Volkswagen’s ‘dieselgate’ scandal costs pile up to $30 bln

It is more than two years after the German automobile manufacturer Volkswagen AG (OTC: VLKAF) was caught using a software to fool pollution tests. Since then, the company had set aside about €22.60 billion ($26.7 billion) to buy back or fix 500,000 vehicles, including Jetta, Golf, and Audi3 models.

However, Volkswagen has now found out that the process is quite complex and the money set aside will not be adequate enough. Last Friday, the company announced that it is taking another charge of €2.50 billion ($3 billion) in the current quarter, in relation to the emission issue. We anticipate the stock of Volkswagen, which closed at $169.82 in the OTC exchange, to turn bearish in the week ahead.

With the inclusion of the $3 billion charge taken last week, the total amount set aside so far to resolve the issue has gone up to $25 billion. In September 2015, the Europe’s biggest auto-manufacturer Volkswagen admitted that it used a software to cheat the US diesel emission tests. The software was fitted in as many as 600,000 cars.

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That triggered the biggest business crisis in its 80-year history. The cheating, popularly referred to as “diesel-gate” scandal, was exposed in 2014, after a discrepancy in emission was noticed during a research conducted by the West Virginia University. A year later, an employee of Volkswagen defied his supervisors’ orders and blew the whistle. Investigation revealed that the cars emitted more than 40 times the legally allowed levels of nitrogen oxide.

Following that, Volkswagen agreed to settle the issue with the US authorities by spending up to $15.3 billion, either to buy back or fix the polluting diesel cars. Nearly 15 months have passed and Volkswagen has not yet resolved the issue. Now, the additional provision made will be reflected in the third-quarter results, due on October 27th . It also raises doubts as to whether Matthias Mueller, the CEO of Volkswagen, is in full control of the situation.

In Germany, last Wednesday, Wolfgang Hatz, an engineer who ran Volkswagen’s motor development between 2007 and 2011 was arrested by authorities. He was suspended in May 2016, after the scandal hit the news headlines. In an unrelated incident, the company’s Scania truck unit was fined $1 billion by authorities for overcharging its customers. Due to heavy resistance from worker’s union, Volkswagen is unable to divest its Ducati motorbike brand and subsidiaries that manufacture ship engines and power plants. Thus, fundamentally, the company’s stock price would remain bearish in the short-term.

The historic price chart indicates a technical resistance for the stock at 170. Furthermore, the MACD indicator has started to descend towards the zero line, with the main line below the signal line. Thus, we expect a downtrend in the share price.

In order to benefit from the bearishness in the stock, a put option can be purchased from a trustworthy binary broker. We may trade the strategy by purchasing a put option when the stock trades near $170 in the equity market. Furthermore, a date around October 11th would be chosen for the expiry of the option.

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