Shares of lithium mining company
Sigma Lithium (SGML) are up 174 percent over the past year, thanks to a view by investors that rising electric vehicle production will require more of the metal. One trader sees the stock cooling off in the months ahead.
That’s based on the July $22.50 puts. With 161 days until expiration, 3,100 contracts traded compared to a prior interest of 113, for a 27-fold rise in volume. The buyer of the puts paid $1.78.
Shares recently traded for about $29.50, so they’d need to lose $7, or about 24 percent of their value for the option to move in-the-money.
The company is in the early stages of developing out its lithium mining operations in Brazil. So there are no notable earnings yet. Shares are a bet that the company can become one of the largest, and lowest-cost, lithium mining operations in the world.
Action to take: Investors may have gotten ahead of themselves a bit with lithium stocks. Given the slowdown in consumer spending, electric vehicle sales may continue to grow, but at a slower-than-expected pace. That suggests a better buying opportunity for going long on lithium stocks.
For traders, the July puts are well positioned for a drop in shares in the coming months. Shares have already been trending down gradually since October, so if the trend continues, the options could deliver at least mid-double-digit gains.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.