Batteries included
11/21/17

We’re not yet at the point where’s there’s a chicken in every pot and a Tesla in every garage, but even the most diehard carbon-fuel backers would concede electric (or hybrid) vehicles are coming—in a big way. China recently mandated that at least 20% of vehicles sold there must be electric by 2025.1 That’s a lot of batteries.

And that means a lot of lithium. While there’s plenty of it on the planet, producers are expected to play a bit of catch-up with expanding demand for some time.2

Lithium suppliers such as Albermarle (ALB) have skyrocketed this year. Even after a 6% pullback from its November 8 all-time high of $144.99, the stock was still up around 58% on the year as of Monday. 

Albemarle (ALB), 2/17/14 – 11/20/17

Source: OptionsHouse

The company’s Q3 earnings release was good, if not spectacular. Earnings of $1.08/share beat consensus estimates by a penny (but missed the “whisper number” by the same amount), and the company upped its expected 2017 revenue and earnings from $4.20-4.40/share to $4.40-4.50/share.3

The stock promptly sold off, dropping to $131.15 by last Wednesday. One possible argument is that the market had already priced in good news, which also happened to coincide with a cooling in the broader market.

Albemarle (ALB), 7/25/17 – 11/20/17

Source: OptionsHouse

Can the stock still hold a charge? Aside from the aforementioned bullish lithium fundamentals underpinning the stock in the longer-term, the market is embarking on what is traditionally the most bullish period of the year, and last week’s pullback might have put in a near-term floor under the stock and the possibility of a challenge to recent highs.

One or more closes below last Wednesday’s low could open the door to more potential selling, but the fact that as of yesterday ALB had held above that level for three days (although admittedly not pushing forcefully higher) keeps alive the possibility of a near-term challenge to recent highs.

In addition to a straight stock play, options traders could use a simple bull call spread (long one at-the-money call option and short a higher-strike call with the same expiration) to take advantage of an up move while limiting downside risk.

January $135-150 ALB call spread

Source: OptionsHouse

As an example, the chart above shows the profit/loss profile for a December 135-150 bull call spread from E*TRADE’s Options Analyzer tool: long the $135 January call and short a $150 January call at a cost of $4.65 ($465/contract). The strategy’s profit maxes out above the higher strike price, and is the difference between the two strike prices minus the cost of the spread ($20 – $15 – $4.65 = $10.35, or $1,035. The loss is capped at the cost of putting on the spread, no matter how far the stock drops.

But to flip the script, traders who anticipated a larger pullback (or reversal)—but who wanted protection against a possible rally to new highs—could put on a bear put spread by going long an at-the-money put and selling a lower-strike put.

 

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1 CNBC.com. China Hastens A Global Move To Electric Cars. 10/10/17.

Bloomberg Businessweek. We’re Going to Need More Lithium. 9/7/17.

3 EarningsWhispers.com. Albermarle Misses. 11/8.17.