This Company Might Be the Best Autonomous Vehicle Trade
Driverless cars appear to be coming. A number of large firms are working on the concept. Picking the ultimate winner might be a difficult task but finding a trade in the industry might not be as difficult as that.
When thinking about driverless cars, instead of comparing the technological and engineering capabilities of the companies in the field, it could be better to look at it as a picks and shovel trade.
A pick and shovel trade is an investment strategy that invests in the underlying technology needed to produce a good or service instead of in the final output. It is a way to invest in an industry without having to endure the risks of the market for the final product.
It is named after the tools needed to take part in the California Gold Rush. Many miners never succeeded, according to legend, but the pick and shovel providers made money whether the miner found gold or not.
Modern Day Picks and Shovels
In the driverless car market, the picks and shovels might be the chips that will power the vehicles. One of the leaders in this part of the industry is NXP Semiconductors N.V. (Nasdaq: NXPI).
Through GlobeNewswire, the company recently announced some highlights of its recent work, “New radar solution combines NXP’s market leading radar processors on a new reference design with automotive-grade radar software. Expanded ecosystem delivers automotive radar libraries in an easy to use software development kit optimized for complex radar development. It Reduces time to market for applications including Adaptive Cruise Control (ACC) and Automated Emergency Braking (AEB).”
NXP Semiconductors is already the world market leader in automotive radar according to the company. Now, “it has expanded its radar ecosystem with an automotive radar solution that combines its S32R processors, RF Transceiver and Antenna design on a new reference platform.”
Created through a partnership with Colorado Engineering, the solution is the only currently available automotive-grade radar development platform designed to meet the stringent functional, performance, and safety requirements of the industry.
This new radar solution is designed to accelerate the development and deployment of radar into production vehicles and includes a full ecosystem of tools that aim to lower development costs and spur radar application adoption worldwide.
A Growing Market
Current automotive market analysis projects that by 2020, radar technology will be in 50% of all newly produced cars.
The safety related benefits of automotive radar, new autonomous vehicle development requirements and emerging safety requirements from organizations such as the New Car Assessment Program (NCAP), have triggered rapid growth with steep implementation challenges for car makers and other radar focused developers.
Adoption of these once premium safety features into mainstream production lines is fueling a need for faster time to market.
The NXP radar solution, featuring the S32R27 processor, the TEF810x CMOS transceiver, and the FS8410 Power management IC, is designed to help customers accelerate time to market by lowering the barriers of entry to radar application development with hardware, software and tools that ease radar implementations.
This could spark renewed interest in shares of NXPI.
The stock has been under pressure after traders noted that the stock price may have gotten ahead of fundamentals. But, the recent market action indicates an upward push after a consolidation is possible.
A Trade for Short Term Bulls
As with the ownership of any stock, buying NXPI 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 usually 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 has 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.
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.
A Specific Trade for NXPI
For NXPI, the October 19 options allow a trader to gain exposure to the stock.
An October 19 $87 call option can be bought for about $1.54 and the October 19 $89 could be sold for about $0.85. This trade would cost $0.69 to open, or $69 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 $69.
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 NXPI the maximum gain is $1.31 ($89 – $87 = $2.00; $2.00 – $0.69 = $1.31) This represents $131 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $69 to open this trade.
That is a potential gain of about 189% in NXPI based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.