Tesla Motors Inc is a major player in the electric vehicle market. Their stock is highly popular amongst investors & traders. However, the stock can be highly volatile at times. This volatility presents investors with an opportunity to make large profits, but, substantial losses can also be made. Advanced traders tend to build a portfolio of shares, currencies, bonds & commodities to “hedge their bets.” Investors may also use futures or options contracts to hedge their positions further.
Tesla Motors Inc & Oil – Negative Correlation?
The automobiles that Tesla Motors Inc manufactures are electric vehicles. Electric vehicles & conventional (diesel or petrol) vehicles are substitutes for one another, they are both competing for demand, and thus sales, from the same people & under the same circumstances. The price of crude oil is highly dependent on the demand for crude oil. If more electric vehicles are purchased, less conventional automobiles will be purchased & used, thus reducing the demand for crude oil. This will lead to a fall in the price of crude oil (provided that supply remains constant.)
Therefore, by purchasing shares in Tesla & “going long” on crude oil, you are greatly increasing the chances of your P & L staying positive (due to the negative correlation.) To some extent, you are taking a risk free position in Tesla Motors Inc , so you will be entitled to dividend payments, without the risk of losing money due to a slump in the share price (as your losses would be covered by an increase in the price of oil.)
Limitations of This Strategy
As crude oil & crude oil products have a wide range of uses, the fall in demand for oil due to less conventional cars being driven may be offset by an increase in demand for oil to power more power stations etc. Furthermore, it is highly unlikely that the changes to the prices of these 2 assets will be equal to one another. However, while this combination of assets is not “risk free”, it does offer a relatively large amount of protection & stability.
If this strategy is implemented & utilized effectively, it greatly reduces the chances of your funds being wiped out. Maintaining capital is a key aspect of a long-term successful trading strategy, as you are unable to trade any assets without the necessary funds.
Other Potential Combinations
Tesla Motors Inc is set to become the largest consumer of lithium in the world. Lithium is a required raw material for Tesla to build their batteries, which store the electrical energy (as chemical energy.) Therefore, buying shares in Tesla & “going short” on lithium also reduces the risk associated with trading.