Traders found a new favorite toy to play with, and its name is Nikola (NASDAQ:NKLA). Nikola stock has grown nearly 600% in the last two months.
Investor infatuation has been on full display ever since May 8, when the masses first stumbled upon the Phoenix-based company specializing in battery-electric and hydrogen trucks. That’s when the meteoric ascent began in earnest.
Today we’re looking at why the technicals for Nikola stock remain bullish and how you can profit from it.
JPMorgan Initiates Nikola Stock Coverage
Let’s start by acknowledging the well-grounded arguments against buying Nikola. Some of them were trotted out by JPMorgan (NYSE:JPM), which just initiated coverage on NKLA shares with a neutral rating.
After mentioning the company’s unique position to “disrupt the transportation industry,” analyst Paul Coster cited the risks of chasing the shares at these high prices.
“The resulting business model could be compelling, however, risks are elevated for this pre-revenue company, and the stock looks fully valued here, so we look for a pull-back or incremental positive development to get more constructive,” he said.
To reflect the downside risks, Coster slapped a $45 price target on the red-hot stock, which is 36% lower than Monday’s closing price. All the fundamental reasons why you shouldn’t buy NKLA here make sense. With its share price as up as it has been in the past few months, the hype machine is running hot. A lot of future profits are being baked in, well before the company even prints any revenue. Consider this the latest case study on the forward-looking, discounting nature of markets.
The million-dollar question is whether irrational exuberance has carried Nikola stock beyond what its future cash flows reasonably justify. No one knows the answer. I don’t doubt the shares will receive their comeuppance at some point, but good luck picking the top.
Let the Chart Be Your Guide
For my chart-reading pals and me, the price action of NKLA gives all the direction needed on whether we should be a bull or bear. Right now, I see zero evidence of weakness. Ever since the stock went into orbit June 8th, the candles have been constructive. I’m impressed by how well the stock has settled in. Buyers have absorbed any overhead supply like a water-hungry sponge.
Meanwhile, the 20-day moving average has been playing catch-up as the stock worked through overbought pressures. We could have used a few more sessions of sideways drifting, but a recent 6% rally suggests bulls are done waiting. On the volume front, the number of high volume up days confirms institutions remain net buyers.
With today’s jump clearing short-term resistance, there’s nothing in the way of a run back toward its peak of $93.99. That leaves a lot of potential upside if momentum traders swarm again. To round out our analysis, it’s worth pointing out what type of movement would have me changing my bullish tune.
Since Nikola stock caught fire in May, we haven’t seen a single pause or pullback break a support pivot. If and when we do, that’s the time to turn cautious. Put an alert at $60. That’s the level we need to hold for the short-term trend to remain healthy.
The Trades
If you’re comfortable with the sky-high volatility, then buying equity outright is always a simple choice. However, the options market provides some exciting alternatives if you want to reduce cost while limiting liability. With implied volatility at 209%, buying calls is immediately disqualified for me. That leaves us with selling puts or building a spread trade.
The mass uncertainty surrounding NKLA stock is keeping out-of-the-money puts pumped to the extreme. If you’re willing to either buy the stock at a steep discount or if you simply think it won’t crash 50% from here over the next month, sell July puts.
The Trade: Sell the July $30 puts for around $1.50.
If NKLA is above $30 at expiration, then you’ll capture the max reward of $150. If the put sits in-the-money, then you will be obligated to buy 100 shares at a cost basis of $28.50.
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