This Is the True Leader in Driverless Technology
Driverless cars are a subject of investor interest. This could be a tremendous leap forward in technology and the race to deliver includes tech giants like Alphabet’s Waymo spinoff.
Waymo was recently in the news after reaching a deal with Fiat Chrysler Automobiles, one of Detroit’s Big Three automakers, for an additional 62,000 minivans to be deployed as robot taxis. Moreover, the two companies have also begun discussions about how to eventually sell self-driving cars to customers as personally owned vehicles.
Selling cars with Waymo’s self-driving technology at Fiat Chrysler dealerships would be a dramatic escalation in Waymo’s plan to bring driverless cars to the masses.
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To date, the company has spoken only vaguely about licensing its self-driving hardware and software to automakers.
But, Waymo and Chrysler may be fighting to catch up with another Detroit automaker, General Motors (NYSE: GM).
A Tech Giant Buys Into GM’s Vision
General Motors announced a large investment into its self-driving unit, Cruise. SoftBank’s Vision Fund will invest $2.25 billion in GM Cruise Holdings LLC and when the deal closes, GM will invest an additional $1.1 billion.
The investments are expected to inject enough capital into Cruise for the unit to reach the ability to deliver commercial vehicles at scale beginning in 2019.
The investments will be made in stages. When the transaction closes, the Vision Fund will invest $900 million, and when Cruise is ready for commercial deployment, the fund will provide the remaining $1.35 billion. When closed, SoftBank’s Vision Fund will own a 19.6-percent equity stake in GM’s Cruise.
General Motors purchased the San Francisco-based startup in 2016 for $581 million. Since then, General Motors has reportedly let the unit operate largely on its own. At the time, GM President Dan Ammann told TechCrunch the car maker intended to integrate Cruise’s technology within its fleet of vehicle brands as soon as possible.
Since being acquired by GM, Cruise seems to be, well, cruising. The company had 10 self-driving test cars on the road in 2016 and later rolled out a high-definition mapping system. In 2017 the company started running an autonomous ride-hailing service for its employees in San Francisco, later announcing its self-driving cars would hit New York City.
The news sent the share price of GM sharply higher.
This move potentially reverses a down trend that can be seen in the weekly chart.
Now, traders might be wary of jumping in, worried that the stock could pull back after the sharp rally on the news.
A Trade for Short Term Bulls
As with the ownership of any stock, buying GM 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.
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 prices stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for GM
For GM, the June 15 options allow a trader to gain exposure to the stock.
A June 15 $44 call option can be bought for about $0.40 and the June 15 $46 call could be sold for about $0.10. This trade would cost $0.30 to open, or $30 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 $30.
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 GM the maximum gain is $1.70 ($46 – $44 = $2.00; $2.00 – $0.30 = $1.70). This represents $170 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $30 to open this trade.
That is a potential gain of about 460% 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.