Nio (NYSE:NIO) stock recently crashed to new lows, but the story didn’t change that much. Long-term investors can hold Nio stock for their own reasons, while short-term traders can get rid of it. NIO made headlines recently when the popular television show 60 Minutes aired a special show about it. This spurred retail investors to pile into the stock as it spiked to $10.65. It was a raging party that looked like it was going to retest the all-time highs, but that wasn’t the case. If you’re still keen on trading Nio stock, however, I’ll show you how to use the options market to squeeze profits from NIO.
It even took bids away from Tesla (NASDAQ:TSLA) stock.
Nio’s epic rally lasted only six days, marking an epic double top on Nio’s stock chart. Soon, shares collapsed by 50%, setting a new all-time low below $5 per share …
It was a perfect storm of a disappointing earnings report and an overzealous bunch of retail investors. What made it worse is that this also coincided with a lockup expiration. The setting was perfect to transfer the risk from original investors into the retail hands.
I came into 2019 long NIO stock by selling the July $5 put. In essence, I had committed to buying the shares at that level if the price were to breach below it. I have since changed my mind.
On the way down, I expected the selling to abate around $6.50. Yet, it fell through it like butter, so I assumed I was missing a piece of the puzzle. I booked my partial profits and I’m thrilled that I did!
This was a low conviction trade because I am unsure of its fundamentals for the long-term. I considered it a tactical trade and I didn’t want to turn it into an investment. So now what?
Unless investors know the industry and the company inside and out, Nio stock still remains a better trading vehicle than an investment.
First of all, I am not convinced that the electric car will replace the internal combustion engines — at least not for a long while. Electric vehicles remain inefficient, and the infrastructure to support the ubiquity of electric cars is still in its infancy.
Then there is the matter of subsidies. It seems that every couple of months we hear of some subsidy expiring, thereby affecting the trade. Now there is the matter of competition and not the one from Tesla. The mega-auto manufacturers like General Motors (NYSE:GM) are slated to unleash a herd of new electric vehicles in the near future. These are competitors whom Nio should fear. Why? They have deep pockets and the infrastructure to scale.
How to Trade Nio Stock
So from a trading perspective and for the short-term investors seem to so far be ignoring the competition aspect of risks in NIO. The most recent stock crash happened because of a perfect setup for failure. The 60 minute bit hit just before the company released its earnings. So it came into the event up huge, which makes it impossible to rally off the news.
At that point, management needed to hit a home run on all fronts and they didn’t. The report missed the mark and broken expectations make for a broken stock. This puts the bulls on their heels as they remount the next effort. The onus will remain on them to break the lower-high trend that started from the first week of its public life.
So is NIO stock a good buy here? The answer depends on investor time frame. If I believe in the industry and specifically in this company then yes, it’s a buy. Because the incremental selling came from events that are no longer here.
But if I am looking to tactically trade it I could consider reselling a similar put like I had to generate income. Or I would chase the stock as it breaks through bullish trigger lines.
The first one comes at $5.75. This will be a hot zone where bulls will face resistance. This was a recent ledge from which NIO fell to its lows. The next level is about $1 higher, which is also another recent accident scene that brought a %25 dip from it. Above those two levels, there are many others but we’d have to take them as prices near them for better context.
Meanwhile, NIO will need the help of the general markets and a deal with China on tariff could also go a long way. Otherwise, it would need to fight both its own negative price action and the market-wide tide.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.