These 3 Automotive Stocks Are Driving Friday’s Unusual Options Activity

As I write this late on a Friday, the S&P 500 is up slightly on the day, ready to close out the week down almost 3%. Officially in a bear market, -3% looks pretty good relative to previous weeks in 2022. 

I was trying to find a theme for my weekly look at unusual options activity, and a couple of General Motors (GM) call options jumped out at me. 

With that in mind, I searched for other automotive-related options experiencing unusual options activity. Luckily, I was able to find three that do the trick. Two are manufacturers, and one is a rental car company. 

They all appear ready to jump on the electric vehicle bandwagon. 

This SPAC Passes the Sniff Test

Over the past two years, there have been too many terrible special purpose acquisition companies (SPACs) to write about in one sitting. A SPAC that is unlikely to disappoint once its combination is completed is Gores Guggenheim (GGPI), the SPAC sponsored by Los Angeles-based investment firm, The Gores Group, and New York-based investment firm Guggenheim Partners. 

When SPACs resurfaced at the beginning of the pandemic, I tended to focus on the sponsors' quality. It was a case of betting on the jockey rather than the horse.    

In March 2021, Gores Guggenheim Sponsor LLC took GGPI public, selling 75 million units at $10. The two companies have completed hundreds of investments over the years. If anyone could find a good dance partner, it would be them.

In September 2021, less than a year into its search, Gores Guggenheim announced a $20 billion merger with Polestar. This EV manufacturer was created in 2017 as an offshoot of Volvo and Geely.  

Polestar sold 29,000 vehicles in 2021. It expects to produce 10x that by 2025. It came. It saw. It conquered. The maker of high-performance EVs is ready to make its mark on history.

As for the unusual options activity, GGPI’s Oct. 21 $7.50 call is experiencing a volume of 722 on June 17, 2.17x its open interest of 332. Based on a bid price of $3.10, it’s got to get to $10.60 to make any money on the call. With 126 days until expiry, I think it’s got a shot. 

Hertz Goes Electric

Incredibly, the rental car industry struggled to keep its doors opened only a few years ago. Hertz Global Holdings (HTZ) filed for bankruptcy in May 2020, emerging a little over one year later, on July 1, 2021. As part of its bankruptcy agreement, it sold more than 180,000 vehicles from its fleet. 

Fast forward to today, and companies like Hertz have the tiger by the tail. Car rental businesses have the best of both worlds: they can sell used vehicles for top dollar and charge their customers top dollar to rent their new cars and trucks. 

In Q1 2022, Hertz had revenues of $1.8 billion, 40% higher than a year earlier. On the bottom line, its adjusted net income during the quarter was $403 million, considerably better than its $52 million loss a year earlier.  

The most challenging part of investing in car rental companies is that they take on tremendous amounts of debt to buy their cars. Electric or internal combustion, they’re not cheap. If we hit a recession and the travel spigot shuts, debt becomes an issue. 

For now, however, all is good with the world.

The Hertz July 15 $17.50 call is currently in the money by 3.1% with 28 days left until the contract’s expiry. The volume to open interest is a reasonably high 7.71x, while the bid is relatively low at $1.46. Therefore, the breakeven on this is approximately $19, or 5.5% higher than its current price. 

That’s very doable. 

Mary Barra Goes Electric

If you follow automotive stocks, you know I’m talking about GM CEO Mary Barra. Boy, has time flown in the past few years. It seems like only yesterday that Barra was appointed CEO of GM. She’s been in the top job for more than eight years. 

Will she leave before the full EV picture comes to fruition? Most likely. She’s 60 now. It will take at least a decade to build the infrastructure. There aren’t too many hired guns that stick around until 70. However, if the business keeps producing competitive EVs, she might not want to leave.

GM is spending $81 million to update its Global Technical Center in Warren, Michigan, to produce the Cadillac Celestiq electric sedan at the facility. It won’t be any old sedan.

Celestiq will be handmade by a select group of craftsmen. It will cost approximately $200,000, and only 400 or so will be built annually. Considering the billions GM is spending on EVs, this amount is a drop in the bucket, but it makes a statement that GM is ready to take on Elon Musk. 

GM is down almost 50% year-to-date. It hasn’t traded this low since 2013. Value seekers appear to be nibbling around the edges, opting for call options to dip one's toe in the EV water. 

The GM July 15 $30 call expires in 28 days. It’s in-the-money by almost 7%. The bid is $3.15, which means its share price must get to $33 before you start to make money on your option contract. In this market, a 10% gain is a lot to ask.  

However, as I write this, the volume is 2,534, 20.44x the open interest. This says to me a segment of investors believe it’s possible. 

I guess we’ll see on July 15. 

Of the three stocks mentioned, I would say that GGPI has the best potential over the long haul, followed by GM and HTZ.
 

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