UAW Strikes: Unusual Options Activity Suggests Investors Don’t Care
It is the first time the UAW has simultaneously gone on strike at all three of Detroit’s big automakers. The unusual options activity in Friday trading for the three automaker’s stocks suggests investors don’t care.
There's a reason for the lack of action.
“‘For the first time in our history we will strike all three of the Big Three,’ UAW President Shawn Fain said, adding that the union will hold off more costly company-wide strikes for now, but all options are open if new contracts are not agreed,” Reuters reported.
Not wanting to play all their cards at once, the UAW opted to conduct surgical strikes involving 12,700 workers at a Ford assembly plant in Michigan, a GM plant in Missouri, and Stellantis’ Jeep plant in Ohio.
If the strike drags on, you can bet shareholders of all three won’t be pleased.
Despite the lack of unusual options activity in the Detroit Three, there are reasons to consider placing a bet or two on the outcome. Here are my two cents worth.
Have an excellent weekend!
Who Will This Strike Hurt the Most?
UAW President Shawn Fain believes that the “billionaire class” are the only ones that the strike will hurt.
“In the last four years, the price of cars went up 30%. [Automakers’] CEO pay went up 40%. No one said a word. No one had any complaints about that but God forbid the workers ask for their fair share,” Fain told CNN. “It’s not [that] we’ll wreck the economy. We’ll wreck their economy, the economy that only works for the billionaire class and not the working class.”
There is no question that Fain is being cavalier in his comments.
A lengthy strike could lead to higher prices as the inventory of new vehicles shrinks due to the pause in production at some of the Detroit Three’s most crucial assembly plants. If the strike lasts long, the prices could drift back to the highs experienced during the chip shortages.
However, economists suggest that if all 150,000 auto workers covered under the UAW contract went on strike for the next six weeks, it would cost the economy approximately two-tenths of 1%.
While that’s not nothing, it’s not a big deal in the big picture.
Interestingly, as CNN reported, GM last had a strike in 2019 that lasted six weeks. Ford’s last strike was in 1978, and Stellantis last had a strike in 2007. It lasted less than a day. When Ford’s strike happened, it had 202,000 UAW members, about 40% higher than all three companies in 2023.
So, unless the UAW goes scorched earth and stops 100% of production, it’s hard to imagine Detroit’s automakers suffering too much from any shutdowns.
The Bigger Issue
As former Labor Secretary Robert Reich pointed out in his Sept. 14 blog post, a two-tier pay system began in 2009 after the bankruptcy of GM. While intended as a temporary measure to return the automakers to prosperity, it’s become permanent, leading to outsized profits for the Detroit Three and stagnant wages for its auto workers.
According to Reich, the Detroit Three have generated $250 billion in profits over the past 10 years, including $21 billion in the first six months of 2023. At the same time, the autoworker’s wages over the past four years have risen by just 6%.
I’ve reported on GM CEO Mary Barra’s massive compensation over her decade in the top job. Reich mentions more than $200 million. I think it’s much higher. According to reporting from the Automotive News, Barra’s total compensation in 2022 was $34.1 million, making her the third-highest-paid CEO of an American publicly traded company.
Yet, over the past decade, GM stock has moved sideways, actually dropping a couple of bucks.
The UAW wants big pay raises for autoworkers who missed out on the enormous profits over the past few years. You can’t blame them for wanting their fair share.
Any settlement is going to cost all three companies billions in future wages. How much really depends on what the Detroit Three are willing to do to eliminate the existing two-tier pay.
It could get nasty if one or more companies try to play hardball. I would NOT recommend it.
The Options Plays
As I write this early on Friday afternoon, six options are exhibiting unusual options activity -- five for GM, one for Ford, and none for Stellantis. Given Ford has the most UAW members at 57,000, I’ll start with it, followed by GM (46,000 UAW members).
I won’t consider Stellantis because it has none that are unusually active. However, of the three stocks, Stellantis holds the most appeal, in my opinion, but that’s a subject for another day.
The one Ford option is the Sept. 22 $13 put with a $0.40 bid price. The volume on this put is 2,053, 1.73x the open interest. That’s not exactly booming volume, but it is over 1.25x, the minimum for unusual options activity.
So, we’re talking about a play that lasts a week. The premium income if you sell the put is $0.40, a 167% annualized return based on a share price of $12.68. Of course, it’s currently in the money by 32 cents, so there’s a genuine possibility that you’ll be required to buy the shares. That puts your net price paid at $12.60.
As recently as July, Ford stock traded as high as $15.42. As long as the strike doesn’t accelerate the number of workers not making vehicles, the upside seems more significant than the downside.
That said, I’d probably look at a cheap call instead because your downside on selling puts is unlimited.
As for GM, four options expire next Friday, with the other a week later. We’ve got two puts and three calls. I’d go with the call expiring on Sept. 29. The strike price is $35.50 with an ask of $0.29, less than 1% of the strike.
The delta is 0.25011, which means you’ll double your money if GM shares appreciate by $1.16 over the next 14 days. That’s only 3.4%. If, by some miracle, a deal gets done before then -- the two sides are miles apart -- the shares would likely take off like one of its electric vehicles, giving you an excellent entry point.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.