There Are Alternatives to TSLA!

Two weeks ago, in the blog entitled Tesla’s Robo Bet, I wrote that “…problems with the robotaxi rollout or some other unexpected setback to the business in general, may cause volatilty to shoot back up.”  And sure enough, last week we got the first episode of what one news outlet dubbed “The Real Housewives of Pennsylvania Avenue.”

The very nasty feud between the President and Elon Musk certainly qualifies as an “unexpected setback” to Musk’s businesses, Tesla included, and comes in two flavors. First, there are the President’s threats to cancel SpaceX contracts; and second is the continuing destruction of Musk’s reputation and public persona. Like most petty arguments, I suspect neither side will emerge unscathed.

Short term, the damage to TSLA was immediate and resulted in a 14% decline in the underlying, as well as a 13.6% increase in its implied volatility, as would be expected. I suspect the stock will recover as the news cycle shifts its focus away from TSLA.

Longer term, the timing for Tesla could not have been worse.

First, the company is beginning its pilot robotaxi service in Austin this month, possibly as soon as this week. Expectations are high, and any stumble could provide yet another excuse to sell the stock.

Second, and more broadly, the market for EVs is not what it was several years ago when they were the wave of the future and could do no wrong. Indeed, Tesla’s Model Y, which was introduced in March 2020, became the world’s best-selling car in 2023, a short three years later (whatever you think of Musk, that’s an incredible achievement). But that was then, this is now. EV lust has faded, and for a variety of reasons. Inadequate charging infrastructure, the termination of the EV tax credit, higher purchase prices, and waning consumer sentiment have all contributed to slower sales.

But…what do you do if you still want to invest in EVs, but for whatever reason, not TSLA? Domestically, there’s Rivian (RIVN) and Lucid (LCID). Of course, there are some Chinese competitors in the space, but given the current political environment, as well as trade tensions and export restrictions, I’m going to keep it simple and stick to these two.

First up, Rivian. Its $5.8 billion JV with VW is certainly encouraging, as is the fact that the company generated positive gross profits for the second straight quarter in Q1. Key to its long-term success is the new lower-cost model, the R2, which is reportedly on schedule to begin production in the first half of 2026. Rivian is depending on it to widen its customer base and to revive sales, which are projected to be lower than last year.

Maybe the R2 will be enough to revive sales. Or maybe the headwinds facing EVs will prevail. I don’t know, but I do know that trading RIVN’s underlying is not the way to go here. As I’ve written before, trading options gives you the flexibility to pivot away from trading just price. Look at RIVN’s implied volatilty since 2023 (see chart below).

Recognize a familiar pattern? Yes, vol crush is present, and it’s not subtle. I’ve written about it several times, most recently here. 25+ percentage points moves are common in RIVN implied volatility before and after earnings releases, and they are consistent. Of course, as in any pure volatilty trade, you will have to keep it delta neutral to maximize the trade’s potential, which could prove difficult. Regardless, with volatility movements of that magnitude, you will have a lot of leeway.

Lucid (LCID) is another competitor that is facing a similar situation as Rivian (and for that matter, all other EV manufacturers) – bringing a new, lower-cost model to market asap is critical to their future. Revenue and production have been increasing nicely, but the amount of red ink is concerning – the company lost $366 million in Q1.

Since the stock peaked at $55.06 in late-2021, at the height of the EV craze, it’s been either declining or going sideways since (see chart below). Not too encouraging – if you’re trading only price.

But, just like RIVN, vol crush is alive and well in LCID. Although less consistent, it has resulted in as high as a 50 percentage decline in implied volatilty the day after earnings announcements. The usual caveats outlined above regarding delta neutrality apply.

Deep Out-Of-The-Money

If you’re into tennis, then you know that Carlos Alcaraz overcame a two set deficit to win the French Open in the fifth set. Less known is that during the fourth set, at which time he faced three championship points, the odds on him winning on DraftKings shifted to +6500. That is, a $100 bet on Alcarez to win would have resulted in a $6500 payout. That’s great news for both the buyers and, counterintuitively, DraftKings – nothing sells lottery tickets like winners.