Tesla Is One Play on Weaponized Commodities. Here’s Another.
For a long time, there was a tacit understanding among the major nations that peace would prevail as long as the world remained a flow chart for money and goods.
The ease with which major companies have exited Russia after it invaded Ukraine—and the speed at which governments have tried to economically isolate it—may usher in an increasingly rough style of economic realpolitik between countries.
If countries can be easily excluded from the world’s trading markets, any nation with global dominance in a major commodity that is critical to the world has extraordinary leverage and strength over others.
After the U.S. and Saudi Arabia, Russia is the third-largest oil producer, according to the U.S. Energy Information Administration. The U.S. this week announced it will ban the import of Russian oil, while the United Kingdom plans to phase out Russian oil and oil products by the end of 2022. And the European Union plans to cut the continent’s reliance on Russian natural gas by two-thirds by year’s end.
As a result of these moves, commodity prices spiked all over the world this week and bullied global financial markets as investors fretted about recession. This leads us back to an investment thesis we introduced in late January when the stock market was just beginning to behave erratically.
At the time, we suggested that investors focus on companies that might be in secular bull markets and thus perhaps insulated from the increasingly erratic behavior that the stock market was starting to demonstrate. We recommended electric-vehicle giant Tesla (ticker: TSLA) and NOV (NOV), which makes equipment for oil and gas drilling and exploration.
Since then, NOV’s price has increased from $16.21 to over $21. Tesla’s price has fallen from almost $1,000 to about $860.
Given the stressed state of the world—and the recent shunning of Russian oil—investors might want to once again consider both stocks, if for somewhat different reasons than before. This time around, the investment thesis is that natural resources could become even more important should nations essentially weaponize their commodities.
Playing both Tesla and NOV is a way to arbitrage the difference between the past and future and idealism and pragmatism. Tesla founder Elon Musk is dragging the world into a future of electric vehicles. NOV’s drill bits and equipment might be in even greater demand if nations try to become more energy independent.
To control each stock, aggressive investors could consider a risk-reversal strategy, which entails selling a put option and buying a call option with a higher strike price but the same expiration. The strategy reflects a willingness to buy the stocks at lower prices, while positioning for rallies.
With NOV stock at $21.14, investors could sell the July $19 put for about $2 and buy the July $24 call for about $2.25. With Tesla stock at $858.97, they could sell the July $750 put for about $76 and buy the July $1000 call for about $71.
During the past 52 weeks, NOV stock has ranged from $11.46 to $24.06. Tesla has ranged from $546.98 to $1,243.49.
The risk-reversal strategy takes advantage of the fear and greed that has warped options premiums as the stock market has declined.
Think of the calls as inexpensive upside proxies that could prove profitable if the realpolitik view of commodities prevails. Selling puts that are lower than the associated stock prices—even if just a little—can be an effective way for long-term investors to get paid by the options market to buy stocks.