How to back a lagging lithium miner and still generate income using options

Published Mon, Apr 29 202410:38 AM EDT

From paleolithic humans mining hematite over 40,000 years ago to rare earth elements, mining is among the oldest industries upon which some of the newest sectors heavily depend. Today, I'm focusing my attention on minerals used in modern technology and presenting a way to use options to play a lithium miner. The strategy gives a lower-risk way to get somewhat long this beaten-up miner without going all-in, and generating some income in the process. Lithium is used, as the name suggests, in lithium-ion batteries which are crucial for portable electronics, energy storage, and electric vehicles. Charlotte, NC-based Albemarle Corporation , ticker (ALB) is one of the largest producers in the world, and counts the major automakers among its largest customers. Most of the major automakers have struggled to profit from selling EVs, and the most notable U.S. success story, Tesla, reported a 9% drop in Q1 revenue last week, its largest percentage decline since 2012. While I believe Tesla will, as Elon Musk stated on the call, produce a lower-priced vehicle and that sales will ultimately recover, it's clear that the EV market is experiencing a bit of a reset. It stands to reason that their suppliers will too. Albemarle does not only supply the automakers, in fact, Volkswagen, Stellantis, BMW, Mercedes, Hyundai, GM, Ford, Toyota, Tesla, Kia, Renault, and Nissan combined represent only about 10% of the company's revenues. But other segments are also under some pressure as the price of lithium itself suggests. Battery grade lithium carbonate has declined 65% since June of 2023. Albemarle which hit its 2023 highs about a month later than the commodity, in July of 2023 has fallen by 52% since then. ALB 1Y mountain Albermarle, 1 year Albemarle is stuck between near-term lithium demand weakness and longer-term positive trends, between a seemingly cheap valuation and mixed technicals. The trade The company is now at an attractive entry point, but the pressures it faces will persist for a couple more quarters. Combined with understandably elevated options premiums this could set as a spot to begin entering a partial position, with some options overlays. Rather than allocating fully to the position, for example, if one would typically allocate 5% or 1/20th of a portfolio for a full-sized position in a portfolio, then instead allocate half that amount — say 2.5% to the long position — in ALB, and then sell a strangle on the position such as the May 31st month-end $102/$135 strangle. The trade: Buy 100 ALB Sell 1 ALB $102 put Sell 1 ALB $135 call One would collect about $4.44/contract for the strangle, or nearly 4% of Friday's closing price. The logic is that one can generate an attractive standstill yield that may be called away if the stock rallies through the $135 strike by the May 31st expiration, with a max profit of about 19% in that case. Or, if the stock falls, would add to the long position at the short-put strike. The effective cost of the additional shares one would need to purchase would be the put strike less the premium collected (not including losses one would be taking on the existing long stock position) This is a way to enter a partial equity position, overlaid with options to generate a bit of yield while not committing fully to the current stock price. 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.