With EVs, Investors Should Sell the Tickets, Not Just Bet on a Team

With traders piling into shares of Brazilian metals and mining firm Vale (VALE) in the derivatives market, the move reminded onlookers that there are multiple ways to play the electric vehicle card. Sure, investors can bid up a number of EV competitors, including Tesla (TSLA), Rivian Automotive (RIVN) and legacy outfit General Motors (GM). However, going for a brand-specific investment might not always be ideal, thus bolstering infrastructure-related names like VALE stock.

Fundamentally, what drives the bullish case for the mining firm is its nickel production. Generating the most of the critical commodity compared to every other company in the world, nickel represents a key component of EV batteries. Per the Nickel Institute, “[t]he major advantage of using nickel in batteries is that it helps deliver higher energy density and greater storage capacity at a lower cost.”

In addition, “[f]urther advances in nickel-containing battery technology mean it is set for an increasing role in energy storage systems, helping make the cost of each kWh [kilowatt hour] of battery storage more competitive. It is making energy production from intermittent renewable energy sources such as wind and solar replace fossil fuels more viable.”

In other words, while the EV rollout can survive the elimination of an individual competitor or two, losing access to nickel production would likely be catastrophic for the sector. Given that challenges such as range anxiety still stymie EV adoption, nickel’s ability to foster higher energy density (i.e. greater range) should soothe consumer concerns.

Therefore, an investment in VALE stock is akin to selling tickets to the big game as opposed to wagering on a specific team. While the latter component offers the highest reward potential, anything can happen in a matchup.

On the flipside, so long as EVs as a concept rises in relevance, VALE stock is an almost-surefire investment. And quite a few folks are putting their money where their mouth is.

VALE Stock Ranks Among the Options Highlights

Following the ringing of the closing bell for the Nov. 29 session, VALE stock represented one of the highlights for unusual options activity. Specifically, traders bid up the $18 calls with an expiration date of June 16, 2023 – 198 days since the placement of the order. Volume reached 15,976 contracts against an open interest reading of 822.

Notably, the bid-ask spread as represented by the midpoint price ($1.27) came out to 10.24%. To be fair, this is a wide margin, signifying lower-than-average liquidity. Also, market makers protect themselves with wide spreads for transactions that are difficult to place.

For the record, VALE stock closed the Tuesday session at $16.09. For the above trade to be at the money, the stock will need to rise 11.87%. Since the start of the year, shares gained 16.5% of equity value. In addition, in the trailing month, VALE swung higher to the tune of 24.3%.

At the moment, the current sentiment in the options market tilts slightly to the bearish side. Per data from Barchart.com, Vale’s put/call open interest ratio stands at 0.73. Typically, the delineation between optimism and pessimism is 0.70, with figures above this threshold indicating that more traders are buying puts than calls.

However, this circumstance may change for the better if Wall Street analysts have anything to say about it. Three months ago, VALE stock commanded a “moderate buy” consensus rating, broken down into three strong buys, five holds and one strong sell.

In the current month, the overall consensus remains the same. However, the individual ratings break down into five strong buys, one moderate buy, three holds and no sell ratings.

No Guarantees for Individual EV Brands

At the present juncture, investors interested in the EV space will likely gravitate toward the dominant force Tesla. Certainly, there’s nothing wrong with this instinct. TSLA stock could very well rise higher, maintaining its status as the crown jewel of EVs. Still, it’s worth reminding ourselves that nothing in the market is guaranteed.

Take for instance the U.S. automotive industry. In the post-World War II boom years, American car brands dominated the roadways. Back then, it may have been inconceivable to think that a foreign country could compete with Detroit steel in a similar vein to how people perceive Tesla’s dominance today.

But as Towson University remarked, “[t]he Japanese automobile has penetrated the American marketplace to a greater degree than any other imported commercial product. It captured an astounding twenty-three percent of the market in 1980, undermining America’s strongest industry.”

Catalysts that many experts didn’t appreciate until later – such as Japanese technology to foster fuel efficiency – aligned with macroeconomic forces such as blistering energy inflation. Stated differently, while brands may ebb and flow in terms of popularity, infrastructural needs remain constant.

And that’s really the opportunity behind VALE stock, one that some options traders apparently recognize.

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