Option Witch | How to Play Drone Maker Companies Through Options?

Drone maker companies skyrocketed recently with SES AI soaring over 591% this month. Ondas Holdings, Palladyne AI shares more than doubled in December.

The Trump name and Elon Musk's preference for drones over traditional jet fighters helped send the shares of a drone maker into the stratosphere.

The CEO of Tesla and SpaceX criticized the F-35, a traditional fighter. He called the F-35 design "broken" and "the worst military value for the money in history." That helped send shares of F-35 maker Lockheed Martin down 8.7% this month.

Lockheed's loss appears to be a gain for tiny drone manufacturers. Adding to the fervor was news that Donald Trump Jr. agreed to become an advisor to Unusual Machines company. Unusual Machines makes components for all drones, including military ones.

What to Consider Now

The possibilities are about as numerous as the problems. We cannot recommend buying this stock outright or shorting it at the current level with so much still unanswered about the future. But what investors might consider are options positions that could pay off handsomely if done correctly. None of the positions represents a recommendation. These are merely possible ways to play the situation depending on what outcome you may believe is most likely.

Below are some specific strategies taking options related to Ondas Holdings as an example:

Scenario 1: Bullish Strategies

If you believe the drone maker companies will continue to jump, then you may consider buying call options.

Example 1: Long Call

• Buy a call option with a strike price of $5 expiring in 3 months. $ONDS 20250321 5.0 CALL$

• Premium: $0.62 per contract.

• Breakeven: $5.62 (strike price + premium).

• Profit: Unlimited if the stock rises above $5.62 before expiration.

Example 2: Bull Call Spread

• Buy a $5 call for $0.62 and sell a $7.5 call for $0.30 (same expiration). ‌‌$ONDS Vertical 250321 5C/7.5C$‌

• Net cost: $0.32 per contract.

• Breakeven: $5.32 (lower strike + net cost).

• Max profit: $2.18 per contract (difference in strike prices minus net cost).

Scenario 2: Neutral Strategies

For traders expecting Ondas to stabilize after the rally:

Example: Covered Call

• Own 100 shares of Ondas.

• Sell a $5 call expiring in 2 months for $0.45. $ONDS 20250221 5.0 CALL$

• Income: Collect $45 per contract ($0.45 x 100 shares).

• Outcome: Profits if the stock remains below $5, with limited upside if it surpasses $5.

Scenario 3: Volatility-Based Strategies

For traders anticipating big moves due to news or momentum:

Example 1: Long Straddle

• Buy a $5 call for $0.45 expiring in 2 months and a $5 put for $0.45 (same expiration).‌‌$ONDS Straddle 250221 5C/5P$  ‌‌

• Total cost: $0.90 per contract.

• Breakeven: $5.9 on the upside, $5.1 on the downside.

• Profit: Significant if the stock moves sharply in either direction.

Example 2: Long Strangle

• Buy a $7.5 call for $0.18 expiring in 2 months and a $5 put for $0.45 (same expiration). $ONDS Strangle 250221 5P/7.5C$  ‌

• Total cost: $0.63 per contract.

• Breakeven: $8.13 on the upside, $4.37 on the downside.

• Profit: Cheaper than a straddle but requires more significant movement.

Scenario 4: Hedging Strategies

For investors holding shares and concerned about downside risk:

Example 1: Protective Put

• Buy a $5 put for $0.45 expiring in 2 months while holding 100 shares of Ondas. $ONDS 20250221 5.0 PUT$

• Cost: $45 for the protection.

• Outcome: Ensures a minimum selling price of $5 per share, capping losses.

Example 2: Collar

• Buy a $5 put for $0.45 expiring in 2 months and sell a $7.5 call for $0.18 (same expiration).  ‌‌$ONDS Custom 250221 5P/7.5C$  ‌

• Net cost: $0.27 per contract.

• Outcome: Protects downside while limiting upside beyond $7.5.

Scenario 5: Speculative Strategies

For traders looking to leverage small investments for high potential returns:

Example 1: Short-Term Gamma Scalping

• Buy $5 calls for $0.45 each expiring Jan 17, expecting quick movements. $ONDS 20250117 5.0 CALL$

• Breakeven: $5.45.

• Profit: Maximized during rapid price movements before expiration.

Example 2: LEAPS (Long-Term Equity Anticipation Securities)

• Buy a $5 call expiring in 6 months for $0.75. $ONDS 20250620 5.0 CALL$

• Breakeven: $5.75.

• Profit: Provides exposure to long-term growth with capped risk.

Key Considerations for Options:

1. High Volatility: small-cap drone maker companies shares may have high implied volatility, inflating option premiums.

2. Liquidity: Check the liquidity of options; thinly traded contracts may have wide bid-ask spreads.

3. Catalysts: Be aware of news on partnerships, government contracts, or technological developments that could move the stock price.

These strategies cater to various market scenarios, allowing traders and investors to manage risk, generate income, or speculate on drone maker companies' potential growth.