Bulls take the wheel at gas guzzling automaker
07/14/17

Are automakers moving into the fast lane? Some traders seem to think so.

Key players like General Motors (NYSE: GM) and Ford Motor (NYSE: F) skidded lower in the spring on weak sales.1 Naysayers were writing obituaries on the industry, especially as electric-vehicle upstart Tesla Motors (NASDAQ: TSLA) revved past Motown’s giants in the stock market.

But investors have started to view the glass as half full in the last month. Guidance for later in the year was better than feared, and executives have even suggested they may stop dumping excess inventories on rental agencies. Those so-called “fleet” sales have long been viewed as a cheap trick to inflate volumes – but at discounted prices.2

Fiat Chrysler (NYSE: FCAU) has had better traction than GM and F thanks to strong demand for its Jeep brand. It ended last year by climbing back to old resistance around $11 and jumped on quarterly reports in January and April.3 Yesterday it broke out to new highs, with options traders going along for the ride.

Hitting the market early and often, they started accumulating August 12 calls for $0.45 shortly after the opening bell. They kept buying as the stock motored uphill, picking up more for $0.50, $0.55, $0.60 and $0.65. Over 16,000 contracts changed hands by the time the dust settled. 

Fiat Chrysler (FCAU), YTD chart

Source: OptionsHouse by E*TRADE

Here’s a rundown of what the activity seems to mean:

  • Calls fix the price where a security can be purchased. They can shoot up in value if a stock rallies but also become worthless if no move occurs. 
  • The August 12 calls will double if FCAU runs 8 percent to $13 by expiration. A 13 percent advance to $13.50 will triple their value.
  • Earnings are due July 27, so traders stand to make money if the shares accelerate into those results.
  • But should the stock close under $12, the calls will be worth zero. Breakeven is around $12.50.
  • FCAU ripped 4.01 percent to $11.92 yesterday. Overall option volume in the name was more than 4 times the average monthly volume, with calls outpacing puts by a bullish 18-to-1 ratio.

While much attention has focused on newer technology like self-driving cars and electric vehicles, analysts say the older story of sport-utility vehicles has remained a key driver for the industry.4 That’s been especially true as surging U.S. oil production lowers fuel costs. Like it or not, gas-guzzlers are still the king of the road – at least for now.

Bottom line: FCAU has broken out as earnings approach, and traders are putting the pedal to the metal.

 

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1. Reuters: Wall Street fears end of boom as automakers' April U.S. sales drop. 5/2/17.

2. Marketwatch: U.S. car sales fall sharply in June as prices rise. 7/3/17.

3. Reuters: Fiat Chrysler profits beat expectations as SUV push pays off. 4/26/17.

4. CNBC: Donald Trump's early trade moves favor Fiat Chrysler. 2/1/17.