A conservative way to get long legacy auto stocks as they rebound from EV troubles

Published Thu, Jun 13 202410:37 AM EDT

I'll review the current market views on fossil fuels, combustible engines and electric vehicles. There may be a trading opportunity to bet on a bounce in auto stocks using options. Geologist M. King Hubbert developed the "peak oil" theory in the 1950s. Hubbert predicted that for any given geographical area, the rate of petroleum production tends to follow a bell-shaped curve. He famously projected that U.S. oil production would peak between 1965 and 1970, which seemed accurate as U.S. oil production did peak around 1970. An additional appeal to the theory is that it makes intuitive sense: The amount of oil available in a region is finite. Hubbert's prediction about the U.S. oil production peak was largely accurate for conventional oil production. Still, global oil production has not followed Hubbert's anticipated timeline due to discoveries, technological advancements, and new extraction techniques. The most notable change in the United States has been fracking. Hydraulic fracturing (fracking) and deep-water drilling have significantly increased oil production beyond what was initially thought possible. The enhanced oil recovery methods have also extended the life of existing oil fields and other nonconventional oil sources, such as shale oil and tar sands. Naturally, economic and political factors influence oil supply and demand. For example, the California has significant reserves that are out of reach of exploration and production due to environmental regulations reducing the amount of available supply, while incentives for alternatives for conventional fuels, such as Federal Electric Vehicle tax credits and higher taxes on gasoline and diesel, may reduce demand. It is worth noting that the pace of EV market share growth relative to conventional ICE (internal combustion engine) vehicles has slowed, and there are several reasons for this. Some climates, such as coastal California, are well suited to electric cars, whose batteries function best at moderate temperatures. Vehicle uses and, preferences had lower demand and need for light and heavy-duty pickup trucks popular in many other parts of the country. Conveniently for EV makers, most notably Tesla, many of these areas are affluent and environmentally conscious, so adoption rates are high. However, EV adoption rates may have hit a short-term peak, as regions likely to see high EV demand have already seen significant increases in market share, so we would naturally anticipate slowing growth rates. The trade Predictions are tricky, and I am inclined to greet "peak anything" predictions with skepticism. Factors change constantly. That said, I have made a couple of recent observations that I believe could impact the oil business, the car business, the truck business, and logistics, among others. ICE vehicles aren't dead, but the legacy automakers are priced as if their products are going extinct, and they will not be able to pivot to future powertrains. While they were definitely caught flat-footed with EVs, they are catching up. Demand for their most profitable vehicles, light-duty trucks, remains strong. I am most concerned about diesel manufacturers among the ICE powertrain alternatives, including gasoline, flex-fuel, and diesel powertrains. As environmental regulations become more stringent, diesel engines have become far more complex, expensive, and less reliable. As a longer-term position, I favor conservatively bullish positions in legacy automakers such as buy-writes and covered calls in GM and Ford . I've provided two examples below: Trade #1: Bought 100 GM shares Sold GM July 26 $51 Call Trade #2: Bought 100 F shares Sold July 26 $13 call Ford was last trading around $11.88 a share. GM was at $47.71. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.