Gambling

Tesla just pre-sold a whopping 325,000 Tesla Model 3s.

Yup, excited buyers gave the company $325 million in an interest-free loan for a car they haven’t seen, or who’s factory still hasn’t been built yet.

Image of Tesla Model 3 in steel grey

The excitement is understandable.

And it’s remarkable that a car company with no advertising, and no dealers can get people to stand in line for hours to buy a car that won’t be ready for over a year. Most of the people in line will have to wait 2 years, and probably won’t receive the $7,500 tax credit for electric cars either.

The key component to the car is the battery. Tesla is still building the gigawatt battery plant in Nevada, and is expected to be a large consumer of global Lithium ion production.

By the time Elon Musk’s prediction of rolling out 500,000 cars rolls around, it will most likely absorb the entire world’s annual Lithium production!

Unsurprisingly, prices for Lithium has soared, doubling this year.

Lithium carbonate spot price chart

This chart from the Economist shows prices up 3 fold from the long-term average of $5,000 per tonne. There are also rumors out of China that prices might double again from here.

If Tesla is absorbing the entire global production what are the other electric car manufacturers going to do, not to mention the makers of power tools, household appliances and rechargeable batteries, that all use Lithium ion as well.

Sounds likes it’s time for a short-term speculation in Lithium exploration/production companies!

While gambling on these sort of things rarely work out, if you’re so inclined, you might want to check out Global X’s Lithium ETF, which invests in the full lithium cycle, from mining and refining the metal, through battery production.

The fund isn’t exactly cheap, with a 0.77% expense ratio, and it owns 25 different companies, with Tesla (TSLA) being one of them. Also, two companies consist of 28% of the fund – FMC Corp and Sociedad Quimica Y Minera De Chile (or The Chemical and Mining Company of Chile, cutely called SQM).

According to Morningstar analysis, FMC is undervalued by about 20%, and SQM is overvalued by 25%. While valuations are highly subjective, Morningstar is a good quality resource at a cheap price.

I’ll probably pass on this fund, despite the fact that it’s an interesting opportunity.

For all you Ken Follett and Frederick Forsyth fans who love thrillers about global intrigue, NPR reported a very interesting story today.

In 2005, the U.S. government suspected a Macau bank of laundering North Korean funds. Under the global jurisdiction of the Patriot Act, the U.S. froze $25 million of the bank’s North Korean assets. This week, North Korea announced they want their money back, or else the country’s nuclear program will continue.

However, North Korea insists they be reimbursed through a private bank, and nobody wants to be the guy signing the check. “No bank is willing to help return the money to North Korea,” reported NPR this morning. “Banks fear helping North Korea would taint the banks in the eyes of the U.S. Treasury Department, even though the request came from the U.S. State Department.”

An unnamed Las Vegas casino may stage a buyout of Banco Delta Asia (the Macau bank that currently holds the frozen assets) in order to refund the money. And what does it gain in the transaction? An almost impossible-to-get Macau gaming license.

Macau is rapidly becoming the world’s gambling capital. Gambling is illegal in Chian except for Macau, so the chinese are flocking there. According to the Pacific Asia Travel Association (PATA), Macau’s tourist receipts are projected to rise from US$2.87 billion in 2003 to US$7.37 billion by 2010. Check out the Wynn Macau and the Venetian Macao to see how much they’ve spent on their casinos.

Maybe its time to invest Macau?

In a previous post on WCI, I had mentioned that I had sold some March 2007 Calls.

When you sell a call and you own the underlying stock, its called selling (or writing) covered calls. In my case, where I don’t own the underlying stock, its called selling naked calls. I gave someone the right to purchase a stock from me at a certain price at a certain date in the future and in return I collected a small premium. [That’s right, I don’t own the stock yet I sold the option on it and collected some money. Makes me feel like I’m in the insurance biz!]

There is unlimited risk in selling naked calls (or puts). If the stock rises beyond my strike price [which is $17.50 in the case of WCI] I stand to lose the amount that it rises minus 17.50 minus the premium I collected up front.

When I entered the position last Friday, the stock was trading around $15. So it would have to jump 16.5% before being “in-the-money”. I collected a premium of $1.45 per share or $145 per contract. So the stock would have to be over $18.95 before I would start losing money. If the stock closes below $17.50 on expiration, the option expires worthless and I keep all the collected premium. If however it closes at say $18, then I don’t have to buy the stock at $18 and deliver it to the buyer. I just close the position before then and pay him the difference of $0.50 per share or $50 per contract. So even though the stock closed above $17.50, I’d still make $145-$50 = $95 per contract.

There are also commissions to be factored in. Interactive Brokers is amongst the cheapest[and most difficult to use] and charges $0.75 per contract.

The stock was down 4.5% today on no news so hopefully it’ll continue its slide into BK. The puts I had bought last month are now up 22%!!! The calls I sold on Friday have decreased in value and if I wanted to, I could close my position by buying them back at $1.25 per share or a 13.75% profit per contract.

I also sold some naked puts on a junior mining stock. I think it might move higher in the near future, however I don’t have any money to invest right now, and I’m not a big fan of buying on margin. Its trading at $11.25/share so buying 500 shares would run me around $5625. So I sold some puts with the Nov 06 expiration at $10 strike price and collected $35 per contract. The options expire in about 3 weeks. If the stock does nothing, I keep the premium. If it goes up, I still made my premium on them. If it drops, it would have to drop nearly 14% before I start losing money. But I was willing to buy them at this price anyway, so at least I curtailed my loss upfront!

[NOTE] Naked Option trading involves significant risk of capital. Victor Niederhoffer, a UC, Berkley professor and hedge fund manager lost 20 years worth of profits in 1 year through over-leveraging in naked option trades. Only gamble with risk capital when selling naked options. This is an extreme form of gambling. Do not take it lightly!