One of today's most exciting investment themes revolves around the electric car market. At the center of this trend is Tesla Motors (Nasdaq: TSLA), which is becoming a commanding force both as an auto manufacturer and a dynamic growth stock.
In 2013, the company delivered 22,477 electric vehicles to customers. Tesla plans to boost that number to a half-million vehicles per year by the end of the decade. That ambitious plan has not gone unnoticed by investors, who have driven the share price up more than 650% from the beginning of last year to the stock's peak in February.
Although I consider TSLA to be far too risky for investors right now, that doesn't mean we can't participate in this industry. In fact, today I have an income trade directly tied to growing demand for electric vehicles that should generate more than 39% per year.
In addition to aggressive growth plans for manufacturing vehicles, Tesla is also focused on the rechargeable battery market. CEO Elon Musk recently made headlines when he announced that the company is building a Gigafactory that is expected to be capable of producing enough lithium-ion batteries for 500,000 vehicles annually by 2020. Tesla has already raised $1.6 billion to start construction on the factory, and Musk said he expects production will begin in 2017.
With all of these batteries being produced, demand for lithium is slated to increase tremendously over the next several years. Lithium is an important metal for rechargeable batteries because of its strong electrochemical qualities compared with the light weight of the metal.
In the past, lithium has been used primarily for laptop batteries and mobile device batteries. This market is experiencing strong growth as markets such as India and China increase their use of electronics. Demand is expected to grow much faster in the next several years as sales of electric vehicles increase. Utilities should also represent strong demand for lithium as batteries are produced to store energy from solar and nuclear power generation.
Analysts estimate lithium demand for portable device batteries will increase by 10% annually through 2025. But the real growth in lithium demand will come from grid batteries (expected to grow by 21% annually through 2025) and electric vehicle batteries (expected to grow by 27% annually through 2025).
This strong demand for lithium should directly benefit shares of Chemical & Mining Co. of Chile (NYSE: SQM). The company is the lowest-cost producer of lithium, and represents 27% of the total world market share for the metal. Although lithium only accounts for a relatively small portion of the company's revenue, that portion should increase over the next few years as demand grows. Meanwhile, the company's primary fertilizer business is also on the rebound.
Shares of SQM have been rebounding since finding support in December. The stock's decline was a direct result of weakness in the fertilizer market. But this year, we are seeing fertilizer stocks rebound as demand for potash and other fertilizers increases.
With SQM trading near $31, I am interested in selling the SQM May 30 Puts, which are currently trading near $0.95 per share ($95 per contract, which represents 100 shares). You may be able to get a better price depending on market dynamics.
By selling puts, we are obligating ourselves to buy shares of SQM at the $30 strike price if the stock is trading below this point when the puts expire in just over four weeks. Since we may be obligated to purchase shares, we will need to set aside $29.05 a share in cash plus the $0.95 in premium we receive from the puts.
If SQM remains above $30 through May 16, and the puts expire worthless, we get to keep the $95 per contract free and clear. The represents a 3.3% return on the $2,905 in capital we set aside to fulfill our obligation. Since the trade will last 31 days, our per-year rate of return would be almost 39%.
Of course, there is a chance that SQM will trade below $30 between now and May expiration. If this were to happen, we would be assigned shares at a net cost of $29.05.
Action to Take --> Based on the excitement surrounding the electric vehicle market and the rebounding sentiment for fertilizer stocks, I expect any pullback will be temporary. I would be happy to pick up shares of this healthy stock at a discount to the current market price.
This article was originally published at ProfitableTrading.com:
Alternate Electric Vehicle Play Could Make Income Traders 39% a Year