Uber’s Problems Point to This Trade
Uber is one of those companies that always seems to find problems. Uber connects drivers and passengers. The app allows users to call for a ride at any time and allows drivers to work when they choose to. It’s billed as a tool that benefits its workers and its customers.
Critics argue that the company’s business model is unsustainable, and they have a point. Each ride is subsidized, for now. The company is losing hundreds of millions of dollars every quarter and riders are paying less than the market rate for their trips.
This means drivers are earning less than they expected and that is creating high turnover and concern. Regulators are scouring the company’s practices and have, so far, unearthed a number of questionable tactics.
Uber has long promised investors that the path to long term profits included driverless cars. This would eliminate the expense of drivers and Uber has been racing to develop self driving technology, even testing its systems in several cities.
However, a tragic accident revealed that Uber may not be as far along in development as it led investors to believe. After one of its self driving cars struck and killed a pedestrian in Arizona, questions about Uber’s technology rose to the surface.
Driverless cars are supposed to avoid accidents with lidar, a technology that uses laser light pulses to detect hazards on the road, along with other sensors such as radar and cameras.
The new Uber driverless vehicle is armed with only one roof-mounted lidar sensor compared with seven lidar units on the older Ford Fusion models Uber initially fielded.
Uber’s Competitors Could Be Better Investments
Autonomous vehicles operated by rivals Waymo, Alphabet’s self-driving vehicle unit, have six lidar sensors, while General Motors’ vehicle contains five, according to information from the companies.
This potentially highlights a fact many investors may have missed which is that GM is a potential leader in driverless technology. Recent data confirms that.
Source: Ars Technica
The new data reinforces the view of other industry analysts who see GM and Waymo as the industry leaders. But it also suggests that GM is rapidly narrowing the technology lead Waymo has enjoyed for years. And it suggests that these two companies could leave everyone else in the dust.
GM has been quietly developing the technology needed for self driving cars. In fact, Bloomberg reports that General Motors plans to have its self-driving cars ready for a ride-share service by 1319 as the automaker looks beyond traditional car ownership for new tech-driven sources of revenue.
That means the stock’s recent pullback could be a buying opportunity.
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.
A Specific Trade for GM
For GM, the April 13 options allow a trader to gain exposure to the stock.
An April 13 $36 call option can be bought for about $0.80 and the April 13 $38 call could be sold for about $0.15. This trade would cost $0.65 to open, or $65 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 $65.
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 $1.35 ($38 – $36 = $2.00; $2.00 – $0.65 = $1.35). This represents $135 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $65 to open this trade.
That is a potential gain of more than 105% 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.