highly automated vehicles, Unity is leading the way in powering the in-car HMI experiences. Through our collaboration with Elektrobit, Unity’s real-time 3D technology will further drive efficiencies in-car development cycles, allowing consumers to interact with their vehicles like never before.
“We’re excited to work with Unity to make it easier and faster to develop immersive, interactive experiences across the entire development lifecycle from design to implementation,” said Bruno Grasset, Head of Product Management, User Experience, at Elektrobit.
“Car makers and Tier 1 suppliers will benefit greatly from the unique combination of experience and expertise from EB in automotive HMI development, and from Unity in immersive real-time 3D HMIs. This in turn will enable smartphone-like, automotive-grade user interfaces in vehicles.”
EB and Unity will showcase a complete automotive cockpit user interface developed with their technologies at Car HMI USA, Nov. 16-17, in Detroit, MI.
As you can see from the daily chart, U only recently started trading.
The chart shows a pattern familiar to new offerings with initial exuberance followed by a decline and a subsequent rally.
A Specific Trade for U
For U, the November options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A November $100 call option can be bought for about $11.90 and the November $105 call could be sold for about $10.80. This trade would cost $1.10 to open, or $110 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $110.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in U, the maximum gain is $390 ($105- $100= $5; 5- $1.10= $3.90). This represents $390 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $110 to open this trade.
That is a potential gain of about 254% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying U could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.